A reservation price is sometimes called the walkaway point because it's the least favorable price that two parties -- a buyer and seller -- agree to after negotiating a contract. For the buyer, it's the highest price the buyer is willing or able to pay. For the seller, it's the lowest price the seller is willing to accept. A reservation price is an important part of the home-buying process; being aware of the bottom line helps people negotiate more effectively.
The Buyer's Bottom Line
Figure out how much money you can afford to pay every month on just housing costs and note it down. Be realistic. It should be how much you can comfortably pay every month without overextending yourself. When figuring out your housing costs, do not forget to take into account taxes and interest.
Figure out how much you can afford to pay per month in taxes, interest and insurance costs -- or the principal and interest costs (P&I) you can afford to pay. For high tax and insurance areas, use a factor of 0.68. For inexpensive tax and insurance areas, use a factor of 0.85. For rough estimates, use the standard 0.75. Multiply the rate by the amount you came up with in Step 1, and you will see how much you can afford to pay per month.
Figure out the loan term and interest rate. Write down the interest rate and the loan term in years. Get a loan payment table from a mortgage lender so you can get the correct payment terms applicable to your interest rate and loan term.
Figure out the total loan amount. You'll find it on the loan payment table that you get from a mortgage lender.
Add the cash you have at your disposal for the down payment. This gives you the total amount you can pay for the house.
The Seller's Bottom Line
Determine the lowest amount of money you can accept from the buyer. Note how much you paid for your property when you purchased it, and compare that amount with the current appraised value of your property. That way you will see how much the property has increased or decreased in value.
Calculate how much money you've spent on home improvement and repairs through the years before putting it on the market. Add how much you've spent on improvement and repairs so your property can pass inspection before you sell it.
See how much you still owe on your mortgage. Ideally, you want to sell the property and have enough money to cover outstanding payments and still have money left over.
Be realistic. It's still a tough market for sellers right now. If you are selling your property because you can no longer afford to make payments, you should consult with the lawyer helping you sell your property and an accountant to help calculate the lowest possible amount you can accept from a buyer.
Remember taxes and fees. The amount you receive from the buyer is not entirely yours. Out of that amount comes the real estate agent's commission, the lawyer's fee, the accountant's fee and the taxes. Taxes vary by state, so get the estimate from the real estate agent when determining for how much you will put your property on the market. In New York, if you had owned another property previous to the one you are selling now, even if it was in another state, you pay additional tax.