You’ve spent the last few months house hunting, preparing your house for sale or doing both. All that stands between you and a pending deal is the right offer.
On both sides of a real estate transaction, the purchase offer is the first formal communication that leads to the final deal. The offer combines financial details with the nuances of trying to avoid offending the other party, reaching an agreement and getting started on the steps toward closing.
In the large-scale seller’s market that has stood strong for the last few years, homebuyers are at a disadvantage as they try to compete with other house hunters for the limited number of houses on the market. Formulating an offer isn’t just about the asking price, but also what other potential buyers could offer at the same time.
On the receiving end of the offer, sellers have to be able to weigh the buyer’s offer carefully, negotiate the terms and be as transparent as possible to avoid the deal falling through later in the process. As all real estate markets work through a cycle, sellers should also be ready for changes that give the buyer an advantage over sellers, whether it’s a temporary or prolonged buyer’s market.
To help you craft an offer on a home and understand what the other side of the deal has to do, we’ve broken down the steps to both making and accepting an offer on a house.
Buyers: Putting an Offer on a House
Making an offer on a house isn’t just about telling the seller how much you’re willing to pay. It’s also important to provide proof that you’re able to pay the amount, establish the expected closing date and state how additional costs will be covered and what you expect of the seller leading up to closing. By submitting an offer, you also need to be prepared to provide earnest money, which shows the seller you’re serious about buying the house and can range from $500 to 10 percent of the agreed-upon price.
But don’t get ahead of yourself. The first step to making an offer on a house is finding the house you want to purchase within your budget. The next steps are fairly easy, especially when you have your real estate agent walking you through the process. Here’s what you need to know.
When to submit an offer. Especially if you’re house hunting in a market where there are few available properties compared to the number of active buyers, submitting an offer as soon as you’re sure you want to buy it is a must. Even if you move quickly, there’s a chance you’ll find yourself competing with other offers.
“The first call I make when someone’s interested in a home is to reach the other agent – the listing agent – and find out if there’s any other offers that they have in hand, and if so how many,” says Jeff Plotkin, a Texas-licensed Realtor, attorney and certified public accountant and vice president of Habitat Hunters Inc. in Austin, Texas.
Even when competing offers are less likely, you must move quickly to avoid missing out on the house you want.
Other scenarios, however, can give you the timing advantage. If you currently rent a property and have the right of first refusal included in your lease, your landlord is required to give you the chance to make an offer on the property before it’s available to other buyers. The landlord may not be required to take you up on your deal, but the early opportunity isn’t one you want to miss.
How much to offer. While the listing price does provide some insight into the seller’s expectations, the value of the property and the work that needs to be done play a larger role.
When you’re ready to make an offer, your real estate agent will likely sit you down and show you the sale history of properties nearby to help determine the home’s approximate value as it compares to the rest of the market. “I like to look at the last six months of houses that have sold in the same neighborhood, or very close proximity, of a similar size,” Plotkin says.
In addition to recent sales and current buyer activity, you need to factor in your personal needs. Consider the details this house checks off for you, and consider the amount of work you’d have to do. Take into account details such as:
- Proximity to work, schools, stores, etc.
- Neighborhood amenities
- Age of major systems and appliances, including the HVAC, roof, plumbing and electric
- Deferred maintenance
- Renovations that need to be done
While your agent will help you consider all the factors that lead to the offer price, the price itself is something you have to determine on your own. Pamela D’Arc, a licensed associate real estate broker for Stribling and Associates in New York City, says she’s learned to advise the buyer appropriately but “never give a number” to avoid making a decision the client isn’t happy with in the end.
Making a contingent offer. Once you’ve moved past the price portion of the offer, consider if other needs and conditions will be included. If you already own a home and need to sell it in order to have the money to pay for this new one, an offer contingent on the sale of your house is necessary.
This offer contingency can be a sore point for many sellers, especially in a seller’s market where other buyers may not have the same constraints.
Barbara Pepoon, a broker with Coldwell Banker Residential Brokerage in Northbrook, Illinois, recommends putting your home on the market before you start the search for your next house. “Once you have the house under contract, you can make offers with home-close contingency,” she says. The contingency will show you’ve already found a buyer and simply need to have the closing on your purchase take place after the sale is completed, which can even take place on the same day.
Competing against other buyers. Low inventory in many housing markets in the U.S. makes the competition among buyers a constant part of the conversation for many homebuyers, particularly for those who are house hunting for the first time. Many buyers are afraid of getting caught up in a bidding war and paying more than they can afford or losing out on the house of their dreams.
Standing out against competing bids may take a bit more work, but a personal touch and some strategic moves can give you an edge. Here are a few things D’Arc recommends:
Write a personal letter. It’s not recommended for every situation, but D’Arc says a personal letter to the seller can make an offer stand out, especially when the seller appears to have some sentimental attachment to the property. Even if your offer price isn’t the strongest, tugging on the seller’s heartstrings can win you the deal, she says.
Include quirky numbers. Rather than rounding to the nearest hundred or thousand, let some of the numbers stay specific in your offer. Offering $345,255 instead of $345,000 registers as a higher number when it’s just a difference of a couple hundred dollars. If you note you’ll cover $1,905 of the seller’s legal fees instead of $1,850, the slight difference in dollar amounts can stick in the seller’s memory. “Quirky numbers can sometimes be the difference,” she says.
Be flexible. A good real estate agent will try to get as much information about the seller as possible from the listing agent so you can structure your offer around those needs. If the seller’s moving out of state, a quick closing date could be more enticing. With the closing date in particular, it serves you well to express that you’re willing to meet the seller’s needs.
Keep in mind that even if you lose out to competing buyers once or even a few times, eventually your bid will be the right one. Don’t get discouraged, and don’t shy away from making an offer on a house because you think you’ll lose out to another buyer. “Most people will still take their best shot – it doesn’t cost a thing to make an offer,” Plotkin says.
Sellers: Accepting an Offer on a House
For a home seller, the first part of receiving offers is waiting for interesting buyers to come around. As long as your property is priced within the range of similar houses in the area and has been prepared for the market, you should have done your duty to attract serious house hunters.
Whether you live in an area where multiple offers the first day on market are common or where you’re likely to have to wait a few weeks for an offer, it’s important to be prepared and work with your listing agent as much as possible. You want to be sure your asking price, curb appeal and the interior of the home attract serious buyers and make them remember the property while they’re touring houses. Here’s how you can make your property desirable and work toward a successful transaction once you’ve found a buyer.
Establishing an offer deadline. For the sake of organization and to help drive interest to your property, your listing agent may opt to establish an initial deadline for offers when it goes on the market. With about a week for the house to show and offers to come in, you’ll hopefully have multiple offers to review in one sitting and compare to each other. An offer deadline should be just a few days in the future, so buyers don’t have enough time to find another property.
This works best when your agent expects there to be more than one interested buyer right off the bat, of course. If you’re living in a buyer’s market, an offer deadline may not drive the competitive spirit quite like it would in a different setting. If you receive good offers, don’t try to incite a bidding war because there’s a chance it could backfire and your more serious buyers may walk away from the deal.
Knowing your limit. When you’re determining asking price for your home, you should have the same conversation with your real estate agent that a buyer has with hers: Based on recent sales of similar properties, how much is this home worth?
Weigh that estimated home value with the amount you need to receive to either pay off your mortgage, be able to buy another property or simply feel like it was a worthy deal. Expect to receive offers below your asking price, and know how low of a price you’re willing to accept to move on with a deal. Factor in other details based on your needs, such as the closing date or requested maintenance, and set your limits ahead of time to avoid making a decision based on emotions rather than logic.
Finding the best offer. Once you’ve received offers – and hopefully more than one – you have a lot more to consider than you might think. The offer price is certainly a major factor, but you also have to look at other costs and expenses, the financial security of the buyer and whether the timeline works for you.
Calculate the bottom line for the deal. If buyer offers $500,000 for your house but asks you to cover all closing costs, you’re likely taking home somewhere between $5,000 and $25,000 less than the total $500,000, and that’s before you’ve taken out real estate agent commission, which can be another $30,000.
If sentimentality matters to you, consider a personal letter a buyer writes, but also be sure you’re not basing your decision on any sort of bias against a protected class. The Fair Housing Act prohibits discrimination based on race, color, religion, sex, disability, familial status or nation of origin. If it’s believed you turned down a would-be buyer for any of those reasons, you could be facing a lawsuit.
Negotiating. You may have found the offer for you, but that doesn’t necessarily mean you have to accept every term in the original offer. Here’s where negotiations come into play – whether it’s a counteroffer of the price to bring it slightly closer to asking, a requested adjustment for the closing date or if you’re willing to make some, but not all, changes to the home requested by the buyer.
As with the buyer’s original offer, it’s important for you as the seller to act cordially and keep the buyer’s preferences in mind. Even in a seller’s market where you have the upper hand, offending the buyer could put you back on square one with your property still on the market.
In Manhattan, for example, D’Arc notes the market has cooled compared to a few years ago, and buyers are able to have more power in negotiations. At the very least, they’re less likely to bend over backward for the seller. “Properties are on the market for longer now, and there’s generally more negotiability, and so buyers expect that,” she says.
Accepting the offer. Once both the seller and buyer have reached a price and terms they can agree on, it’s time to move forward with the deal. Your next step is to go under contract and start the due diligence process.
Both parties will need to sign documents noting their intent to move forward with the transaction, along with the established closing date and any other terms or conditions necessary to complete the deal.
Real estate law varies from state to state, so look to your real estate agent for guidance on any other nuances specific to your area to move toward the sale. In New York, for example, the due diligence period takes place prior to both parties signing the contract. In most other states, the due diligence period takes place during the first 10 days under contract.
Backing Out of a Deal
Making it past the offer and negotiation is a major step, but it doesn’t guarantee the deal will go through. In the roughly 30 days or so it takes for most transactions to close following an offer, a lot of information can come up that requires additional negotiation and may lead one party to back out altogether.
For buyers, the biggest problem you may encounter is financial. Be sure to have your finances in order before you place an offer on a house and be forthcoming with your lender about your income, any debt you may have and other possible blips that may appear in your credit history. Being preapproved for your mortgage before you start touring homes can help speed up the approval process because the lender will have already confirmed your credit history and financial background. Even with preapproval, however, avoid making any major purchases until after you close on your house.
The appraisal can also be a potential issue. If the property appraises lower than the agreed-upon asking price, you may have to come up with additional cash or try renegotiating the price with the seller.
For sellers, defects on the property discovered during the inspection can cause a lot of problems. To avoid this, Pepoon recommends having a prelisting inspection to allow you to make repairs, or at least note the needed repairs before a buyer sees the property.
Pepoon says it’s valuable to go as far as having quotes from contractors for the necessary work ready when the buyer’s inspector views the property. When the report notes issues, you’ll already have the cost estimates to negotiate if you’ll make the repairs or credit cost to the buyer in the deal. “Maybe don’t have [the quotes] out on the counter, but at least have them in your back pocket,” Pepoon says.
At the end of the day, the under contract or escrow period serves as a period of time for the buyer or seller to discover everything necessary for the deal to take place and to back out if necessary. That earnest money submitted by the buyer typically goes back to the buyer if the deal falls through with cause on either side, like a low appraisal or major cracks in the foundation, though rules may vary based on state laws.
If you’re experiencing buyer’s or seller’s remorse, now is the time to express your misgivings and determine if the deal isn’t right. Once the deed changes hands at closing, there’s little to no room to go back.