* How Property Condition Affects Your Offer
* How Home Improvements Affect Your Offer
* How Market Conditions Affect Your Offer
* How Seller Motivation Affects Your Offer
* The Final Decision on Your Offer Price
How Property Condition Affects Your Offer
In just about any market, a Hawaii home that has been highly upgraded commands a much higher price than a similar size and location house without the upgrades. Let’s say that the difference of the actual upgrades is $100k, which in our example includes wood floors, Viking stainless appliances, new paint, marble and granite countertops, and new vinyl windows. That sounds like about $100k right?
Now let’s say the house is in an expensive area like Hawaii Kai, and specifically Triangle. Down the street is a very similar size house that has a similar location on the street and similar view. In fact when you compare just the bones of the house, they are almost identical. But the $100k in upgrades that I mentioned just makes this house feel completely different. Well in Hawaii this house might command up to $150k or $200k difference in price. I know it sounds crazy, but I have seen this many times.
And not only does it command a much higher price, it also sells faster. So if you’re thinking of buying a house like this, consider buying the run down house and doing the work yourself. Sure it will take months of work and headaches with contractors to get it all done. Sure contractors in Hawaii are usually flaky and can often be very frustrating. But the difference in price may be worth it to you.
How Home Improvements Affect Your Offer
Now if you’re thinking of buying the improved house, it’s probably because you don’t want to be the one who has to deal with the time and hassle of putting all the improvements in. This is pretty understandable, because for many people the months of work that it takes to get a house in pristine condition is not worth saving $50k or so, because they make a lot more than that in that amount of time on their regular job.
If this is the case, you might consider the opportunity cost. Let’s say the actual dollar difference will be $50k in time and effort, while the rest is just the cost of the work itself. You figure it will take 6 months of your life to do all the upgrades, and that means living with a messy construction zone house for 6 months. Will that be worth the $50k you will save?
The answer lies in another question: How much money can you make with that time in another activity, like your regular job? If you figure out that it’s just better to buy the house that is already done up the way you want it, then make an offer that shows the seller that you want the house. You may have the pay a premium, but for you it’s worth it. As you consider the comps in the area, add the value of the upgrades into your offer. Even if all the comps are $100k-$200k below the house, it may still be worth it.
In Hawaii Kai, with average home prices over $800k, it’s common to see a highly upgraded house go for $200k over other comps. Seriously.
How Market Conditions Affect Your Offer
Since about 1999, the market in Hawaii has gone up dramatically. During this time, offers were frequently at or above the asking price, with terms that were specifically in favor of the seller. That’s because inventory was sparse and buyers were willing to do almost anything just to get into a house. In areas like Kailua and Hawaii Kai, homes were selling in just a few days, sometime hours. If a house was especially nice, it could go for 10% above the last sale with no problem, even if the last sale was yesterday.
As of Spring 2007, the Hawaii real estate market has changed. While prices haven’t dropped overall, the available inventory has more than doubled, and buyers have changed their tactics quite a bit. With more available homes you would think prices might come down, and in some areas they have a bit, but in the higher priced areas, this hasn’t happened yet. So now as demand has decreased and supply has increased, a purchase offer can be far more in favor of the buyer. Buyers in a slower market can offer a price well below the asking price and put together terms that would not get accepted in a hot market.
One aspect of the offer you can write in your own favor is the inspection period. C-51 is the paragraph of the Hawaii Real Estate contract that allows you to inspect a property and back out of the contract at any time during this period. So if you have a 21 or 30 day inspection period, then the contract is very easy to cancel for quite a long time. Since escrows usually take 30-45 days, having a 21 day inspection period is very much in favor of the buyer.
When the market favors buyers, you can make offers that favor buyers. Price, timeframes, contingencies, inspections, and other terms can be used to put together an offer that favors you. Sometimes you can make a low priced offer that puts all the other terms in favor of the seller.
How Seller Motivation Affects Your Offer
Before you make an offer on a house, you should find out as much as you can about the seller. Are they moving? Did they buy another house already? Did they get a job transfer? Are they in financial trouble? Any information can be useful for you as you put your offer together.
If you find that timing is very important to your seller, you might be able to make a low offer that fits right into his timing. For instance, if the seller has bought another house in Manoa and needs to close escrow on that within 30 days, he may accept a low offer if it meets that deadline.
Sometimes the listing advertisement says “motivated seller” right up front. Usually I interpret this to mean something like, “make us a low offer well below asking price.” On the other hand, I sometimes find a seller that really doesn’t care if the house sells or not. They may have plenty of time and no plans to go anywhere. They may not want to sell unless the price is exactly what they want. You should find this out because you don’t want to have someone else come in and buy the house you wanted because you made a low offer.
While we’re at it, it’s also important to know if they have any other offers. If a seller has multiple offers they are more in control of the negotiations than the buyer. They don’t have to reveal what the other offers are, but they can. Even if they don’t they have leverage against the buyers because the competition for the home means the seller can choose the offer with the best price and terms.
The Final Decision on Your Offer Price
Deciding on your offer price is a process that involves considering all the factors I mentioned above. The seller’s motivation, the market, the upgrades, etc. Putting all the pieces together allows you to find the number and the terms that you feel are right. It avoids wasting time with low ball offers that won’t even get a reply. It also avoids over paying for a house that you could have gotten cheaper.
When I represent a buyer, I usually tell them to offer as low a price as the market conditions will allow. What’s the worst case scenario? The seller doesn’t respond or we lose the house to another buyer. If these are acceptable results because there are plenty of other houses, then why not go for it?