If homebuying is your goal, you will want to start the process by pulling together a compelling offer. Making an offer on a home rouses many of the same emotions as proposing marriage: hope for the future, excitement, anticipation, and fear of rejection.
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While nobody can give you tips on persuading someone to become your life partner, real estate experts have some very clear recommendations for how to make and present a strong offer to buy that dream house. A good start is getting a clear overview of how the home offer process works.
The Home Offer Process
Just like you don't propose marriage the day you meet someone, presenting an offer on a prospective new home cannot be done on a whim. This critical step that opens the door to homebuying takes time and preparation. It is neither the first step nor the last step in the buying process. Rather, it's somewhere in the middle.
Homebuying usually proceeds like this:
- You get your finances lined up to buy a house and set a budget.
- You go house hunting, see a great home and decide it's the one for you.
- You work with your agent to decide on the terms of an offer.
- Your agent writes the offer letter and delivers it.
- The seller either accepts, rejects or sends you a counteroffer.
As a prospective homebuyer, you have total authority over the first two steps, but putting together an offer is a task you undertake in partnership with your real estate agent. An offer letter contains much more than the price you are willing to pay for the property.
The Offer Letter
An offer letter is your first contact with a seller, and as with all first contacts, you want to make a good impression. You need to know up front that the term "letter" doesn't mean that the document is informal. The offer letter is not a chatty note or even a business letter. It is a legal document that must comply with the laws of your state. In some states, you must bring in a licensed attorney to write or review an offer before it is submitted. In others, offer letters are lengthy forms filled in by your real estate agent.
A written offer that is accepted classifies as a valid and enforceable contract. You need to take this seriously and comply with formalities, but you also want your introduction to the seller to convince them to sell to you. Four primary matters that belong in an offer letter are:
- Purchase price
- Financing details
Each one is an essential part of the offer.
The Purchase Price
The seller cares about many issues, but the most important one is almost always the price. Obviously, the seller wants the highest-possible price. The seller already came up with a price when the house listing was put on the market, but this is not set in stone.
The price you propose in your offer can be below or above the listing price. You select that number after discussions with your real estate agent. It is your opening salvo in the purchase price discussion. Like in any negotiation, it is best to leave yourself some room with your first offer.
When your budget for a home has a hard and fast maximum price, you'll usually want to propose a price that is under that amount to allow for upward movement in negotiations, but if the seller isn't way off on the list price, you only have so much wiggle room. Exactly how much you offer depends on a number of factors, like the following:
State of the Current Market
One primary consideration in setting an offer price is the state of the housing market in your area. A market with more qualified buyers than properties for sale is called a seller's market, and the seller is in the driver's seat.
With multiple people seeking to buy the home, a seller is not likely to drop precipitously from the list price and may even expect a bidding war above the list price. In that case, you will have to come in high in order to have any chance of landing the property. In fact, when multiple offers create a bidding war in a sweltering market, you may have to offer more than the list price.
When there are many properties on the market but not many buyers, it is called a buyer's market. In this situation, a seller is likely to be more flexible when it comes to price since you have many other homes to consider. Even if it is not a buyer's market, a seller might be willing to accept a lower price if the house came in below appraisal on a previous sale that fell through or has been sitting on the market for a long period.
Renovations or Repairs Needed
While the listing price gives you and your agent an idea of the seller's expectations, the actual market value of the property is more important when making an offer. Actual value means the amount for which similar homes are selling in the current market, something your real estate agent will figure out as "comparable sales."
You also need to take a hard look at the cost of necessary repairs and renovations. Note the age of in-home systems, like electrical, plumbing and air conditioning as well as the condition of major appliances and the age and condition of the roof. If you see deferred maintenance, that must be factored into the offer.
More Cash in the Offer
While the state of the market is not within your control, there are several things you can do to make your offer more attractive to a seller. One is to come in with as much cash as possible.
The more cash you bring to the table, the happier the seller is with the offer. That's because a seller is interested in closing quickly without hiccups and knows that you are more likely to sail through financing from your mortgage lender if you are paying a large chunk of the sales price in cash. A seller who wants to be out of the home by a certain date might accept a lower offer that has a large cash component than a higher financed offer. More cash is also a good strategy in a bidding war.
An Experienced, Local Agent
If you're interested in paying the lowest-possible price for a new home, you should sign up with an experienced local real estate agent. An agent who has been working in a community for some years is likely to "read" the situation better than you can, factoring in your finances and desires with the local market, the condition of the property, the seller's goals and the sales history of the area. She can tell you how long the house has been on the market and may be able to find out how many offers are already on the table. She may even be able to find out why the owners are selling to help you use that information to shape your offer.
Once you select an agent, tap into her expertise. Ask lots of questions and listen carefully to the answers. She will run "comps" for you — that is, identify similar houses that were recently sold or are currently for sale in the neighborhood to give you a better idea of the market. Generally, agents will present you with information on valuation and may give you suggestions, but in the end, you make your own decision about the offer price.
Other Financing Details
Your offer letter must address not just price but also a number of other financing details. First, the seller wants to be sure you are serious about the offer, so you'll want to include evidence that it is solid. Attach a preapproval letter to let the seller know that you have financing lined up.
Then, there is earnest money, a type of deposit on your down payment. This check shows the seller that you are making the offer in good faith and not just making a bunch of offers on possible homes. If the seller accepts your offer, his agent will place the funds in the escrow account (a neutral third-party account) and it is used as part of your down payment. The amount is a percentage of the purchase price and will depend on what is customary in the local market. If you back out of the deal without a good reason, you may not get that money back.
An offer letter usually sets out a proposal for splitting various other fees with the seller, most notably the closing costs. Generally, the seller bears the largest part of the closing costs — between 6 and 10 percent of the entire mortgage cost, including the commissions for the two agents — while buyers pay between 2 and 5 percent. It makes your offer more attractive if you can offer to increase your share of the closing costs. You may be able to add those closing costs to the loan itself and pay them off over time.
Contingencies to the Offer
The two words "if" and "then" describe a contingency. When you include contingencies in the offer letter, you are basically conditioning your offer on the occurrence of certain events. Few offers are made without any contingencies at all, but from the seller's point of view, the less contingencies, the more attractive the offer.
Common contingencies in an offer include getting financing, an acceptable appraisal and a property inspection. If you absolutely cannot buy the new home without selling your own, that has to be a contingency too. In a hot market with many competing bids, a seller may decide to go with the one with the least contingencies.
Setting a Closing Date
Most sellers prefer to close the deal sooner rather than later, and sometimes, this is important enough to tip the deal. For example, when a seller is moving out of the state or country, she needs her old home to sell quickly. Likewise, if her offer to buy a new home is contingent on selling her old one, timing is crucial and is perhaps even more important than the offer price.
Your agent may be able to determine the importance of the time frame to the seller, and then you can use that information to craft your offer letter. As a general rule, a quicker closing is usually more attractive to a seller than a slower one.
Win, Lose, or Negotiate
Once you've signed your offer and it's been sent to the seller, you play the waiting game. The seller has a certain amount of time to accept your offer as it stands, decline the offer or send you a counteroffer to start negotiating with you.
If he accepts, all parties sign the purchase and sale contract, making the deal official. You still have the contingencies to accomplish, such as the home inspections and appraisal and getting your mortgage finalized.
It's also common for the sellers to send you a counteroffer that you can discuss with your agent. The ball is in your court to accept the counteroffer, reject it or reply with a counter of your own. If you ultimately agree on terms, you sign on the dotted line, and you are in contract.
There is always the chance that the seller will decline your offer no matter how much care you put into it. Negotiations end, and you start looking at houses all over again, learning from any mistakes you made. Keep at it and one day, you will be signing closing documents.