How Much Should I Offer for a House: List Price, Higher, or Lower?

What does the advertised, or "list" price of a house really mean with regard to how much a potential real estate purchaser should offer? It's certainly a clue to how much the seller wants for the home—but it's never the last word on the matter. Both the market and the individual sellers' predilections make a difference in whether the home seller expects (or should expect) the eventual sales price to go up or down from the list price. As we'll discuss here, you'll want to do the following in preparing to make an offer:

• learn about common pricing strategies
• enter the market with an understanding of why you might need to bid higher than the published list prices
• figure out how much the house in question is worth to you
• check online valuations, but don't assume they're correct, and finally
• choose what dollar amount you will list in your purchase offer.

The bottom line is, if you're in the market for a property, don't believe the price tag. In the end, it's the market—that is, the level of other buyers' interest in the place, and their view of how it compares to other available homes or real estate—that rules.

Common Home-Price Listing Strategies

In a hot market, with lots of demand for houses and prices on the rise, sellers often take an approach that seems counterintuitive. They list their houses at an artificially low price. Why? It helps make sure the maximum number of buyers come in to take a look, so that a bidding war ensues and the price goes sky high, even higher than they might have realistically listed the place at.

Of course, other home sellers might set a more realistic, or even optimistic, price. Some are being strategic, not wanting to make buyers think, for example, that something is wrong with the place.

In a cold market, where houses are moving slowly and demand is low, it's more common for sellers to set the list price that's meant to be "just right," so as to neither scare away potential buyers nor feel stuck if only one offer comes in at list price.

Nevertheless, some sellers in slow markets choose to set the list price on the low side, just trying to get potential buyers to come in and take a look. They figure that if the place really is a bargain, more than one person will bid, and the price will eventually get moved upward anyway.

You might find regional variations, too. In California, for example, the real estate industry sometimes uses what it calls "transparent pricing" even during hot markets, meaning that the list price was really truly what the seller would accept.

Then there are the sellers who set their house list prices on the high side, either wanting to set a starting point in negotiations (not a good idea), or because they're blind to what their house is worth. Sellers tend to have difficulty believing that their house has dropped in value (which can happen dramatically after a major market correction). Or, if they've put a lot of money intro improvements, they might be feeling desperate to recoup it.

Sometimes, the fault for overpricing a home lies with an inexperienced or unscrupulous real estate agent, who "bought the listing"—that is, convinced the sellers that they could get a higher amount for the house despite what other agents were saying about how the place compared in value to other properties.

Why Bidding Full Price Might Not Get You the House

It's perfectly legal for a real estate seller to reject a full-price offer, or indeed any offer (unless the reasons are discriminatory). For example, sellers in a hot market who are expecting to sell for over asking have been known to counter a full-price offer—even one that came without contingencies (such as to have a home inspection done). Similarly, sellers who receive multiple bids frequently reject full-price offers in favor of higher offers.

Even in slow markets, sellers can and do reject full-price offers. Real estate purchase contracts are complex: They contain many terms beyond price, such as closing date, earnest money amount, and title insurance. So, even if potential buyers submit a full-price, contingency-free offer, the parties still need to come to an arrangement about these other terms. If the buyers' offer doesn't meet all the sellers' needs and wants (and even if it does), the sellers can legally reject or counter the offer.

How Much Is the House Worth to You?

In the end, it's up to you (with the help of your real estate agent) to decide how much money a house that you like is really worth—and how much you're willing to offer for it. Base your offer price on such factors as:

• the amount that comparable houses have sold for recently in the same area
• the house's aesthetic or "wow" appeal to the average buyer
• whether the local real estate market is hot (demand for houses is high and prices are going up, with you perhaps competing against other bidders) or cold (prices are dropping or stagnant and houses are staying on the market for a long time)
• the seller's personal needs—such as the desire to move quickly, or to unload a house that's been on the market for several weeks or months
• the house's physical condition (which you might not find the entire truth about until you hire someone to prepare a home inspection report—something you could actually arrange to do before making an offer, though most buyers wait until they're in contract)
• whether the house is uniquely valuable to you (if you need an in-law unit or art studio, for example), and
• what you can afford, after a careful examination of your budget and existing debt, and taking into account the ongoing costs of home ownership.

Don't Rely on Online Valuations

Websites such as Zillow let you type in an address and receive an instant, free valuation for a home. These listings can be fun to look at—and are actually important to check on, so that you know what other buyers are also looking at—but realize that they tend to be based on general, sometimes out-of-date or erroneous, public data, and can be off by tens or even hundreds of thousands of dollars.

A computer has no way of knowing whether the house overlooks a botanical garden or a garbage dump, smells like the nearby pine woods or like the last owner's cats, or is streaming with sunlight or molding in the shadow of a nearby high-rise. Nor will the computer know whether you are facing one other bidder or five. In the latter situation, you'll obviously want to aim high when setting your offer amount.

Choosing a Dollar Amount to Bid on a Property

Putting it all together, you'll need to arrive at a number that's high enough to get the real estate seller's attention, but low enough that you won't feel buyer's remorse for having overpaid. If there's competition for the house, this might be your only chance to impress the seller. If not, and you come in low (but not insultingly low) the seller might be willing to negotiate, and will send you a counteroffer.

The exception to the "only chance" scenario is if you're bidding in a part of the country that allows "escalation clauses," such as New York State. This advises the real estate seller that you are willing to match or exceed other bids on the property, up to a set limit.

A final hint: Although many homebuyers tend to think in multiples of five, that is, of offering either $350,000, $355,000, or $360,000, there's no rule that says you have to do this. If, for example, you know that another buyer is interested in the same property, and you think that person is likely to bid $360,000, you could always bid $363,000, just to set yourself apart.

For more information on getting to know your local real estate market, looking carefully at houses, finding the house that's best for you, and making an offer, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray and Ann O'Connell.