How to Make an Offer on a Home

Once you have found the home of your dreams, it's time to make an offer. The official offer is a written proposal, or purchase contract, that identifies the buyer, the seller, the property address, and the brokers. It also includes the purchase price, down payment, loan amount, deposit and terms of conditions.

Because the purchase contract must conform to state and local laws, and potentially certain provisions in your area, your real estate agent will prepare the document on your behalf.

There are three potential outcomes when making an offer: the seller accepts the offer without any modifications and it becomes a binding contract, the seller counter offers, or the seller rejects the offer and that's the end of that.

Do Your Homework Before Making an Offer

To ensure that you are making the right offer, one that the seller will likely accept, it's best to do some research beforehand. If you feel there are potentially many homebuyers interested in the property, conduct your research quickly, and get your offer in before it's too late.

1. Find out why the seller is selling, if you can. This will reveal what kind of situation the seller is in; do they want to get out quick, or can they afford to wait for the ideal offer? This may be hard to find out as the listing agent will likely not want to divulge this information.
2. Analyze the market; is it a buyer's or seller's market? If it's a buyer's market, there will be fewer competing offers and a higher likelihood that the seller will be flexible on price and terms. If it's a seller's market, the seller can get choosey with price and conditions and will probably be entertaining multiple offers. In this case, you'll want to make your offer as attractive as possible.
3. Ask your real estate agent for a comparable market analysis(CMA). This is a report that compares properties similar in configuration, age and location to the home you want to buy; use this to gauge what price to offer.
4. Analyze the list-price-to-sale-price ratio of homes sold in the last six months. Your agent can provide this report. Take a look at the numbers, are homes selling for more than their list price or less? The seller will likely do this as well and will expect the same differential from offers.
5. Determine the number of days the home has been on the market. The longer a home has been on the market, the more flexible a seller may be in terms of price and conditions. Keep in mind that it's possible the selling agent took the listing off the market and then resubmitted it as a new listing to keep it looking fresh and new.

What's in an Offer?

Here are the basics that are included in an offer:

• Property Address
• Sale/Offered price
• Seller's promise to provide clear title (ownership)
• Method by which real estate taxes, rents, fuel, water bills and utilities are to be adjusted (prorated) between buyer and seller
• Provisions about who will pay for title insurance, survey, termite inspections, etc.
• Type of deed to be given
• Other requirements specific to your state, which might include a chance for attorney review of the contract, disclosure of specific environmental hazards or other state-specific clauses
• Various conditions/contingencies
• Terms

There are a few items in the purchase contract to which you want to pay particular attention.

Include a Home Inspection Condition: It's wise to make an offer conditional upon a professional home inspection, which most often happens during escrow. If a home inspector finds structural damage or some other major issue, you will be able to back out of the deal, or oblige the seller to fix it. However, the professional inspection should not prevent you from doing your own investigating. Include a provision that will allow you to do a walk through one last time and inspect the propertybefore closing. Test out every appliance, and check the sink and faucets for any unforeseen leaks.

An earnest money deposit will be included with the offer. The earnest money may be a check, cash or a promissory note.

The clock is ticking, so a time limit is usually set for responding to the offer, obtaining financing, closing the deal, and moving in. You and the seller will agree on a closing date, often between 30 and 45 days from the signing of the contract.

One common contingency is the requirement for a buyer to obtain specific home financing from a lending institution. In the case that the loan can't be obtained, the buyer will not be locked into the contract.

Outline anything extra that you want included in the purchase such as appliances, furniture, drapery, etc. Add fixtures to be on the safe side, along with anything else, because if it's not in the contract, it's not part of the deal and the seller is free to take these items.

What's Negotiable?

As a buyer, determine what is a must and where there is room for negotiation. Keep in the back of your mind, that if you give in a bit on price, you can expect to take something on terms and vice versa. When everything is negotiable, which it very well could be, ask for what you want, and hope for the best.

Many of the negotiations will depend on the state of the market, and how well you look to the seller: are you pre-approved; do you have a decent down payment; do you have to sell a home before you can afford to buy? The more attractive you look to a seller, the more leverage you have in negotiations.

Price. Remember all of the research you did prior to making the offer? Now it will come in handy. If it's a seller's market, you may find yourself offering more than the listing price to beat out other offers. If there aren't any other offers on the home, and it has been listed for over 45 days, you may start below the listing price. Take the advice of your real estate agent, and use what your research revealed, to present a price that you think is suitable. Don't start out too high – leave some wiggle room, but don't offer a price so low that it would insult the seller.

Down Payment. A strong down payment and pre-approval can help provide leverage with negotiations as it signals to the seller that your chances of obtaining a mortgage are very high. This makes your offer more enticing as there's a better chance the deal will go through. This is especially important because, when an offer is accepted, the listing is taken off the market. If for some reason the financing falls apart, the seller has lost time entertaining other offers.

Don't feel too bad if you don't' have a strong down payment, however, be sure that you have gone through the necessary steps to obtain a pre-approval.

Earnest Money. When making an offer on a home, you include a deposit or earnest money to show good faith as a buyer, and that you are serious about the offer. The amount of earnest money usually ranges from $1,000 to 3% of the purchase price. The earnest money will be put into an escrow account that is held jointly by the buyer and seller until the transaction is finalized. Once finalized, the earnest money is put towards the buyer's down payment.

How does this help in negotiations? Well if it's a good chunk of money, it will provide negotiating leverage, as well as some security to the seller for taking the listing off the market; if for some reason the transaction does not go through due to the buyer's retraction, the seller is usually awarded this money (depending on how the contract is set up). If the seller retracts, the earnest money will likely be returned to the buyer. Ensure that it is clearly stated under what conditions the earnest money should be returned and how it should be returned.

Requested Closing Date. If possible, be flexible in this area as it may lift some stress off the seller, making their life easier and your deal sweeter. If the seller is not living in the home, it's likely they are making payments elsewhere, on top of the home for sale. In this case, the seller will probably want a quick closing date.  If they are living in the home, they may or may not want a speedy closing date. If you can afford it, be open to the seller's requested time frame.

Counter Offers

So let's say that in general the seller finds the offer suitable, but doesn't like the proposed sales price or the requested closing date. You will probably receive a written counter offer explaining the changes the seller would like to see made before they will accept. You can accept, reject, or make another counter offer (this is where negotiating comes in).

Every time either party makes a counter offer, the other side is free to accept, reject, or counter offer once again. The offer does not become a binding contract until one of the parties officially signs the contract.

Withdrawing an Offer

If for whatever reason, maybe you found a better home or upon a home inspection needed repairs were found that the seller doesn't want to cover, you can withdraw your offer. If you withdraw before the offer has been accepted (technically still in negotiations), the usual process is to have your real estate agent draft something up to send to the seller's representative, and that should be that.

If you withdraw after the purchase contract has been signed, it gets a bit tricky. Depending on the time frames, and the contingencies and conditions stated in the contract, you may face losing your earnest money. In this scenario, it's wise to have an attorney take a look at the contract and help you navigate through this process.

Offer Accepted

Once one of the parties accepts, the offer becomes a legally binding contract. You'll provide the earnest money to your agent, who will deliver it to the title or escrow office and then …

Stay tuned for our next blog on opening title and escrow! If you haven't done so already, check out our previous blogs on getting pre-approved, and the key players in the home buying process. If you have any family or friends going through this right now, be sure to share this blog with them!