Making the right offer is one of the most important part of the home buying process. Experts advise all homebuyers to find out home prices in an area and set their own reservation price, or the maximum price they are willing to pay for a home. A reservation price actually helps homebuyers in negotiating with the seller and stay within their budget when making an offer.
Barron’s ‘Smart Consumer Guide to Home Buying’ explains that it is customary for buyers to discount their offering price to create some negotiating room when making the offer; there is no rule on how much this discount needs to be, but it will depend largely on market conditions and how much you really like the home.
Below is the basic process for calculating reservation price to help you in making your offer and negotiating for the home you are eyeing.
1. Write down the amount you can afford to pay each month. This may be close to what you are paying now, or what you are comfortably willing to spend per month on housing costs.
2. Calculate tax and insurance costs. Barron’s ‘Smart Consumer Guide to Home Buying’ offers the following suggestions for calculating tax and insurance rates. Use a factor of .68 for areas with high tax and insurance costs; .85 if tax and insurance is relatively inexpensive; or use the standard .75 for a rough estimate. Multiplying this rate by the amount in Step 1 will give you your affordable loan P&I payment.
3. Calculate your typical loan term and interest rate. Write down the loan term in years and the interest rate. You’ll need to locate the appropriate payment from the loan payment tables that are applicable to this loan term and interest rate.
4. Calculate your total loan amount. This will also be found in the loan payment table; you may also obtain this from your mortgage lender.
5. Add your cash available for the down payment. This will give you a final figure of the amount you can afford to pay for the home.
You then have to compare the calculations you made on Step 1 with the amount on Step 5. The difference between the two will give you your negotiating range when making an offer. If the amount in Step 1 is larger than the amount in Step 5, you can offer a higher price for a home to secure the bid. If the reverse is true then you need to negotiate to bring down the final price into the range that you can afford.
Computing your reservation price can help you in negotiating for the home you want while making sure that you work within your budget. Apply your calculations for each prospective home so you can be flexible in your bids – either offer a higher bid or negotiate to lower the final price.
Are you a new homebuyer looking for homes for sale in Minnesota? Searching online using the Minnesota MLS is an excellent way to find the type of home you’re looking for.
No comments yet.