Making the Offer
Placing an Offer to Buy the Home
How the offer should be presented will depend on the type market you will be working in. Learn what should be included in the offer and how best to negotiate the contract.
When In a Buyer's Market
What is a Buyer's Market:
The market has more sellers than buyers and timing is on your side. You will find many homes that you can visit, revisit again for comparisons, and negotiate favorable contract terms.
It would be advisable to run a comparable neighborhood analysis among homes that you have visited before making an offer.
Items to compare include:
- age and condition of similar homes in the neighborhood
- homes that have sold within the last six months
- list of comparable sales in the neighborhood
Have your agent run this list, or generate your own list online:
What's it worth?
Order your personal home valuation report:
get your home value
Individual home appraisals:
You may want to hire an appraiser to look at the home to get an independent appraised value based on market conditions. The appraisal can run anywhere from $200-500, depending on how fast you want the appraisal done. The appraisal will help you negotiate best price:
Working In a Seller's Market
What is a Seller's Market:
You need to act fast in a seller's market. Home prices are firm and many homes sell quickly even before reaching the MLS listing. Homes in a seller market receive multiple contract offers and buyers will compete for top price.
It's important to have your paper work completed in a seller's market. You can negotiate more easily knowing exactly how much you can offer and when you can close on the home.
Know what kind of home and neighborhood you want:
Know exactly what kind of home you want and in what neighborhood. This way you can move fast on the home if it meets your requirements.
Know exactly what you can afford:
Knowing what you can afford based on your financial resources can save you time from calculating different mortgage payment scenarios. You can move fast knowing what price you can work with.
Check out our mortgage calculators
to estimate how much home your can afford:
Get home comparisons:
Have your agent run a list of comparable sales in the neighborhood and have it available when you tour the home. The list will show comparable homes that have sold in the area and at what price. Or you can generate your own list online:
What's it worth?
Order your personal home valuation report:
get your home price
Individual home appraisals:
Hire an appraiser to look at the home and to get an independent appraised value based on market conditions. The appraisal can run anywhere from $200-500, depending on how fast you want the appraisal done. The appraisal will help you negotiate best price:
Keep yourself available:
Let your agent know that you are available at any time to look at homes that come on the market. Give the agent your daytime numbers and cell numbers so that you can act instantly. Other buyers in the market may be using similar tactics.
Have your mortgage pre-approved:
This will give you a negotiating edge if the seller knows that you have been pre-approved and that you can close fast on the house if necessary.
Understanding the Contract
About the Contract
When you are ready to make an offer, your agent will provide you the standard documents that list the terms of the contract. The agent should review the contract with you.
Ask your agent to explain each line item before signing the contract. Once you sign the document, and the seller accepts your terms, you are legally bound by the agreement. So make sure you include items that are important to you.
Listed are some key variables that you will find in a typical real estate contract:
This is the price you are willing to pay for the home. You should offer what you think the house is worth. It would be helpful to compare your offer with comparative homes that have sold in the neighborhood.
Your offer should consider any negatives that could potentially devalue your home in the future.
Sellers generally adds some padding in their asking price. In a tight seller's market, you may have to bid close to that asking price. In a buyer's market, you can negotiate that price down.
The Terms of the Sale:
The contract generally lists items that become terms of the sale. These items include personal property and fixtures that are part of the house such as ceiling fans, window treatments, outdoor lighting fixtures, and other attached items.
You may list in the contract other items that you want to remain with the house after you close. These items may include window draperies, shower curtains, wall ornaments, and other items that are reasonable and appropriate.
The seller may not agree to your terms and strike them out of the contract. But it wouldn't hurt to list these items if you feel they should remain with the house. The seller may be willing to negotiate these items as part of the sale.
The terms of the sale may include a portion of the closing costs that should be paid by the seller. Sometimes the seller may be willing to pay a portion of the closing costs if they are less likely to negotiate downward on price.
You should have a good estimate of your closing costs before you make an offer. If your closing costs are going to be high, you may want to negotiate the asking price down or ask the seller to pay a portion of the costs.
The contract is usually contingent upon the buyer obtaining within X-days a written loan commitment from a lending institution.
The contract usually states that the buyer will make a loan application within a few days from the effective date of the contract, and that the buyer will use all diligence to obtain this loan at a reasonable interest rate and terms as defined in the contract. If the financing doesn't come through, then the contract is no longer binding.
Now place yourself in the shoes of the seller. If two buyers submitted contracts offering the same price and terms for your home, which of the two contracts would you prefer to work with:
- Buyer 1: This contract obligates the buyer to apply for a loan application within a few days.
- Buyer 2: This contract states that the buyer has already made application for a loan and has been pre-approved by a lending institution.
Can you see why your paper work should be completed before making an offer? The seller is confident that you will have the financing ready upon settlement.
Earnest money is a cash deposit made by the buyer "as a security" when you enter into a contract with the seller. This cash deposit will be paid to the seller in the event the buyer fails to honor the contract
The deposit will be set aside as payment on your closing, or returned to you if the seller doesn't accept your contract terms. If both buyer and seller agree to the contract terms, and then the buyer breaches the contract, the earnest money is paid to the seller as compensation for potential losses the seller may have incurred.
Earnest money is not required in most states. But an earnest deposit signals to the seller that you are serious about your intent to buy. Most sellers will not enter into a contract unless the buyer deposits earnest money.
The amount of your earnest money may vary. Most experts recommend a deposit anywhere from 3-5% of the total purchase price. In a seller's market, a sizable earnest deposit could swing the sale in your favor.
Earnest money is usually deposited into a third-party trust account such as a bank or with the listing real estate agent. At closing, the earnest money will be applied to any cash down payment required, then to the buyer's closing costs, with any excess amount refunded to the buyer. In most cases, no interest is paid while your money is in escrow.
Settlement and Possession:
The contract will list settlement and possession dates and terms.
Settlement date is when you close on the contract and both parties fulfill the contract terms. Settlement date is usually 45-60 days after you sign the initial contract, but that may vary depending on how fast both parties want to move. Make sure you allow enough time to sell your current house if you are using the proceeds from your sale on your new home.
The possession date is when buyer takes possession of the home. The possession date and settlement date are usually the same day unless otherwise noted.
Occupancy date is the date when the buyer can move into the home. Some contract terms may allow the seller to stay in the home after possession date. For example, the seller may request more time to move out of the house. Usually the seller will pay the buyer some rental fees for the seller's time in the home after possession date. Check with your closing attorney on possession and occupancy terms and agreements.
Pro-ration and Sale of Current Residence:
All real estate taxes for the current year, homeowner or condominium fees and maintenance fees, and rents, if any, will be prorated at the closing date. These annual expenses will be divided between the seller and buyer.
If the contract is conditioned on the buyer selling their current residence, you must include this provision in the contract. The terms of the agreement must be clearly stated so the buyer and seller understands what constitutes the sale of the current residence. Discuss these terms with your agent or closing attorney.
The contract should include provisions for structural inspections. You should state in the contract that the buyer has the right to withdraw from the contract if the inspection report is not satisfactory.
The seller agrees to deliver the plumbing, heating, electrical (including light fixtures and ceiling fans), air conditioning, fireplace, all built-in appliances, and if one exists, swimming pool in working condition. The roof must be free of visible leaks at the time of closing.
Environmental, Termite and Other Tests:
Other tests that may be included in the contract are environmental and termite inspections. You will want to test for radon, lead paints, and asbestos if you believe these tests may be necessary, particularly in older homes.
The home must also be free from active termite or other wood destroying insects. The seller agrees to furnish a letter or report from a reliable licensed termite control operator stating that the home is termite free. Make sure these inspection items are included in the contract.
The contract should contain contingencies clauses that allow you to withdraw from the contract if certain events do not occur. Some of the most common contingencies include:
- contingency that you are able to obtain adequate financing to purchase the home from a lending institution
- contingency that a full inspection be performed and that the inspection report satisfies you
- contingency that you receive the job offer that allows you to buy the home
- make sure all contingencies are fully noted on the contract
Before Making the Offer
Ensure the contract includes all essentials:
The contract should include the following items (this may vary by state). Make sure you discuss these items with your agent before signing the contract:
- attached lighting, heating, cooling, plumbing fixtures, and equipment
- all doors, storm doors, and windows
- all window treatments and hardware, ceiling fans
- wall-to-wall carpet
- all built-in kitchen appliances and range
- pool equipment and accessories, if any
- all bathroom fixtures and mirrors
- garage door opener and all remote controls
- satellite dishes, rotors, and control devices
- all landscaping and related lighting, mailbox and basketball goal and backboard, if any
- all security system components
- other components listed by the buyer and agreed to by the the seller
Your contract should include a provision that everything should be in working order on the settlement date.
All personal items that belong to the Seller should be removed from the house and property and the house should be thoroughly cleaned before taking possession.
Attach additional items
Consider adding items to the contract that you want to remain with the house after you close. These items may include:
- window draperies
- shower curtains
- wall ornaments
- yard decorations
- home appliances
- home furniture
- building sheds
Be sure to specify exactly what you would like included this prevents the seller from replacing the item with an inferior substitute.
The seller may not agree to your terms and strike them out of the contract. But it wouldn't hurt to list them. The seller may be willing to negotiate these items as part of the sale.
As you walk through the house, conduct your own personal inspection:
- run the appliances to see if they operate properly
- run the air conditioning and test for broken window seals
- move the furniture and investigate any bad floor spots
- check the walls behind furniture for damage
- check the wall's and ceiling's paint/wall paper
- inspect the attic for structural damage
- eye under the outside eaves for structural damage
- investigate potential drainage problems
- check the driveway and sidewalk for damage
- check for paint peelings
- review the exterior for animal damage
Include a Home Warranty Provision:
A home warranty protects you against costly repairs for one full year after the sale. The warranty usually covers the plumbing, electrical, built-in appliances, heating and air conditioning units.
Sellers are not obligated to offer a home warranty. But you can make it part of the contract. It's worth the price of the home. Ask the seller to add a warranty provision as part of the sale terms.
List of home warranty companies to consider:
American Home Shield:
Home Warranty of America:
Negotiating the Contract
Presentation and Counter Offer:
Review every line item before your sign the contract. Once the contract leaves your hand and is presented to the seller, you are legally bound by its terms if the seller accepts the contract without any changes.
The contract should stipulate how long the seller has to respond to your offer. You should allow at least 48 hours as your response time limit. Allowing too much time gives the seller the opportunity to shop other buyers.
Your agent will present the contract to the seller's agent. The seller has four options:
- The seller may accept your offer as is.
The contract then becomes binding on the both parties.
- The seller may reject your offer.
Any rejection of even the slightest provision makes the contract non-binding.
- The seller may change the terms of the contract
and counter-offer the original contract.
It may come back as a new document, changes to the original document, or added pages to the original contract. The buyer can accept the seller's counteroffer or walk away from the deal entirely and receive their earnest money back.
- You have the right to counter the seller's counteroffer. You will simply change the terms of the seller's counteroffer as advised by your agent. Your agent will go back to the seller with your counter-counteroffer and seller repeats the process over again. The negotiation can go on forever with counter-offers to the counter-offers. But most offers are reached on the 2nd or 3rd round.
The seller may entertain a second offer.
In a seller's market, it is common for the seller to receive several offers. Of course, the seller will take the best offer which may include a better price, lesser terms in the sales contract, larger earnest money deposit, or that the contract shows greater financial qualification such as a pre-approved mortgage application.
The seller can have several contract offers and may try to play one against the other. Don't accept any oral messages. Make sure the seller responds to your contract with a formal written proposal.
Once both parties agree to the terms and sale price stated in the contract, the terms of the contract are binding on both parties.
If you change your mind for any reason and breach the terms of the contract, the seller has the right to declare the contract null and void and retain your earnest money. You may also be liable for any other financial damage suffered by the seller and the seller's agent.
If the seller fails for any reason to complete the sale of his home according to the terms stated in the contract, the earnest money will be returned to you and the seller may be liable for any financial damage.
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