How Much to Offer on a Newly Listed Home

Knowing how much to offer on a newly listed home in the Bay Area and Silicon Valley is an art that calls for a blend of strategic thinking, market understanding, and a dash of negotiation skills. Whether you’re a first-time homebuyer or a seasoned investor, understanding the nuances of making an offer on a home that’s just it the market (or had something of a price reduction) can make or break your home buying experience. This guide will walk you through the key considerations and strategies so you will know how much to offer on a newly listed home in Silicon Valley and the Bay Area.

Understanding the Seller’s Expectations

When a home is fresh on the market, very few sellers will be open to accepting an offer that is materially below list price; in fact, many sellers will insist on a full asking price offer. Actually, when a home is new on market, even a full-price offer may result in the seller countering back higher than list price. That’s because sellers in and around Silicon Valley are conditioned to expect that their homes will sell at least at asking price, and when they receive even a full-price offer soon after it’s listed, they may negotiate hard to get the buyer to increase the price, even over the asking price.

Of course, with prices as high as they are, there is a strong temptation on the part of many buyers to offer less than full price on a newly listed home. The buyers may even be able to point to “comparable” recent sales which appear to indicate that the listing is overpriced, and that the seller should therefore be open to considering a less-than-full-price offer.

Playing “the comps” game with the seller of a newly listed property is invariably an exercise in futility. If a seller were open to accepting a low offer “right out of the gate” with a newly listed property, they would have listed at a lower price. Rather, sellers will want the market to prove to them that the price is too high by either a) receiving no offers after an extended period of time, or b) receiving low-er offers from buyers over the initial weeks of the listing. In my experience, it is exceedingly rare for a seller to be open to a low offer when their home is newly listed.

Don’t be surprised if a less-than-full-price offer for a newly-listed home doesn’t even get a counter offer. Sellers may well sit on any weak offers and just wait to see what else comes in. That’s because the seller can make a counter offer on an offer at any time until it is withdrawn; it is perfectly fine, legal, and ethical to make a counter offer to an offer that has expired. Sellers will do whatever they feel they must, so long as it is legal and ethical, to get the highest price possible for their homes, and that may well mean sitting on your offer until they’re ready to negotiate further with you – usually when they have other offers in hand as well.

Understanding the Silicon Valley Real Estate Market

The Silicon Valley real estate market is not a monolithic entity; it ebbs and flows, presenting different dynamics that can sway the power balance between buyers and sellers. Understanding these dynamics is the first step in deciding your offering price on a newly listed property in Silicon Valley.

As a general rule though, the Silicon Valley real estate market is fairly strong – even when it appears weak. There’s a lot of money in town, and housing is always in demand. Regardless of your understanding of the current state of the market, it’s important to know there’s a buyer for every property – at the right price. The seller surely knows this, and so when a home is newly on the market, and the market has not yet had an opportunity to speak, few sellers will be inclined to seriously consider offers more than a hair off list price.

The Buyer’s Market

In a buyer’s market, the supply of homes for sale exceeds the number of interested buyers. This glut of inventory may give buyers an upper hand in negotiations. Sellers, eager to close a deal, may be more amenable to lower offers – even if their home has just come on the market, and especially if the terms of the buyer’s offer are otherwise favorable.

This certainly isn’t something you can count on, however it is patently clear that homes are sitting on the market a long time and that the list price really isn’t likely to get the property sold soon, you may have a shot with a lower initial offer price.

The Seller’s Market

Conversely, a seller’s market presents a scenario where demand outstrips supply. This is most usually the kind of market you’ll find in Silicon Valley. With more buyers vying for a limited number of properties, sellers gain the upper hand. In this case, you may find yourself in a bidding war, often pushing your offer above the asking price to secure the property. Be cautious not to overstretch your budget in such scenarios.

The Balanced Market

A balanced market, as the name suggests, achieves an equilibrium between the number of buyers and properties available. In such a market, neither buyers nor sellers have a significant advantage. Historically, a “balanced market” is one that has 5-6 months of supply of homes. However, in the Bay Area and Silicon Valley, a “balanced market” has some to mean a 3-4 month supply of homes. This is the “new normal” that Silicon Valley has enjoyed since the market recovered after the mortgage crisis of 2008.

Evaluating the Property

Before you decide on your offer, it’s crucial to thoroughly assess the property. The home’s condition, its time on the market, and its comparison to similar homes in the area can all influence your offer. You will also want to look for signs of economic and functional obsolescence: if the home has a weird, choppy, or outdated floor plan or is located on or near a busy street or freeway may explain why the home is priced where it is, and these factors must be given strong consideration before writing an offer – and may in fact be reasons enough not to write an offer at all.

Property’s Time on the Market

The length of time a property has been on the market (or how long it’s been since the last significant price reduction, say 5% or more) can provide valuable clues about how the market sees the home. A property that’s been listed for a long time, experiencing multiple price reductions, almost invariably signal an overpriced home – which would indicate it’s ripe for a low-ball offer. Be aware though that many sellers – even those on the market a long time – can be quite stubborn and often times, low-ball offers don’t go very far.

However, if the home is newly listed, say within only 10-14 days on market, it is very rare for a seller anywhere near Silicon Valley to accept an offer that is materially lower than asking price. You may be able to shave off a few thousand dollars, but trying to nickel-and-dime the seller may end up costing you the property if another offer comes in while you’re trying to wheedle a few grand out of the seller.

It’s a good idea to check the average days on market for homes that have recently gone under contract, and also to see what is the average sales-to-original-list-price ratio for homes that have been on the market as long as the property you want to buy has been. You may be surprised to see that the average ratio is over 100% for homes that have been on the market less than say 2 weeks, and even at 3-4 weeks, the ratio will probably be very close to 100% in most parts of the greater Bay Area.

Property Condition

The condition of the property (including deferred maintenance) can significantly impact your offer. Move-in ready homes with modern amenities often command higher prices compared to fixer-uppers that demand extensive repairs or renovations. Always consider the cost of potential repairs or upgrades when deciding on your offer. Realize that homes which are in good condition, and with prime locations, are quite likely to sell quickly and close to (and often higher than) list price.

Comparing Similar Homes

Comparing the property with similar recently sold homes in the area – known as comps – can give you insights into the fairness of the asking price. Your real estate agent can provide a comparative market analysis (CMA), revealing the listing and selling prices of similar homes sold in the past few months. If the home you’re interested in is priced higher than comparable properties, it may warrant a lower offer.

Budget Considerations

While market conditions and property specifics play a pivotal role in crafting your offer, your budget is often the ultimate determinant. It’s essential to know your financial limits before making an offer to avoid the risk of overextending yourself.

Affordability Evaluation

Understanding how much house you can afford is a critical step in the home buying process. This involves considering your income, existing debts, credit score, and other financial obligations. Use a home affordability calculator to get an accurate estimate of the maximum offer you can make without straining your finances.

Pre-approved Mortgage

Getting pre-approved for a mortgage has dual benefits. It gives you a clear idea of how much a lender is willing to lend you, setting a cap on your maximum offer. Moreover, it signals to the seller that you’re a serious buyer, enhancing the credibility of your offer.

Crafting Your Offer

With a clear understanding of the market, a thorough evaluation of the property, and a defined budget, you’re now equipped to make your offer. But how much should you offer? Depending on the circumstances, you may decide to offer above, at, or below the asking price.

Offering Above the Asking Price

In a hot seller’s market (or in any market) when multiple buyers are competing for the same property, offering above the asking price will usually be the only way you have a shot at securing the property. In fact, the reality is that in the Bay Area and Silicon Valley, it is quite common to overpay for a home – often times by 10%, 20%, 30% or more – irrespective of condition.

It should be worth noting that even in a lukewarm or buyer’s market, you may want to offer over asking price if your terms are in any way weak – such as if you need to sell a home you own first, or you need the seller to pay for termite clearance or help pay for your closing costs.

Offering At the Asking Price

In a balanced market or when the property is reasonably priced and newly listed for sale, offering at the asking price is usually the right move. It shows the seller that you recognize the value of their property and are serious about purchasing it. Again, do your research about the average days on market and sales-to-list-price ratio – the seller probably knows this information as well, and usually be expecting to do as well as the average seller – or better.

Offering Below the Asking Price

In a buyer’s market or when the property has been on the market for a long time without any offers (perhaps twice the average days on market in the area), proposing a price below the asking price might be a viable strategy. However, it’s essential to make the offer reasonable and not insultingly low to maintain a good rapport with the seller. Generally speaking, any offer less than 90% of list price won’t go anywhere – that’s not based on any academic research, that’s just my 20+ years of anecdotal experience talking here.

But again – and I hate to sound like a broken record – check the market data and see what the market is doing and craft your offer accordingly.

An Appraisal Contingency is No Saving Grace

When you write an offer – especially an offer that is pretty high, perhaps higher than what you believe would be fair market value – you may feel some comfort in negotiating an appraisal contingency into the purchase contract. After all, the appraiser is supposed to be objective and if the price you’re paying is too high, certainly the appraiser would show that in their appraisal report. That may be true in many parts of the country, but in the Greater Bay Area and Silicon Valley, it’s actually fairly rare for a home appraisal to ever come in low.

Strengthening Your Offer

Beyond the price, there are other ways to make your offer more appealing to the seller. This could mean being flexible with the closing date, limiting contingencies, or even waiving certain contingencies such as home inspections. However, be sure to understand the potential risks before waiving any contingencies. You may be able to offer other sweeteners to the seller, such as allowing them a 1-2 month rent back, possibly even at no charge.

I have a whole separate article I’ve written about how to write a strong offer in a competitive market like Silicon Valley.

Deciding to Wait on Making an Offer

As loathe as I am to say it, sometimes, the best option is to wait on making an offer. When a home in Silicon Valley is newly listed, it’s pretty unusual for a seller to accept much, if anything, less than full asking price. If you want to offer much less than list price (less than 90% of asking price), you may want to wait on making an offer. Giving the seller a lowball offer – even in a buyer’s market – can sour the owner against working with you, possibly causing the seller to drive a harder bargain than they might otherwise would a few weeks, or a month or two, after their home has sat on the market a while.

When a home in Silicon Valley has been on the market considerably longer than the market average, sellers may begin to be more receptive to lower priced offers. It’s a good idea to have your agent keep in touch with the listing agent and ask to be apprised if any offers come in while you’re waiting for the seller to soften up on price. Of course, if another offer does come in, you would then have to compete against it – but it, too, may be a lower offer. There’s no perfect answer, but waiting and staying in touch with the seller’s representative may be the best way to get an acceptable price on the home you want.

Conclusion

Making an offer on a home in Silicon Valley is a delicate process that involves careful consideration of various factors. By understanding the market conditions, evaluating the property thoroughly, and taking into account your financial capabilities, you can craft a competitive offer that’s likely to get accepted without breaking your bank. Remember, working closely with an experienced real estate agent can provide invaluable insights and guidance to navigate this intricate process successfully.

Understanding the Seller’s Expectations