Nancy Sollee

MAKING AN OFFER

The sellers want to sell their home just as much as you want to buy it. If not, you would never have gotten to this point. You know exactly why you want this home. What you do not know is why the sellers want to sell it. They could be retiring to Florida, being transferred by their job, or simply moving into a different home that better suits their needs. Chances are that their motivations for moving are similar to yours. This can work to your advantage.

A good Buyer's Agent will have done as much research about the home as possible. Part of your Buyer's Agent's job is to do the investigating and research that may come in useful when it comes time to make an offer. This may even include learning the sellers' motivations if they can.

It is usually safe to say that the sellers want as much money for their home as they can get. They most likely have an emotional attachment to their home, including memories and home improvement projects, that can lead them to believe that their home is worth more than it is. They sometimes forget that they are selling a house, not memories.

You, the buyer, obviously want to pay as little for a house as possible. Unfortunately, the final decision always rests with the sellers. If the sellers say "no", there isn't much you can do about it. So the trick here then becomes how to "sell" your offer to the sellers to get the deal that is right for you.

Everything is Negotiable

A standard Purchase Contract is used in most cases because it contains the most common negotiating points. However, that standard contract has space to write in things you want to negotiate for.

Everything from the furniture, to the curtains, to the kitchen sink is negotiable. If you want the sellers to pay closing costs, fix a roof, or build a deck, you can always ask. The sellers can always say, "no". The rule of thumb here is that for the right price, everything is negotiable.

"Hot" Markets and Competitive Offers

Your home search should start by researching the area and knowing what type of market you are going to buy in. A "hot" market is a real estate market where demand to buy homes is very high. This happens when there are more buyers looking to buy homes than there are homes for sale. The buyers are forced to compete with each other for a limited number of homes. This is also called a "Seller's Market" because the sellers have the advantage: if they wait a little while, another buyer will knock on the door.

Unfortunately, this type of market works against you, the buyer. When demand exceeds supply, you may find yourself in a situation where there are a number of other buyers looking to buy the same house you've fallen in love with. When multiple offers, or Competitive Offers, from different buyers are made on the same house, the sellers will choose the best one. No matter the type of market, if a beautiful house in the right area is for sale at a reasonable asking price, chances are it will sell quickly. This is also an instance where there may be more than one offer on the house for the sellers to choose from. Somehow, you have to make your offer look better than all the rest. Offering the full price is always the best way to do this, however, it is not the only way.

Much more goes into an offer to buy a home than the asking price. There are contingencies that have to be met, inclusions and exclusions. There is creative financing and deadlines. Everything is negotiable.

For example, the sellers may be up against a deadline for some reason. Part of your offer is to suggest a potential closing date. You have the right to schedule closing sometimes up to  three months out, however if that falls after the sellers' deadline, they might reject your offer even if it is the highest priced offer they get!

Is Your Goal to Get Your Offer Accepted or to Entice a Counter-Offer?

You need to define your goal and stick to it. If your goal is to buy the house before anyone else does, then you need to make an offer that looks good to the sellers so that they will accept it quickly. If your goal is to entice a counter-offer and start a dickering and negotiating period, that's fine. Just remember what type of market you are in. In a "hot" market, the sellers will most likely say no to a low offer and wait for the next buyer to knock on the door.

Enticing a counter-offer generally works best in a slower market - such as the winter months. Even in a "hot" market, if your Buyer's Agent finds out that a home has been on the market for a long time, the sellers might be getting anxious to sell. They may even be up against a deadline. This is where you have some leverage to entice a counter-offer.

You need to be careful. Do not disrespect or insult the sellers. Keep in mind that they have a professional Seller's Agent working for and advising them. If you make an offer on the home that is ridiculously low by any standard, chances are the sellers will not take you seriously. They may figure that you, as a buyer, are more trouble than its worth and regardless of the market or how long the house has been on the market, they may say no to you without making a counter-offer.

Your goal when enticing a counter-offer is to play to the sellers motivations. They want to sell the house, but neither do they want to be taken advantage of. Ironically, many sellers do not focus on the bottom-line of the offer. There may be a big difference between the asking price, the offer price, and the selling price. In addition, the other contingencies, or lack thereof, and items in the contract may look good enough to outweigh a lower offer price.

Do the Sellers HAVE to Accept a Full-Price Offer?

Once you find the home you want to buy, the next step is to write an offer – which is not as easy as it sounds. Your offer is the first step toward negotiating a sales contract with the seller. Since this is just the beginning of negotiations, you should put yourself in the seller’s shoes and imagine his or her reaction to everything you include. Your goal is to get what you want, and imagining the seller’s reactions will help you attain that goal.

The offer is much more complicated than simply coming up with a price and saying, "This is what I’ll pay." Because of the huge dollar amounts involved, especially in today’s litigious society, both you and the seller want to build in protections and contingencies to protect your investment and limit your risk.

In an offer to purchase real estate, you include not only the price you are willing to pay, but other details of the purchase as well. This includes how you intend to finance the home, your down payment, who pays what closing costs, what inspections are performed, timetables, whether personal property is included in the purchase, terms of cancellation, any repairs you want performed, which professional services will be used, when you get physical possession of the property, and how to settle disputes should they occur.

Buying a home is a major event for both the buyer and seller. It will affect your finances more than any other previous purchase or investment. The seller makes plans based on your offer that affect his finances, too. However, it is more important than just money. In the half-hour it takes to write an offer you are making decisions that affect how you live for the next several years, if not the rest of your life. The seller is going to review your offer carefully, because it also affects how he or she lives the rest of their life.

Contingencies in an Offer to Purchase Real Estate

In most purchase transactions there may be a slight challenge or two, but most things will go quite smoothly. However, you want to anticipate potential problems so that if something does go wrong, you can cancel the contract without penalty. These are called "contingencies" and you must be sure to include them when you offer to buy a home.

For example, some "move-up" buyers often agree to purchase a home before selling their previous home. Even if the home is already sold, it is probably a "pending sale" and has not closed. Therefore, you should make closing your own sale a condition of your offer. If you do not include this as a contingency, you may find yourself making two mortgage payments instead of one.

There are other common contingencies you should include in your offer. Since you probably need a mortgage to buy the home, a condition of your offer should be that you successfully obtain suitable financing. Another condition should be that the property appraises for at least what you agreed to pay for it. During the under contract period you are likely to require certain inspections and that creates another contingency dependent on the condition of the home especially concerning structural and health and safety items.

Basically, contingencies protect you in case you cannot perform or choose not to perform on a promise to buy a home. If you cancel a contract without having built-in conditions and contingencies, you could find yourself forfeiting your earnest money deposit.

Or worse.

Earnest Money Deposit in an Offer to Purchase Real Estate

After you have come up with an offer price, the next step is to determine how large a deposit you want to make with your offer. You want the "earnest money deposit" to be large enough to show the seller you are serious, but not so large you are placing significant funds at risk.

One recommendation is to make sure your deposit is less than two percent of your offered price. The reason for this is that if your deposit is larger than that, the lender will pay particular attention to how you came up with the funds. You might have to provide a copy of a canceled check along with a bank statement showing you had the money to begin with. Normally, this is not a problem, but if you have a short escrow period or are barely coming up with your down payment, it could pose an inconvenience. The seller generally has certain amount they require for earnest money for them to consider and move forward with your offer.

As with practically everything in real estate, there are exceptions to this rule, too. During a hot market there may be multiple offers on the property that interests you. A large deposit may impress a seller enough so they will accept your offer instead of someone else’s, even when your unknown competitor is offering the same price or slightly higher.

Since large deposits do impress sellers, you may also find that by making a large deposit you can convince the seller to accept a lower offer. More money up front may save you money later.

The Closing Date in an Offer to Purchase Real Estate

It is absolutely essential that you include a closing date as part of your offer. This way both you and the seller can make plans for moving, and the seller can make plans for buying his or her next home. Though most transactions actually do close on the right date, do not be so inflexible that a delay creates insurmountable problems.

For example, if you are renting and need to give the landlord notice that you are moving out, you may want to allow a little flexibility. Otherwise, if your purchase closes a few days late you could find yourself staying in a motel with your belongings packed in a moving van somewhere while you pay storage costs.

There are also times when closing can be delayed by weeks, through no fault of your own. Have back-up plans prepared for such a contingency.

Transfer of Possession in an Offer to Purchase Real Estate

1 - Act now.
Assume there is no time to waste in making your offer. You've invested time and energy in your search for a homenow follow through. If possible, we’ll let the sellers know they'll be receiving your offer shortly.

2 - Determine your offering price.
You'll want to be aware of dynamic market conditions, as well as property-specific factors contained in a comparative market analysis (CMA).

The CMA is a tool for comparing the subject property with other similar properties in the neighborhood. A well-prepared CMA is critical in helping to determine the fair market value of the home (which may be what you offer). Your Buyer’s Agent should have a form specifically designed for this purpose. The CMA will also include Listing Date, Listing Price, Sale Price, and Sale Date, number of Days on the Market. The CMA should include homes currently for sale.

3 - Protect yourself.
Your offer should contain financing and inspection contingencies for your protection. If you're working with a licensed real estate agent, it's likely she'll be using a comprehensive form which includes standard text for virtually all normal contingencies.

4 - Think ahead.
Now is the time to plan when you want to close the transaction. If you're nearing the end of your tax year, discuss with your tax advisor the best time to close. There may be benefits associated with closing in the next tax year. Consider closing near the end of the month. Pre-paid interest on your new loan will usually be less. Coordinate closing with the closing of your current home, or the termination of your lease.

5 - Present your offer.
If you're working with an agent, she'll likely present your offer for you. Letting her represent you will help protect against emotional flair-ups which can occur in face-to-face negotiations between principals.

The more someone wants something, the more they'll sacrifice to get it. In the case of buying real estate, find a seller who wants your money more than you want their house. A motivated seller is much more likely to make concessions in your favor. You may have to make offers on several properties before you find a motivated seller. When you find oneyou'll know it.

2. Know when to walk away. If you reach that point - walk.

How do you determine ahead of time when to walk away? Before making your offer, you had your agent complete a Competitive Market Analysis (CMA). The CMA helps you determine the value of the home. Can you offer more than the CMA suggests? Sure. And in a hot market, you may have to. But decide ahead of time how high you'll go, and what concessions you're prepared to make. Price isn't the only reason you might walk away. Don't compromise on home inspections, removing contingencies too soon, allowing enough time to act, etc.

General principles to Remember During Negotiations

By all means, negotiate.

Negotiation is part of the process of buying a home. Price is just one point of negotiation. Personal property, home inspections and repairs, closing dates, etc., may also come into play. If you're like most people, your home is the largest purchase you'll ever make. It's likely the home-buying experience will be an emotional one. If you find yourself reaching the limits of your patience and endurance, don't despair that too is sometimes part of the process. By remembering the two rules, you'll do fine.
Maintain your objectivity.

This isn't always easy. At least two compelling influences will test your ability to remain objective: a hot market and finding the "perfect" home. A hot market can sway you to offer more than the home is perhaps worth. Finding the perfect home can also have such an effect. It is true that no two homes are exactly alike. For practical purposes, most homes are very much alike, however. When you think you've found the perfect home, chances are there's another one available just like it and for possibly a better price. You can always increase your offering price.

Get it in writing.

Colorado requires that contracts for the sale of real property be in writing. Do not expect oral agreements to be enforceable.

Give up something to get something.

Ask for something you can easily give up. If the seller sees you're making concessions, they'll be more likely to give you what you really want. In your offer, include some things you can do without. Here's a hypothetical example:

A home is for sale for $110,000. What you want most is to buy it for $105,000. You offer $100,000, 45-day closing, you get the refrigerator and a $1000 credit to clean the home.

During negotiations, you give up the $1,000 credit, the refrigerator and agree to a 30-day escrow. The sellers feel like they won something, and you get the home for $5,000 less than you were willing to pay!

.

Determining your offering price can be influenced by a number of factors. Market conditions, personal factors affecting you and the seller (if known), and factors directly effecting the property and neighborhood may all play a role.

Market Considerations

Market conditions broadly affect the price level of homes. These conditions are external to the property, yet greatly influence your offering price.

In a seller's market, competition for homes is high and property values may be increasing. Under these circumstances, expect to pay a premium price for the home. Listen to your agent's advice regarding what to offer. Offering full- or over full-price in a seller's market is not unusual.

Conversely, in a buyer's market, competition for homes is low and property values may be level or decreasing. Offering less than full-price is the norm under these circumstances.

In the ideal market (a market in equilibrium), demand for and supply of housing are in balance, and neither buyer nor seller is disadvantaged by market conditions.

Property-Specific (Internal or Local) Considerations

Property-specific considerations are more easily quantified compared to the market considerations discussed previously. The numbers of bedrooms, bathrooms, square feet, lot size, etc., are examples of these.

Prior to making your offer, you'll need to compare the home with others in the neighborhood. This is done with the aid of a Competitive Market Analysis (CMA). Gathering and analyzing information from comparable sales helps to establish the range of prices you should consider when making an offer to buy a home. More weight should be given to the most recent sales, but even so, you need to do a bit more analysis before setting upon the price you will offer. That is because you also need to consider the condition of the property, improvements, the current market, and the circumstances behind the seller’s decision to sell.

Since you have toured the property you are interested in, you should know how it compares to the general neighborhood. All you have to do is put the home in one of three categories - average, above average, or below average.

When evaluating a home’s condition, there are a number of things you should consider. Structural condition is most important - items such as walls, ceilings, floors, doors and windows. Then paint, carpets, and floor coverings. Pay special attention to bathrooms and bedrooms and whether the plumbing and electricity work efficiently. Look at the fixtures, such as light switches, doorknobs, and drawer handles. The front and back yards should be in reasonably good shape.

The missing ingredient will be information on the condition of the homes from your comparable sales list.

How Home Improvements Affect Your Offer Price

Even when comparing exact model matches within a tract of homes, you should note whether the previous owners have made any substantial improvements. Cosmetic changes should be largely ignored, but major improvements should be taken into account. Most important would be room additions, especially bedrooms and bathrooms. Other items, like expensive floor tile or hardwood floors, central air, etc. should be taken into account, too. How Market Conditions Affect Your Offer Price

A hot market is a "seller’s market." During a seller’s market, properties can sell within a few days of being listed and there are often multiple offers. Sometimes homes even sell above the asking price. Though most buyers’ want to get a "deal" on a home, reducing your offer by even a few thousand dollars could mean that someone else will get the home you desire.

A slow market is a "buyer’s” market. During a buyer’s market properties may languish on the market for some time and offers may be few and far between. Prices may even decline temporarily. Such a market would allow you to be more flexible in offering a lower price for the home. Even if your offered price is too low, the seller is likely to make some sort of counter-offer and you can begin negotiations in earnest.

More often than not, the market is simply "steady," or in transition. When a market is steady, no real rules apply on whether you should make an offer on the high end of your range or the low end. You could find yourself in a situation with multiple offers on your desired house, or where no one has made an offer in weeks.

How Seller Motivation Affects Your Offer Price

Truthfully, it is rather rare that a seller’s motivation will dramatically affect the price of a home, but it is often possible to save a few thousand dollars. The most common "motivated seller" is someone who has already bought his or her next home or is relocating to a new area. They will be under the gun to sell the home quickly or face the prospect of making two mortgage payments at the same time. Since that can drain a bank account quickly, most sellers want to avoid such a situation and may be willing to give up a few thousand dollars to avoid the possibility.

There are also family crises that can motivate a seller to make a quick deal. However, when you see a real estate ad that mentions "divorce," "motivated seller," "relocation," or something to that affect, beware. Although the facts may be true, that does not necessarily mean the seller is motivated to make a quick and costly sale. Most likely, the ad is more designed to generate phone calls and leads rather than sell the home.

However, there are times when a seller is truly distressed, willing to make a quick sale and sacrifice thousands of dollars. With the seller’s permission, the listing agent will post this information along with the listing in the Multiple Listing Service. They may also inform other agents during office and association marketing sessions or by flyers sent to other real estate offices. Provided this information has been made generally available to Realtors, your agent should know when a seller is truly motivated and when it is just "puff" designed to elicit interest in a property.

The exception is when an agent is selling a home they have listed themselves or selling a home that was listed by another agent from their own company. In such a situation, the agent may be acting as an agent for the seller, or as a transaction broker representing both you and the seller. In such a situation, they cannot legally provide you with information that would give you an advantage over the seller nor can they give information to the seller to give them the advantage over you.

The Final Decision on Your Offer Price

Comparable sales information helps you to determine a base price range for a particular home. Adding in the various factors like property condition, improvements, market conditions, and seller motivation help determine whether a "fair" price would be at the upper limit of that range or the lower limit. Perhaps you will feel a fair price is outside of that price range.

The "fair" price should be approximately what you are willing to agree on at the end of negotiations with the seller. The price you put in your offer to begin negotiations is totally up to you and depends on your negotiating style. Most buyers start off somewhat lower than the price they eventually want to pay.

Almost all deals close and the earnest money funds are applied to the buyer's down payment and closing costs. As the saying goes, however there are exceptions to the rule. Some sellers think that if the deal falls through, the earnest money deposit is automatically forfeit. Some buyers think that if the deal doesn't close, they automatically get the money back.

Neither one is true. Even when the failure to close is the buyer's fault, the seller doesn't have a "right" to the deposit as a way to "punish" the buyer. Nor does the buyer automatically get the entire deposit back, even when they are not at fault.

If something goes wrong very early in the deal, the seller normally understands and the deposit is usually returned to the buyer without a fuss. When things go awry later in the transaction, both parties usually exercise common sense and negotiate a fair solution. In a few rare occurrences, the buyer and seller find it difficult to agree.

The point is that is always makes sense to reach an agreement. Failure to agree ties the money up for awhile, could possibly lead to further legal action and inconvenience, and it just becomes a frustrating mess for both sides more so than you realize at the time.

Although you have toured the property, looked at the walls and ceiling, turned on the faucets and played with the light switches, you have not lived in it. The seller has years of knowledge about his or her home and there may be some things you want to find out about as quickly as possible. For this reason, you will require certain disclosures as part of your offer.

Basically, you want the seller to disclose any adverse conditions that may have a substantial impact on your decision to purchase the home. This would include any problems with the house, whether the property is in a flood zone, a noise zone, or any other kind of hazardous area.

If you have an agent representing you, this is almost automatic, but many states do not require require banks selling foreclosed property to provide these disclosures, either. Obtaining these types of disclosures should always be a part of your offer, and time is of the essence.

Condition of the Property

The last thing you want when you assume possession of your new home is to find it in a total mess. Therefore, you should make it clear in your offer that certain minimum standards are required. If you do not, you might find out the seller or neighbors have begun using the back yard as a trash dump, or something worse – and you would not be able to do anything about it.

Some of the requirements you might want to include in your offer are that the roof does not leak, the appliances work, the plumbing does not leak, that there are no broken or cracked windows, the yard has been kept up, and any debris has been cleared away.

Home Inspections

Besides appraisal you should also have a professional go through the house and seek out potential problems. Of course, you will have inspected the home, but you are not used to looking at some things that a professional will find. Even if they are not things the seller is expected to repair, at least you will have foreknowledge of any potential problems. You can also have specific tests, such as radon, done too, generally at your expense.

The seller will want this inspection performed quickly, so that you can approve the results and move forward with the purchase. Once you receive the inspection, you will want to allow yourself sufficient time to review and approve the report. If you do not approve the report, you may negotiate with the sellers on which repairs should be performed and who should pay for those repairs. Otherwise, you can cancel the purchase without penalty, provided you have included timetables in your offer.

Final Walk-Through Inspection

That is a "contingency." Actually, it is a major contingency.

Contingencies are important in real estate contracts because they limit a buyer's or seller's responsibility to fulfill the contract and close the deal. Some are major, some are minor. Some contingencies are frowned on others are not. Other contingencies are "normal."

For example, in a seller's market most sellers would not accept the contingency listed above. A potential buyer with a home to sell should already have their home listed AND have an accepted offer from a "ready, willing and able" buyer.

Other contingencies make perfect sense. For example, a buyer might want to make their purchase "contingent" upon their ability to obtain financing. If they can't get the loan, they can't buy the house anyway, so it is a contingency that makes sense.

Another buyer may want to make his offer contingent on the home appraising at (or above) the purchase price. Since the appraiser is hired by the lender and is independent of the actual transaction, that is another contingency that makes sense.

In addition, there are loads of inspections. Buyers will often want to make sure the property passes these inspections, so these become additional contingencies...

...and that is what makes a real estate contract different than most contracts.

Most contracts are set at the time of offer and acceptance. They are a "done deal" and both parties are liable to fulfill their obligations no matter what. If either party attempts to renegotiate any point, the other party can "void" the original offer and acceptance.

Real estate contracts have specific clauses which allow renegotiation in limited areas. For example, a real estate contract may require a buyer to get his home inspection completed in fourteen days. It allows the buyer three days (or whatever) to review the inspection and report any problems to the seller. If no problems are reported, that contingency automatically disappears.

Suppose the inspection is performed within the required time frame, it shows a cracked tile in the corner by the fireplace, and the buyer reports that problem to the seller.

What happens next? The buyer and seller renegotiate that aspect of the deal. It's a legal contingency. It is subject to renegotiation.

The seller may decide to replace the tile or he may decide not to replace the tile. The buyer decides whether it is worth losing the house over a broken tile or not. The seller decides whether it is worth losing a buyer over a small thing like a broken tile.

That example was purposely minor. The problem could be a faulty roof. That would require more serious thought.

Down Payment

As part of your offer, you will need to disclose the size of your down payment. Once again, this allows the seller to evaluate your likelihood of obtaining a home loan. It is easier to get approved for a mortgage when you make a larger down payment. The underwriting guidelines are less strict.

Asking for Closing Costs and Financing Incentives

There may be times when, as part of your offer, you request the seller to pay all or a portion of your closing costs, or provide some other financial incentive. One common request is asking the seller to provide funds to temporarily buy down your interest rate for the first year or two. Such incentives can be especially effective if a buyer is tight on money or pushing their qualifying ratios to the limit.

Whenever you ask for incentives such as these, you will probably find the seller less willing to negotiate on price. After all, what you are really asking for is have the seller to give you some money to help you buy their house. The end result is that, for a little relief in the beginning, you are willing to pay a little more in the long run.

Seller Financing

Another occasional request is to have the seller "carry back" a second mortgage to help facilitate your purchase of their home. In cases when the seller does not need all the proceeds from their sale in order to purchase their next home, this is an option. The advantage to the buyer is that by combining your down payment and the second mortgage from the seller, you may be able to avoid paying mortgage insurance and save yourself some money.

If such a carry-back is part of your offer, you should include the terms you wish to pay on such a second mortgage. Keep in mind that your first trust deed lender needs to know this information so they can underwrite your loan, and they have certain minimum requirements. The minimum term of the second mortgage can be five years. The minimum payment can be "interest only." Longer mortgage terms and payments that also include principle are also acceptable.

Cash Offers

If you are one of those rare individuals making a cash offer to buy a home, most sellers require you to provide some documentation with your offer that shows you have the funds available. A bank statement would be fine. If you have to liquidate stock or some other asset, your offer should give a timetable on when you will provide proof you have converted the asset to cash.

Other Financing Details in Your Offer

Non-Allowable Fees

First, VA and FHA loans prohibit buyers from paying certain types of fees that are often charged by lenders, escrow companies, settlement agents, and title companies. They are called "non-allowable" fees. They still get charged anyway, but as the buyer, you are "not allowed" to pay them. The result is that the seller ends up paying them instead of you.

Most of these "non-allowable" fees come from your lender. By the time you are making an offer you should have already been pre-qualified by a loan officer, so you or your real estate agent can ask how much the lender’s non-allowable fees will be. Experienced agents should also have an idea of what non-allowable fees will be charged by the title insurance company.

Since these are fees the seller would not pay on an offer with conventional financing, this information must be included in your offer. You should also realize that since the seller will be paying these additional fees, they may be a little less negotiable on the price.

VA and FHA Appraisals

Home appraisal inspections on FHA and VA loans are a little more detailed than on conventional loans (and more expensive). The appraisers are required to perform certain minimum inspections as well as evaluate the market value of the property. Although these inspections are not as detailed as a professional home inspection and should not be considered a substitute, sometimes repairs are required.

These are additional costs the seller would not be obligated to pay for someone obtaining conventional financing, so your offer should include a maximum figure for these repairs. Otherwise the seller is signing the equivalent of a blank check, and they do not want to do that."