Buying a Home and Determining the Right Purchase Price

Lisa Curlett October 16, 2018

Let’s consider this scenario. You’re buying a home and have finally found the ideal property for you and your family. The next question becomes how to determine the purchase price so that you successfully procure your dream home, but at the same time, you don’t overpay for it. And what is the best way to determine the winning purchase price? This – as you might guess – is the $100 million question for buyers.

The answer is that there is no one way to determine the right purchase price. It’s not derived from a mathematical equation or a scientific approach but instead is more of an art form. It’s a blending of all kinds of information to ultimately determine the price. To this end, here are some approaches to use when you are trying to assimilate all the information at your fingertips to ascertain what’s going to get the deal done while simultaneously leaving both parties feeling satisfied and financially secure.

Review the sold comparatives (comps) and assess the market trends – This is step #1. Find the sold properties in the price range of your potential new home and adjust for condition, square footage of the home, lot utility, location, etc. When reviewing the comps, you’ll need to assess the information using a state-of-the-market filter. In other words, how does the current market affect the pricing? What has happened since these comps sold? Has the market gone up or down? This is another element of the comparative analysis that needs to be considered.
Compute several mathematical equations – There are a variety of mathematical equations that will help provide valuable data points in your analysis. Again as you did with the comps, you begin with the sold properties in the price range of your potential new home. Then you turn your sights to the various equations. One is the average assessment to sale price ratio. Another is the average sale price/square foot then multiplied by the home’s square footage**. Next on the list are the average sale price to list price ratio and the average sale price to original price ratio. And there are others such as the seller’s purchase price plus cost to renovate or build***. This kind of equation can be especially relevant if the seller is “flipping” the home.
Assess the Competitive Situation – How many other homes are on the market in this price range and how many other buyers are “circling” or seriously looking at this home? For example, if there are multiple buyers making offers on the property you feel is ideal for you, the right purchase price will likely be much higher, especially if you want to eliminate your competition, win the bidding war, and ultimately be the home buyer.
Look at the Days on Market (DOM) – Timing is not everything in the world of real estate, but it certainly plays a significant role. The longer the house has been on the market and hasn’t sold, the more likely the seller will be to negotiate (see #5 below). Conversely, if the property has just come on the market, and you hear that several buyers are making offers on the property, you know these will be very close to – or over – the asking price.
Try to Understand the Seller’s Mindset – Has the seller bought another property? What’s important to the seller besides price – closing date, buyer profile, or other factors? Has the seller turned down other offers? All of these questions will give you great insight into understanding whether the seller is more or less negotiable and therefore what purchase price s/he is willing to accept. This is a crucial element in understanding the pricing puzzle.

As you can see there are many factors that enter into determining the right purchase price, and it is prudent to consider them all and weigh them accordingly depending on the scenario. It also should be noted that you might very well find that each of the above analyses and equations will lead to different answers about what is the right purchase price. Some of them could yield similar numbers but not all of them will, which again leads you to the pertinent question – what is the true value of the home and what is the right purchase price to successfully buy the home but not overpay? My recommendation is to take all of the data, put your best foot forward with your offer, and then negotiate keeping in mind your assessment of the right purchase price. The bottom line is that you’ll never know until you try.

Have you been in this kind of situation when you’re trying to determine the right purchase price for your potential new home? What factors did you consider? Was your strategy successful? I can’t wait to hear.

For more information on this or about the real estate market in Weston, Wellesley, Wayland, and the surrounding towns, or if you are considering selling your home, please contact me, Lisa Curlett (781-267-2844 or [email protected]), to answer any questions or for a complimentary home appraisal.

An ideal home is a bit of a misnomer because, in my experience, there is no perfect home no matter what the price point. There is always some kind of concession the home buyer must make.

Note that with this equation, the reported square footage on the listing sheet can be falsely inflated (its not usually deflated) to include finished basements, for example. The only way around this so that you are truly comparing apples to apples is to use the town’s public record for square footage, but even then this number can be out of date.

This requires you to assume various prices to build/renovate which aren’t necessarily correct. For instance, if the seller renovated the kitchen, you could value that at a cost of $50,000 or $80,000 (or even more). And depending on which number you chose, your pricing answer would be very different.