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Making an Offer on a Home

OK, you found the home that meets all (or at least most) of your criteria, and now you want to make an offer. This is really where an experienced Buyer Agent comes into play. The first thing your Buyer Agent will do is to figure out what the approximate market value of the property is. Unless the property just came on the market, had a price reduction, or is a distressed property (includes short sale & bank-owned properties), the actual value of the property is probably somewhat below the list price.

How much below? Well, there is no set rule-of-thumb for determining how much under the list price a property is really worth.  Your buyer agent can look up how much of a mortgage the seller took out on the property (sometimes 2 mortgages), and calculate approximately what amount is still owed. From there your buyer agent will look up comparable properties in the same neighborhood  that have recently sold - usually in the last 6-12 months, depending on the market. Another method is to take the price that the current seller paid for the property, and add on the percentage that real estate prices have increased or decreased since that time. With this information, your Buyer Agent can calculate the approximate current value, though in most cases this is not an exact science.

The actual definition of market value is "The price that a buyer is willing to pay for a property, and that the seller is willing to accept". So, just because we have determined a property is worth a certain price doesn't mean the Seller will accept it. The Seller will have his/her own idea of what the property is worth. If this is a house you really love, then maybe you are willing to pay the Seller's price. That's something only you can decide.

There's going to be some negotiating involved, so we aren't going to offer the Seller market value. Ideally, we would like to get the property for below market value, but in reality, we just want to get it for the best price we can. So we will determine what a good starting point would be. Again, this all depends on the individual property, and whether there are any other offers competing with us.

Now you and your agent have decided on what you want to offer. Next step is to write up a "Contract to Purchase" (also called a "purchase offer" or "offer to purchase". They're all the same thing). We'll just call it the "Offer" for simplicity sake.

Click Here to take a look at a typical Contract to Purchase

The first thing I want to say about an Offer is that nothing is written in stone when it comes to the terms you set. There are general guidelines, but anything can be changed. So just keep this in mind when you are drawing it up. Again, your Buyer Agent has done this many times, so rely on his/her recommendations, but ask questions if you don't understand any part of the contract.

Included in the Offer is the purchase price - let's use $300,000 for an example. You need to give a deposit, or binder (technically, a contract needs something of value exchanged to be valid). This amount is usually $500 or $1000. It can be more, but $1000.00 is usually adequate to show the seller you are serious. The only time I recommend more is when you are competing against other offers on the same property.

Next item on the Offer is the amount you are going to put down as a second deposit. This is typically done after you have had the home inspected, and at the same time you sign the Purchase and Sale Agreement. The typical amount is 5% of the purchase price, less the initial deposit ($300,000 x 5% = $15,000, less the $1000 binder, equals a 2nd deposit of $14,000). In many circumstances, the Buyer (that would be you) does not have that kind of cash at his/her disposal, especially 1st time home buyers and people who's equity is tied up in their current home. What you do in this case is to put down as much as you can, without leaving yourself completely cash poor (you still need to eat!). The more you put down, the stronger it makes your offer. The reason for a deposit is to give the Seller some assurance that you are not going to walk away from buying this property 2 days before closing (believe me, it happens, and it ain't a pretty situation). You can get your full deposit back for 2 reasons - a bad home inspection or the inability to obtain financing. I'll explain more about that later.

Even if you are doing 100% financing, you still need to put down a deposit, even if it is only $1,000 or $2,000. You will get back any money you put down at the time of closing.

Next is the the amount of time that we are going to give the Seller to make a decision on this Offer. This can vary from several hours to several days, depending on the Seller's situation. A good Buyer Agent will ask the listing agent a few questions about the Seller to determined the Seller's availability and how many people are involved in the decision process. Typically (I'll use this word many times), 24 hours is sufficient time for a Seller to make a decision. In the case of a bank owned property, an estate sale, or a divorce situation, it could require a couple of days or more to reach all parties involved.

Inspection Contingency - Your home inspection period is typically 10 days from the acceptance of your offer. This is when you hire someone (we recommend a licensed home inspector) to inspect the entire property for flaws and deficiencies (more on this in the next section).

The next section of the Offer is the Financing Contingency Date. This is typically 30 days from the acceptance of the Offer. During this period you must submit an mortgage application (this must be within 10 days), submit all required documentation to the bank/mortgage company that they request (and they will keep requesting more), and the bank does everything that it needs to do such as appraising the property, verifying that all the information you have given is accurate, contacting  the closing attorney and submitting everything to underwriting (the company/department that supplies the money) for final approval. You need to have in your hand a written mortgage commitment letter before this 30 day period ends. Don't worry, this is one of the many jobs of your Buyer Agent - to make sure that everything is done in the timeframe needed to protect your deposit money.

If you cannot get a commitment from the bank by this date, we need to request an extension for more time from the Seller. If for some reason you cannot get financing, then we inform the Seller of that fact in writing, along with a letter of rejection from the bank, and you will have your full deposit returned to you. If you go beyond this date and cannot get financing, then the Seller has the right to keep your deposit as damages. (We won't let that happen)

The Closing Date is the next item to be addressed. This can be anytime after your finance commitment date, and needs to be on a Monday through Friday. Six weeks from the acceptance of the Offer is typical, but can be any date that is suitable for you - the Buyer, and the Seller. This date is often negotiated by both parties.

Last item is Special Provisions. This is where you want to include anything that is not addressed in other parts of the Offer. Maybe you want the washer & dryer included in the sale. This is where you would put that request. Also, if you want the Seller to pay for your closing costs (a very common request), that would go in this section.

Alright, you wrote up your offer and your Buyer Agent submitted it to the Listing Agent to be presented to the Seller. What can you expect from here?

Well, the Seller will respond in one of 3 ways:

  1. Accept your offer as it stands (Wow, you submitted a cash offer over asking price in a buyer's market?) Now you can move onto the next step.

  2. Reject your offer outright. (OK, now you've insulted the Seller with your low-ball offer) The seller can do this by sending you back the offer signed reject, or may even just not respond at all. Typically, you will just get a verbal rejection. You can still submit another higher offer, but you've already upset the seller and now he standing his ground on principle. (Yes, it can get emotional, see below on that subject).

  3. Submit a counter-offer back to you (Now we're talking!)
    The counter offer can be in writing or given verbally to your agent. You can accept the Seller's counter-offer, or you can submit a counter-offer to it. Eventually, the idea is that the two of you can come to some sort of agreement on the price and other terms of the Offer.

Please, Please Please! Do not get emotional when negotiating an offer. Emotions have no place in this part of the real estate transaction. You can get emotional all you want when you are walking into your new home for the first time after closing. This is a business transaction, and you must think everything through logically. I've seen many offers fall apart over a few thousand dollars because no one would budge on price ("It's the principle of the thing"). Remember, a thousand dollars works out to less than $6.00 (or a Starbuck's double mocha caramel latte with an extra shot of espresso) per month on your mortgage payment, so don't lose the home you want over "principle". You'll regret it later. I don't want you to overpay for a home, but I also don't want you to hate me later on because "I" let your dream house slip away.

At this point, you have your new home under agreement. Now the real work begins.



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