How Much Should You Offer For a Property?

We provide strategies on how to figure out how much you should offer for a property that you want to buy. This is especially important now, as property prices have dropped. Ideally you do not want to pay a high price, or at least, a higher price than you need to. However, the offer should be fair and reasonable.

More banks and economists are speculating that the New Zealand housing market has reached the bottom of the market. In addition, talk is that the housing prices are very close to the bottom. 

Economists say it will probably take three years or so, to return to the prices that were present during the peak. Naturally there are no guarantees.  Forecasts are only forecasts. 

Here is what we do know now:

  • House prices have dropped (and questionably almost at the bottom?)
  • People are migrating to New Zealand
  • Medium and longer term interest rates seem to be decreasing
  • People are feeling secure in their job

A year ago, the market was good. Homes were selling quickly. Competition was strong, which caused prices to rise. There were many buyers wanting to purchase.   

The property market has changed. The “real” competition now is really the vendor themselves and how motivated they are to sell.  The market has now shifted more towards a “buyers market” than a “seller’s market”.

This then creates opportunities for both home buyers and investors. Once you have found the home you considering buying, you need to figure out how much to offer.

Making an Offer on Property Negotiation

We provide some techniques to consider for both investment property as well as owner occupied property.

1. Figuring out how much to offer for Investment Property

To determine the “right” price to offer, incorporate the following tasks. This can help avoid bidding wars and multiple offer situations, which drive prices up.

 A. Market Research and Analysis

It is essential to conduct extensive market research and analysis to understand the local real estate market conditions and trends.  This includes analysing local factors such as growth, rental demand, and other economic factors.  For instance, if you are looking at a property in Auckland, it is important to understand the Auckland Property Market.

  • Study the local real estate market
  • Analyse recent sales data and trends within that area
  • Consider the supply and demand dynamics and whether there is a rental shortage

B. Comparable Sales

This technique involves identifying properties that have recently been sold. These properties should have similar qualities and features to the property you want to buy.

  • Identify comparable properties
  • Assess their sale prices and key features
  • Adjust for differences to determine a fair market value

C. Income considerations

The income method is often used to evaluate rental homes that are bought as investments.  Calculate the net operating income of a property. Estimate the potential rental income. Subtract associated costs, such as property taxes, insurance, maintenance, and management fees.

  • Estimate potential rental income
  • Evaluate expenses associated with the property
  • Calculate the net operating income (NOI) – income less expenses

D. Return on Investment (ROI) or Yield

Similar to the income approach, however the focus here is more on the desired yield

  • Determine desired ROI or yield
  • Factor in financing costs, vacancy rates, and potential appreciation
  • Evaluate the property’s cash flow and potential for appreciation

A common calculation/guideline on the offer price is: Potential Rent divided by yield percentage = Offer Price.

The potential rental income is $900 per week, thus $46,800 per annum. Assuming a desired yield percentage is 8%. We can use the following formula to determine the offer price:

$46,800 divided by 8% = $585,000 offer price.

Of course, this is only one aspect of the many factors that you need to take into consideration and always remember, each situation is unique.

Profit margins are an important factor for investors.

E. Professional Appraisal

An appraiser assesses the condition and location of a property. They also take into account recent sales of similar properties. This helps them estimate the property’s fair value.

This evaluation can provide an impartial review. It can help confirm your analysis, ensuring you make an informed decision.

  • Consider hiring a certified appraiser (We can help with this)
  • Obtain a comprehensive appraisal report
  • Use the appraised value as a benchmark

Although the objective for an owner-occupied property may differ, there are some similarities.

Deliberation on what to offer on property for a family

2. Figuring out how much to offer for Owner-Occupied Property

Similar to Investment Property, it is important to do some homework to get to the “right price” and avoid pushing the price up.

A. Market Research and Analysis

  • Research the local housing market
  • Examine recent sales data and trends
  • Understand the supply and demand factors

B. Comparable Sales

  • Find and analyse similar properties in the area
  • Compare their sale prices and characteristics
  • Adjust for differences to determine a fair market value

C. Check Condition and Features

Unlike rental properties, how much it costs to buy has a bigger impact. The value of the property can be affected by factors such as its construction quality, age, and necessary repairs or upgrades.

Many homes built between the mid 1990s and early 2000s did not meet the standards of the New Zealand Building Code. This resulted in the leaky homes crisis.

Examples of this is monolithic cladding, untreated wood framing, flat roofs without eaves, and decks over other living areas. Note that not all monolithic cladded properties are created equal.  Cavity systems and treated framing became the standard after the year 2004.

  • Evaluate the property’s condition
  • Consider whether upgrades, renovations, and maintenance is required
  • Assess the value of additional features offered (e.g., pool, garage, freehold vs cross-lease)

D. Location and Neighbourhood

The location of a home has a big impact on how much it’s worth.  Price is affected by proximity to schools, public transport, shopping centres, and desirability of the neighbourhood.

For example, a property in a preferred area like Forrest Hill on Auckland’s North Shore, is often worth more. This is because of Westlake’s good school reputation, low crime rate, and convenient bus terminals. A property in a less desired area is not as valuable. It usually has fewer services and a higher crime rate.

Bear in mind that your dream home or location, will not necessarily be another persons dream home or preferable location – So:

  • Examine the desirability of the location – We all have our own preferences and that’s okay.
  • Evaluate nearby amenities and infrastructure
  • Consider the overall appeal and demand for the area
  • Make a list of your ‘non-negotiables’ in a home

E. Mortgage Pre-Approval and Budget

Your Mortgage Broker can arrange pre-approval for you. This way, you know exactly what your budget is and whether it is within your capabilities.  You can then focus on homes that are within your price range.  This also helps narrow down your search.

  • Obtain a mortgage pre-approval
  • Understand the loan amount you qualify for
  • Set a budget based on your financial capabilities

In summary, when conducting due diligence, it is important that the analysis undertaken is comparable.  There is no point comparing data and trends between properties that are not “pretty much the same” or similar. This includes sales data, sale prices, key features, and potential rental income. Moreover, these properties should be located within the same areas.

There are multiple pricing strategies and techniques to consider. The more aspects or techniques brought into consideration, the better.  Your preferred pricing model may be as simple as an excel spreadsheet. There is no one defined formula to determine what the right price is, since it depends on multiple factors.

Purchasing a property, regardless of the objective, is a large investment. Ensuring your purchase is aligned with your personal financial goals is important.

We have more than 17 years in the mortgage industry, and this is our niche. The experts know exactly what products or services lenders offer, and we will guide you to your unique optimal solution. Contact us for assistance.

Additional Helpful Resources:

  • Real Estate Agents