Ask your discount broker or agent to show you inside five or six of your top choices.  Do this even if you have your heart set on just one of them--looking at several alternatives will help you decide how much to offer and may improve your bargaining position.
 

Step 2:  Try to find problems with your top picks.

Before making an offer, make sure there's nothing seriously wrong with the property.

Ask your broker for the following:

• The disclosure packet (if available).  This will usually be emailed to you as a pdf file.
• All previous MLS listings of each property, with photos.  This will tell you, for example, how much the current owner paid for it and what upgrades have been made.

Then do the following:

• Talk to neighbors.  
• In California, visit the Megan's Law website to see if any registered sex offenders live nearby
• If you're buying land, go to the county planner and discuss zoning restrictions on the parcel. 
• Call an insurance company to verify that the home is insurable.  
• If the home is in a risky area, ask the seller for a C.L.U.E. (Comprehensive Loss Underwriting Exchange) report for the house.  This lists all insurance claims that have been made on the house for the past five years.  
• If the home is governed by a homeowners association (HOA), ask about monthly fees and CC&Rs.  If you're buying a condo or cooperative unit, ask to see the association's legal and financial documents. 
• If you like, you can download parcel maps and other deed information.  In many western states, you can find a treasure trove of information at netronline.com for $3 each.  Another website, docedge.com, charges $5 per map but covers a broader area.

Before making an offer on a house, I like to stroll through the neighborhood.  I invariably find one or two neighbors outside doing gardening or unloading groceries.  They almost always give me useful information.

Step 3:  Estimate the home's market value

If you still want to go ahead with an offer, you'll need to come up with an offer price.  Start by estimating the home's market value.

To estimate the home's market value, I recommend that you collect data from various sources:

• Ask your broker for a comparative market analysis of the property, showing the prices paid for properties that have recently sold, and asking prices for active, withdrawn, and cancelled listings.  Drive by these properties and look for the best deals.

• Get a $29.95 Complete Property Valuation from electronicappraiser.com.

• Get free online appraisals of the property from Zillow.com, realestateabc.com, and Ditech.com.  (On the Ditech website, click on "Calculators," and then click on "Free eAppraisal.")   These websites don't reveal their appraisal methodology, but I think it's based on taking the last sales price for the property and scaling it upward or downward according to how average property prices in the neighborhood have changed.  If the owner has spent a lot of money remodeling the house, you should fudge the estimates up accordingly.  I found that Zillow gave fairly good estimates for houses in subdivisions but poor estimates for houses with unique attributes, like custom-built homes on scenic lots.  Zillow allows you to review the details they have about your home (Click on the "See home details" link) and edit them.  

• Get information about "comparables"--houses that are similar to the one you want to buy that have sold recently.  Zillow.com and realestateabc.com are good sources.  (Click the "Map comparable homes" link.)  So is realestate.yahoo.com (Click on What's My Home Worth? in the Tools section on the left hand side.)  Create a separate fact sheet for each comparable, then drive (or better yet, walk) by all of the homes and compare them to the one you want.  Try to guess how much more or less your dream house is worth compared to each of them, then use these guesses to fudge the actual sales prices of the comparables into estimates of  your home's market value.  

Step 4:  Figure out what you think the home's worth

This value may be more or less than the home's market value, but bear in mind that lenders sometimes won't approve loans if the sales price is much higher than the appraised market value.

A good way to figure out what the home is worth to you is to weigh your alternatives against one another.  Suppose you're interested in a house on South Street, but you also like a smaller one on Cable Road.  Write down the benefits of the two choices on a piece of paper.   Here's how your notes might look:

This diagram shows that, to you, the benefits of the South Street house outweigh those of  the Cable Road house. 

Now try to imagine how much money you would need to add to the Cable Road house in order to make the two properties equally appealing to you.  For example, if you added $100,000 to the Cable Road house, would that make it more appealing to you than the South Street house?  Keep testing different numbers until you come up with a number that exactly balances the two sides, like this:

Now guess the market value of the Cable Road house (say $870,000) and do some algebra.  Think of the balance's fulcrum as an equal sign and solve for the value of the South Street house.   In this case, the equation would read:  South Street house = Cable Road house + $60,000.  Substituting in your estimate of the price of the Cable Road house, you'll get a value for the South Street house of $870,000 + $60,000 = $930,000.  

The sum, $930,000, gives you an estimate of the maximum price you should pay for the South Street house, based on the assumption that you could buy the Cable Road house for $870,000.   

Do the same exercise with your other options. 

When deciding how much a house is worth to you, consider renting as an option.  See The Buy vs. Rent Decision by Suze Orman for help in thinking this through.

Step 5:  Consider your bargaining position

My husband is a good negotiator, but it's agonizing to watch him in action.  He sometimes starts low--really low.   The buyer's agent (or car salesperson) invariably looks crestfallen.  I don't say anything during these negotiations, but I always feel ashamed and embarrassed.  After wasting hours or even days of the salesperson's time, we're finally revealing ourselves to be flaky and unrealistic.

But we often end up getting terrific deals.  

Buyers' agents will often act disappointed or annoyed if you want to make a low offer.  Pay no attention.

Of course, we don't always make low offers.  Once, we even made a full-price offer with no contingencies on a lot that we absolutely had to have.   There were no other lots like it and we were afraid we'd lose it to another buyer.

Whether or not you can start low depends on the strength of your bargaining position.   Here are some factors that would give you a strong bargaining position:

• If the house has been on the market for a long time. 

• If there are other, similar houses in the neighborhood.

• If you're likely to be able to close the deal in a timely manner.

• If you're interested in more than one house.

• If you're in no hurry to buy a house.

If your bargaining position is weak, it will be harder to get a good deal.  That's why it's a good idea to strengthen your position before you begin negotiations.  One way to do this is to sell your existing home before you begin searching for a replacement.  Another is to go a mortgage lender and get pre-approved for a loan so you can demonstrate your ability to buy the house.  Finally, you should look at lots of houses and try to find several that are acceptable to you. 

Step 5:  Decide on an offer price

Sellers usually set their asking price about 1-10% above their estimate of its market value.  But sellers can get that wrong, and they're sometimes willing to accept offers that are well below the asking price.  

If your bargaining position is very strong, try subtracting 10% from either your estimate of the market value or the asking price--whichever is lower.  Suppose, for example, the asking price was $950,000 and your estimate of the home's market value was $920,000.  I'd recommend that you consider a starting offer of $830,000 (which is roughly 90% of $920,000).  Before making this offer, verify that the offer falls below your lowest estimate of what the house is worth to you ($910,000 in our example).  If it doesn't, lower it. 

If your bargaining position is weak, or if the housing market is hot in your area, you'll probably want to make an offer that's much closer to the asking price.  And if the market is very hot, you may want to make an offer that's above the asking price. 
 

Next step:  Making an offer.

©Lori Alden, 2008.  All rights reserved.