Question. I am a first time home buyer, and have been pre-approved for a mortgage in the amount of $250,000. I have seen plenty of condominiums in the $300-375.000 range in good move in condition. My problem: where should I start my offer? My realtor is telling me that these prices are too high, and I should start low. What do you advise?

Answer. Real estate agents will tell you there are three magic words in real estate: location, location and location. I would like to add three additional words: negotiate, negotiate, negotiate.

In order to have a legal, binding contract, three elements are required. First, there must be an "offer." Generally, the buyer makes a written offer, spelling out all of the terms and conditions under which the buyer is prepared to purchase the house.

When a seller receives that offer, he or she has three choices; the offer can be accepted, it can be rejected, or it can be counter-offered. If the seller makes a counter-offer, the buyer then has the same three choices.

Ultimately, the parties will either reach agreement or there will be no deal. Thus, the second legal requirement for a binding contract is that there be "acceptance."

The third legal requirement is "consideration." Usually, this is in the form of money -- and is referred to as the earnest money deposit. This deposit is held in escrow by the broker -- or the settlement attorney -- until settlement takes place. However, the courts have also taken the position that consideration need not only be money. If, for example, the seller stops marketing the property once a contract is signed, this can also be considered "consideration" -- i.e., something for value.

When you are considering making an offer, the first thing you should do is determine exactly how much you can afford to pay for a new home. You have been approved for a mortgage in the amount of $250 ,000. If you plan to get a mortgage and put down 20 percent, which means that the price cannot exceed around $300.000.

But let's analyze this a little further:

Purchase price: $300.000
Less Mortgage: $250,000
Down Payment: $50,000

At the very least, you will need $50,000 to make up the difference between the loan and the purchase price. However, discuss closing costs such as title insurance, title search, appraisal fees, and recordation and transfer taxes with your REALTOR®. In some jurisdictions, the law gives a bonus to a first time home buyer in the form of reduced recordation fees, but you should obtain a comprehensive list of all such costs before you make your offer.

You should also include in your calculations any moneys which the lender will require you to escrow for future real estate taxes and home owner insurance. If, for example, you are buying your house in Maryland -- where the real estate taxes have to be paid by September of each year –depending on in what month you go to closing, your lender may require that you escrow 8, 9 or even 10 months of real estate taxes on the day of settlement.

Finally, keep in mind that when you obtain a loan whose ratio is more than 80 percent of the purchase price of the house, you will have to pay the lender the cost of private mortgage insurance. And there are loans you can get where you only have to put down 5 or 10 percent -- assuming you qualify for those kinds of loans.

Thus, as you can see, you must be fully prepared before you make your first offer. You do not want to find -- at the last minute at the settlement table -- that you just do not have enough money to close.

Once you have your numbers -- and know exactly how much you can afford to pay for your new house -- we then move to the next step: negotiation.

Let us assume you can easily qualify for a condo worth $300,000, and that the seller is asking $325,000. Ask yourself if you really want this particular property. If you like the condo but are prepared to lose it if you cannot reach an acceptable price, make a low offer -- for example $290,000. The worst the seller will do is reject you out of hand.

On the other hand, if you really have fallen in love with the place, you may want to offer $295,000 -- which gives you some (but not much) room for negotiation, again assuming you plan to put down 20 percent.

You should also understand there are factors other than price which may be important to a seller. For example, when will settlement take place? Your seller may want to move in 30 days, and will be willing to reduce the price considerably if you can close within that short period of time.

The bottom line is that absolutely everything in real estate (except of course my legal fee) is negotiable, and you should not be afraid to make any bona fide offer -- regardless of how low it is, and regardless of what others may tell you. A low offer may insult the seller; on the other hand, it may get you a condo at an affordable price.