When you make an offer on a new home and are praying for a quick deal, a counteroffer that forces you to negotiate is not fun to deal with. For many homebuyers, the negotiation dance is dreadful and confusing. But keep in mind that a counteroffer is better than a rejection since it means that the seller is willing to talk to you. It's easier to wade through the next steps in the homebuying process if you have a complete understanding of how a counteroffer works.
What Is a Counteroffer?
A counteroffer is easier to understand if you think of it in a context other than real estate. For example, imagine that you want a friend to meet you for lunch. You propose meeting at noon at a specific restaurant. Your friend can say yes or no, or he or she might also suggest 1 p.m. at a different eatery, replacing your offer with an alternative proposal. That is a counteroffer. Now, it's your turn to respond.
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In a real estate deal, a counteroffer is more complicated since the deal is more complex, with many different terms for the parties to consider, but the concept is essentially the same. A buyer pulls together an initial offer, setting out all essential terms of the proposed purchase contract. The seller reviews each term, usually with a real estate professional, and determines if it is acceptable. He or she can accept or reject the offer or replace it with an alternative proposal. That's where the counteroffer comes into play.
Understanding Real Estate Counteroffers
For people who do not enjoy negotiating, the idea of having to do so can be majorly stressful. Buying a home is often a negotiated deal, and it is much easier if you have an experienced agent to help you.
It happens like this: A buyer makes an offer to buy a property, and the seller likes it well enough not to reject it but not enough to accept it. The seller puts a counteroffer on the table — a different proposal that replaces the buyer's offer as the one under discussion. The counteroffer can change any of the terms of the deal, including the price.
For example, say the seller lists the home for $275,000. The buyer sees the house and makes an offer of $250,000. The seller counteroffers for $265,000. Now, the buyer's offer is off the table, and the buyer must decide whether to accept, reject or counter the new proposal with a price higher than $250,000 but lower than $265,000. This exchange of counteroffers can ping-pong back and forth indefinitely, but in practice, it may be more like two or three exchanges. Check with your real estate agent to see what is typical in your area. If a counteroffer is accepted, a binding contract is formed.
Which Terms Are Countered?
Anyone who makes an offer on a home knows that price is only one of many elements of a real estate deal. An offer includes a proposed purchase price but also financing details, contingencies and timing issues. According to real estate experts, price is the most common subject of a counteroffer.
1. Sales Price
In a really hot market, full price offers are not uncommon, and a buyer may even offer a higher price than the listing price. In a very slow market, the buyer may present a low-ball offer that is far less than the list price. Neither of these are the norm. Generally, the buyer comes in with a strong offer, and a counter on the sales price in the offer is usually to nudge it closer to the list price.
A savvy seller doesn't present a knee-jerk counteroffer pressing for the original asking price. The counter, like the initial asking price, will usually be based on a review of comparable sales. The seller's agent will have looked at sales of similar homes in the same or similar neighborhoods, adjusting the comp for differences in the properties. For example, if the property next door sold six months earlier for $400,000 but it has four bedrooms instead of three, the agent would adjust the comp to take this difference into account.
When a buyer proposes a sales price that is considerably less than the seller's price, the justification for this is often set out in that offer. For example, the buyer's agent might list the comps used or the repairs believed to be necessary. The seller takes this into account in preparing a counter. Usually, the price in the counter will be somewhere between the buyer's offer and the original asking price, but there is nothing stopping the seller from countering with the listing price.
2. Other Financial Issues
Another important part of the buyer's offer involves other financial issues, including closing costs and earnest money specifics. Closing costs are fees and charges over and above the purchase price that must be paid at the close of a real estate transaction. These can include mortgage origination and underwriting fees, real estate commissions, taxes, insurance and record filing costs. Any proposal a buyer makes regarding a seller's share of the closing costs can be the subject of a counteroffer.
Earnest money is an amount of cash a buyer includes in the offer as a deposit on the down payment. If the offer is accepted, the earnest money funds go into escrow and are used toward the down payment. A buyer may not be able to get this money back if she cancels for a reason not specified in the contract. In a counteroffer, the seller may demand more earnest money since the bigger the deposit, the more the seller is assured that the buyer is seriously interested in the home.
3. Buyer's Contingencies
A contingency in a real estate offer is a precondition for the sale. Almost every offer contains a number of standard contingencies — like home inspections, a home appraisal and a good title — about which sellers usually don't argue. However, other contingencies are more likely to be contested or at least negotiated in a counteroffer. This depends in part on whether it is a buyer's market (with more properties for sale than buyers) or a seller's market (with more qualified buyers than properties.)
For example, many buyers are selling prior homes and would like to make the current purchase contingent on that sale. A seller might counter by removing this contingency or may suggest a kick-out provision, giving the agent authority to continue to show the property during the wait.
4. Timing of Closing
The buyer's offer will contain a closing day, setting up what has to happen and when in terms of the sale. A seller might want to shorten or extend that time frame in a counteroffer. A seller who is not ready to leave may present a counteroffer lengthening the time until closing or allowing for rental of the home for a certain period after the sale.
How Long Are Counters Open?
When a buyer makes an offer on a home, that offer has an expiration date. The terms of the offer will specify how long it is on the table, and this can range from hours to days. The timing depends on the customs in the region and how hot the market is since properties tend to move quicker in a steaming market. A seller is under no obligation to respond to an offer, but if he wishes to accept or to counter, he must do so within the time limits of the offer.
This is also the case with a counteroffer, but the seller gets to set the timing. Expect a short time frame if the market is flooded with buyers and a longer period in a buyer's market. A typical turnaround date in many markets is 48 hours. One of the first things to note in a new counteroffer is the deadline for responding.
A buyer has every reason to act quickly on a counteroffer since the seller has a right to accept a higher offer from another buyer while the counter is pending. To do so, he simply notifies the first buyer that he is withdrawing the counteroffer. It is perfectly legal to withdraw an offer or counteroffer before it is accepted, but to be effective, the withdrawal must be communicated to the other party.
While courtesy suggests that a response be given even if it is a rejection of the offer, letting the expiration date pass without responding provides the same result. It is typical for a rejection to explain the reasoning, but again, this is often honored in the breach.
How to Accept a Counteroffer
A counteroffer turns into a contract when it is accepted and that acceptance is communicated to the other party. A buyer accepting a counteroffer usually does so by signing in the acceptance space at the bottom and communicating that acceptance to the seller.
At that point, the parties have come to a final agreement. A written contract is prepared, and both parties sign. Often, online electronic-signature tools are used to accomplish this as easily and conveniently as possible. A real estate sales contract must be in writing, which means the signing must happen quickly to lock in the deal.
Tips for Negotiating Counters
One reason people get stressed by real estate negotiations is because they take the exchanges personally. Try to think of the entire affair as a business deal and understand the numbers and what they mean to you. An experienced agent will be able to help you with this perspective.
People who take the negotiations personally are likely to set hard and fast limits on their purchase — lines in the sand that they will not cross. If they made an offer of $375,000, they may declare that they won't accept a counter of a dime more or that they won't go beyond $380,000. This kind of thinking is likely to impede a good deal. Take some time to cool off and then consider every aspect of the counter objectively. Exactly how much more will it cost you each month? What are your options?
Get creative with the negotiations and it may feel more like fun. Remember that you can negotiate any aspect of the deal, not just the price. If the seller won't budge from the listing price, you might ask that she leave certain personal property in the house, like that grand piano in the living room or the stack washer and dryer. You might ask for her to pay for a home warranty to cover any appliances that get sick or die within the first few years of your ownership.