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How do you decide what to offer?
We are getting ready to put in an offer on a short sale, and trying to figure out how much to offer. By square footage and compared with other recently sold houses in the area, the asking price is completely reasonable. However, the other houses in the neighborhood are mostly well upgraded and well maintained, and this one is a mixed bag.
It has a lot of high end things (better than a lot of the neighbors): new 50 year roof, double sinks in both full bathrooms, a walk-in closet (rare in this 40 to 60-year-old neighborhood), granite in the kitchen, vinyl windows downstairs, siding in good shape, upstairs laundry, a balcony off the master bedroom, a larger than normal lot, and a nice view of the creek and wildlife preserve it backs up onto. It's also very close to the transit center (1/2 mile: about as close as any single family homes), which is important to us, and 2 blocks from a very nice city park. The neighborhood is very nice and the schools are good. It seems to be on the one street in our preferred neighborhood that is not part of the HOA, and NOT being part of the HOA is our preference.
It also has a few big problems: the lot has a lot of slope and part of it is currently flooded, and another part is overgrown with blackberries and ivy. The house itself is well above the water, so I'm not worried about the house flooding. Some of the neighbors have filled in the low area on their lots and have very nice grassy back yards, but we don't know the legality, cost, or environmental impact of doing that. Very expensive, I'm sure, but we aren't quite sure how to find out. On the inside of the house, the flooring is almost all carpet that desperately needs to be replaced. Ideally, we'd replace it with all hardwood, which is what most of the other houses for sale in the neighborhood have. Most (maybe all?) of the rooms need to be repainted and have the holes in the walls patched (holes ranging from nail to fist size and not a ton of them, but all over the house). There is one broken window (a small one into the garage), and a couple planks in the deck need to be replaced. The owners have not bothered to clean it before showings, so it looks worse than it is... I think.
Anyway, we wanted to go see it again this weekend, but our agent talked to the seller's agent and apparently the owner has a serious medical problem and will not be able to have the house shown for at least 2 week while recovering from surgery. The seller's agent says that there are currently no offers and the owner plans to "get serious" about lowering the price once she is recovered from her surgery in about 2 weeks. Our agent is urging us to put in an offer for a reasonable price sooner than that, since inventory in this desirable neighborhood is low, and it is sure to get other offers when they lower the price significantly. Plus, we have already seen it (several months ago) and the offer isn't binding anyway.
We know we are going to offer less than the asking price, but how do we figure out what a reasonable price is? A reasonable price per sq ft (what it is currently listed at) minus the cost to upgrade it to be similar quality to the other houses in the neighborhood? Minus some fraction of the cost to upgrade it to be a similar quality to the other houses in the neighborhood? Do banks counter offer, or are they likely to look at secondary offers instead if they feel ours is too low? On the one hand, people say "you never get back the money you put into upgrading your house", which seems to imply that the price of the house should be discounted less than the cost to do the upgrades. On the other hand, unless you are paying cash, you don't see the money you save by getting the house at a lower price for a very long time, which makes it seem like the house should be discounted by more than the cost of the upgrades.
I feel like I have no clue what a reasonable price for this house would be. I'm not even sure what it is worth to us. We're going to be paying for it for 30 years, which is longer than my whole life to date (barely). I know we can afford it, but it's more money and more time than I feel like I can really comprehend. Our agent says she thinks it is overpriced, but has not said how much she thinks it is overpriced by. She thinks it would take at least $40K-$50K to bring it up to a similar quality to the neighbors. We'll have $30K (give or take) in savings after closing that we can put toward the upgrades/fixes that are most important to us in this 2300 sq ft house. This is on top of a 6-month emergency fund. We plan to stay in the house at least 20 years, though obviously you can't know for sure.
Re: How do you decide what to offer?
With a short sale I'm sure there are times that it varies, but I would look at comparable sales in the neighborhood (look on redfin.com), and see what others have sold for to get an idea. My agent had said that you should come in within $20K of the asking price, your agent should give you a little more guidance around this -- what do they think would be a fair offer? What would they offer on the house? They always will say, "it's your decision" because it is, and they can't make it for you, but I think it helps to know. With that being said, if you feel the house needs substancial work, you can always go in low, and then contend with the whole "if you insult the seller" deal...I guess some people will get insulted, but then again, it's a business deal and it's common to negotiate.
I would offer what you think the house is worth, definitely taking into account the work you'll need to put into it. It's not true that you never get back the money you put into a house - some of your improvements will add value and you'll get to enjoy all of them.
If the owner is thinking about lowering the price, you might be able to go in 30k or 40k under the current asking. Your agent would be able to give you the best advice though.
Keep in mind, some of the fixes you're talking about are huge under takings if you plan to DIY. My MIL has been trying to get rid of poison ivy and raspberry bushes in her back yard for three years and is finally forking over $2,500 for a company to come do it. Not sure if you've painted before (I hadn't before closing on this house) but that's harder than it looks too. Muscles hurt that I did not know existed. Make sure you love it if you're going to have to put that much into it.
It's really impossible to say without knowing the asking price of the house. If you feel comfortable giving it, that would probably help you get more responses.
Honestly, some of those fixes sound pretty cheap to me. Carpet is dirt cheap, so if you didn't want to get into a bunch of renovations right away, you could always just replace the old carpet with new carpet and live with that for a few years until you are ready to put a bunch of money into wood floors. Same with patching and painting walls. No fun to DIY, but it's not that expensive to hire a painter.
The yard sounds like an expensive fix to me. I'd try calling your city and just asking about that lot -- they could possibly point you towards any environmental regulations or other restrictions. If you wanted to, you could try to talk to the neighbors to see what it cost them. Also, is this something you'd want to do right away or could you enjoy the house and yard without it?
I wouldn't get too caught up on what you "should" offer. A house is only worth what someone wants to pay for it. Listing prices are sometimes way too high. You need to decide what that house is worth to YOU, given all the money you'd have to put into it. If you offer 80% of the asking price and insult the owner, oh well. If that's what you think it's worth, then don't feel bad about offering it.
Add up the cost of renovations you'd want to do right away and factor that in when you think about making an offer.