One of the most important elements of the home buying process involves making the right offer for your home. Experts encourage all homebuyers to take the time to research prices in the area and create their own reservation price, or the highest price they are willing to pay for the home. A reservation price helps you to bid more effectively and stay within your budget, making it easier to negotiate with the seller or seller’s agent when it comes to making the 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.
Here is a basic process for calculating your reservation price so you can negotiate the best price for your dream home:
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. Compute for tax and insurance costs. Barron’s ‘Smart Consumer Guide to Home Buying’ gives these suggestions for computing tax and insurance costs: Use a factor of .68 for regions with high tax and insurance rates; .85 for areas with inexpensive tax and insurance rates; or use the typical factor of .75 to get a rough estimate. Your loan P&I payment that you can afford can be computed by multiplying the factors above to the amount in Step 1.
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. Know your total loan amount. This information can also be found in the loan payment table, or you can simply ask 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.
Calculating your reservation price is an important part of the homebuying process and can help you negotiate the best possible deal for your situation and get the home you want. Consider using the above calculations for each home you are considering so you have the confidence to overbid or negotiate for a lower price with your budget in mind.
When looking for MN homes for sale, searching online is one of the fastest ways to find the types of real estate your looking for. People use the Minnesota MLS to view most of the homes that are currently on the market.
