November 27th, 2009 
Kelly Gleaves One of the most important elements of the home buying process involves making the right offer for your home. Experts encourage all homebuyers to take the time to research prices in the area and create their own reservation price, or the highest price they are willing to pay for the home. A reservation price helps you to bid more effectively and stay within your budget, making it easier to negotiate with the seller or seller’s agent when it comes to making the offer.
Barron’s ‘Smart Consumer Guide to Home Buying’ states that buyers typically reduce or discount their offer price to create some allowance for negotiations. How much the discount is will largely depend on market conditions and the homebuyer’s desire to acquire the home.
I will outline here the basic steps in computing reservation price to help you in negotiating for your chosen home’s purchase price.
1. Write down the amount you can afford to pay each month. This may be close to what you are paying now, or what you are comfortably willing to spend per month on housing costs.
2. Calculate your tax and insurance expense. Use the following suggestions from Barron’s ‘Smart Consumer Guide to Home Buying’ when calculating your tax and insurance costs. Use a rate of .68 for areas with relatively high tax and insurance. If an area has relatively cheap tax and insurance rates, use a factor of .85. Lastly, you can just use the standard .75 to do a rough estimate. Multiply the rate applicable to your area by the amount in the first step to arrive at your affordable loan principal and interest payment.
3. Calculate your typical loan term and interest rate. Write down the loan term in years and the interest rate. You’ll need to locate the appropriate payment from the loan payment tables that are applicable to this loan term and interest rate.
4. Compute for your total loan amount. This information can also be found in the loan payment table or you can just ask your mortgage lender for the total amount.
5. Sum up your cash available for the down payment. This will give you a final amount that you can afford to spend for the purchase of the home.
After completing the calculation in Step 5, you can compare it to Step 1 and see what the difference is. This will give you your negotiating range that you can use when making your offer. If the amount in Step 1 is higher than Step 5, you may be able to secure an offer by bidding a higher price than the seller is offering. If the amount in Step 1 is lower than Step 5, you’ll need to focus on bringing the final price down to a more affordable range.
Calculating your reservation price is an important part of the homebuying process and can help you negotiate the best possible deal for your situation and get the home you want. Consider using the above calculations for each home you are considering so you have the confidence to overbid or negotiate for a lower price with your budget in mind.
If you are a new homebuyer searching for houses for sale in Minnesota, using the internet is one of the fastest ways to locate what you are looking for. The MN MLS allows you to search by price and location, throughout the state.
Posted in 
Tags: 
