Buying a house can be stressful, especially in a hot market. If you wait too long to put in an offer, it may be too late as the buyer may have already accepted a previous offer in which case previous buyer would be “in contract” (pending sale) in which case the seller can’t entertain other offers while in contract. Therefore, getting “in contract” quickly prevents blocks other buyers.
Of course, the more you offer to buy a house, the more interested the seller would be to accept your bid. However, you don’t want to offer too much as you could be overpaying. Let’s say you find a duplex on sale for $360,000. You then do some research to determine if $360K is the market value.
According to Redfin, you find that the house is estimated at $360K. However, Redfin shows you how they came up with that estimate using comparable properties in the area. After looking at the comparables, you find that Redfin’s automated estimation algorithm is using single family homes as comparables instead of duplexes. Obviously, single family homes are not good comparables to use if the subject property is a duplex.
Zillow Estimate (Zestimate)
According to Zillow, you find that the house is estimated at $346K. Like Redfin, Zillow shows you comparables that they used to come up with their Zestimate. After looking at the comparables, all but two of them are single family homes. In general, when comparing the price per sq ft of a single family home to a duplex, the latter is almost always cheaper. Therefore, Zillow’s automated estimation algorithm isn’t taking into account this difference which results in a relatively high estimate.
Your real estate agent can provide you a listing of comps (comparables) for your target house. In doing so, the agent can pick better comparables, e.g. duplexes only, to compare against. According to one of 10 different comps, you can create a spreadsheet to determine the average price per square foot as shown below.
According to this analysis, the average price per sq ft for similar duplexes recently sold in the area is $136 per sq ft. Since the target property area is 2240 square feet, then a more accurate estimate of its value is 2240 x $136 = $304K. Since this estimate was manually done taking into account similar types of homes (duplexes) which is how a certified appraiser would estimate a property’s worth, then this estimate is likely to be more accurate.
If we list these 3 estimates side by side, we get
There’s a huge difference in estimates. Since the seller is asking for $360K, then if you put in an offer for $304K, the seller will likely reject your offer, even though you know the house should be worth $304K +/- 5%. It may be possible that the seller recently renovated the property to justify a high asking price however, in this particular real case study, that is not the case as the seller only painted the exterior of the house and replaced a patch of weeds with black mulch.
In this case, one strategy would be to put a bid in for a certain amount that you think the seller will accept BUT add an appraisal and financing contingency to protect yourself from overpaying. Let’s say you put in a bid for $346K, the Zillow estimate which most people are familiar including the seller’s agent. As that is the Zestimate, it’s reasonable that the seller would consider it a fair bid even though you believe it’s too high. Once the seller accepts your bid – which contains the appraisal contingency, of course – then you will be in contract to block out other buyers. Then, once you get a real hand-made appraisal done by a certified appraiser, it should conclude that the value of the target property is $304K +/- 5% which gives it an upper value of $319K. Since this value is less than your bid price of $345K, then you have the option of walking away without losing your deposit or you can show the appraisal report to the seller and argue that the house isn’t worth $346K and that you would be willing to write an addendum to the contract stating that the revised price is $319K, for example. If the seller accepts your revised price based on the appraisal, you can proceed, otherwise, you may want to walk away to avoid overpaying, unless you really want the house. Either way, at this point, you’d be in contract so you’d have exclusive access to negotiate with the seller to come up with a price you are willing to pay.