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Home Buying Basics – Computing The Reservation Price June 10, 2011

Posted by minnesotarealty in MN Realty.
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One of the most important components of the home buying process includes making the right offer for your house. Minnesota real estate experts encourage all homebuyers to take the time to research prices in the area and make their own reservation price, or the highest price they are able to invest for the house. A reservation price lets you bid more efficiently and stay within your financial budget, making it easier to negotiate with your seller or seller’s agent when it comes to making an offer.

Barron’s ‘Smart Consumer Guide to Home Buying’ explains that it is traditional for buyers to cut the price of their offering price to create some room for negotiation when making the deal; there’s no rule on how much the discount needs to be, but it will depend largely upon economy conditions and how much you really like the the house.

Here is a basic process for calculating your reservation price so you can negotiate the best price for your dream home:

1. Jot down the amount you can manage to pay each month. This may be close to what you’re paying at this point, or what you are comfortably willing to spend per month on housing costs.

2. Calculate your tax and insurance rates. Barron’s ‘Smart Consumer Guide to Home Buying’ gives the following tips for computing the tax as well as insurance costs. Make use of a factor of .68 for locations with higher taxes and insurance rates; .85 if the tax and insurance rate is comparatively cheap; or use the standard .75 for a rough estimate. Multiplying this rate by the amount in Step 1 gives you the affordable loan P&I payment.

3. Compute your typical mortgage loan term as well as interest rate. Jot down the loan term in years and also the interest fee. You will need to locate the right charge from the loan payment tables which are relevant to this loan term and to the interest fee.

4. Calculate your total mortgage loan amount. This may also be seen in the loan payment tables; you can also get this from a mortgage company.

5. Include your cash available for the down payment. This will help provide you with a final sum of the amount you can afford to pay for the home.

After completing the computation from Step 5, you can compare it to Step 1 and see what the difference is. This will the negotiating range which you can use when making a offer. If the amount from Step 1 appears higher than Step 5, you may be able to get an offer by bidding a higher price than the seller offers. However if the amount from Step 1 is lower than Step 5, you’ll need to focus on reducing the final price 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. Think about using the above calculations for each home you’re considering so you have the confidence to overbid or negotiate for a low price with your budget in mind.