Fri, Jun 10th - 4:09PM

One of the most essential components of home buying process includes making the perfect offer for your house. Real Estate experts encourage all home buyers to take the time to research prices in the area and create their own reservation cost, or the highest price they are willing to pay for the home. The reservation cost lets you bid more efficiently and stay within your financial budget, making it simpler to negotiate with your seller or seller's realtor in terms of making a deal.

Barron's 'Smart Consumer Guide to Home Buying' states that it is normal for buyers to discount their offering price to allow some negotiating room when making the offer; there is no rule on how much this discount needs to be, however it will depend largely on economy conditions and just how much you actually like the property.

Below is a simple process for computing the reservation price so you can get the right price for your very own dream home:

1. Write down the amount you can afford to pay every month. This is often close to what you are paying now, or what you're conveniently willing to pay per month on property costs.

2. Compute tax and your insurance costs. Barron's 'Smart Consumer Guide to Home Buying' gives the following tips for calculating the tax and insurance costs. Use a factor of .68 for areas with higher tax and insurance costs; .85 if the tax and insurance is relatively inexpensive; or apply 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 fee. Jot down the loan term in years and also the interest fee. You'll need to find the appropriate fee from the loan payment tables that are relevant to this loan term and interest fee.

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

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

Right after completing the calculation in Step 5, you can compare it to Step 1 and find out what the difference is. This can give you your negotiating range that you can use when creating your deal. When the sum from Step 1 appears more than Step 5, you may be able to get a deal by bidding a much higher price than the seller is offering. However if the sum from Step 1 is lesser than Step 5, you will need to focus on reducing the final price to a more affordable range.

Computing your reservation price is an essential part of the homebuying process and can help you negotiate the best possible offer for your situation and have the home you want. Think about using these computations for every property you are considering so that you have the confidence to overbid or even negotiate for a lower price with the budget you have.

Alexandria P. Anderson is a licensed Minnesota Realtor that uses the MLS Listing Minnesota to help her clients to find and purchase Homes in Minnesota.