How To Make An Offer On A House
Andrew Tavin, Personal Finance Writer
Andrew Tavin, Personal Finance Writer
Andrew Tavin a contributing writer for Own Up.
You've done all the house hunting, you’ve gone to the open houses, and you’ve been dragged by your real estate agent to see virtually every home for sale in the area.
Finally, it happens. You've found the home of your dreams (or at least, it's the closest to your dream house that you can afford).
And now, you're nervous. After investing so much time in your house hunting and falling in love with the perfect home for your family – you're scared that your offer will be too low and you'll lose the house. Or that you'll offer too much and feel foolish for overpaying. Or that you'll end up in a bidding war and won't know what to do next.
Calm down. Buyers, particularly first-time homebuyers, always feel that way. If you have a good real estate agent or realtor, they'll be able to walk you through the process without breaking a sweat; after all, they've done this a million times before. It's part of their job.
However, whether you're going it alone or you have a great agent, you're making what probably is the biggest investment of your life. And thousands – or tens of thousands – of dollars are at stake when negotiating a purchase price for your new house. That means you need to understand exactly how to make an offer on a house before you commit to such an enormous transaction.
Nearly 90% of buyers work with a real estate agent on their transaction. So to make things easy for the purposes of this discussion, we'll assume that you're doing the same.)
Know the Environment
The first step is to figure out how much the house is worth and to decide on the right amount to offer the seller.
Estimating the market value of a home is more of an art than a science. A good roadmap is to consider comparable homes in your market that have sold recently. Location is everything: even if a home is similar to yours but is in a different city or town, the value of that home will not give you a useful comparison. Your realtor will be able to provide raw information and an interpretation. Lean on this interpretation, because your realtor is familiar with dozens (or hundreds) or homes which have been for sale in the same area.
Forget about the asking price. Instead, look at the comparative market analysis your agent will prepare; it will let you see all of the similar homes (by size, location and features) that have sold recently.
The key issues to look at are the asking price, the sale price, how long each house sat on the market before being sold, and whether the seller had to reduce the asking price while the house was on the market. That information, combined with the assessed value of the home you want to buy, will give you a good feel for what the property is actually worth.
Now you can think about the seller's asking price, comparing it to the home value you've come up with, to determine if the list price is realistic. You're not done yet, though, because the negotiation isn't going to occur in a “vacuum.”
Your agent will be able to shed light on other factors that will help you decide whether your offer should be close to the asking price, substantially lower, or even higher. Among those factors:
- What's the real estate market like – is it a seller's market or buyer's market? You may have to pay more than you'd like if there aren't a lot of homes available and people want to buy. But if there's a huge inventory just sitting on the market, you're in much better negotiating shape.
- Are there other offers pending, or are there interested buyers about to make an offer? This isn't public knowledge, but your agent can often obtain it from the seller's agent. The information will tell you how quickly you have to act and whether you'll be in a bidding war.
- Is the seller motivated to move quickly? Again, this is “inside” information your realtor may be able to find out from the listing agent. But if they have another house waiting for them and want to be out of their current home quickly, or if the house has been on the market for a long time and they just want to get rid of it already, you might get away with a lowball offer.
- Are there major repairs or renovations that have to be done? This knowledge helps you decide on a price to offer (for example, if there are appliances that don't work, you may want to reduce your offer by the cost of replacing them). It also helps you craft contingency clauses (the seller agrees to fix the air conditioning before the sale) to go into the contract.
The First Offer
The initial offer you make on a home is rarely accepted without negotiation unless you're offering what the seller is asking (or even more) in a hot market with other bidders in the mix. It should be realistic but not necessarily the best offer you can afford. You should leave room to increase your number if necessary.
Your offer letter won't really be a letter; it will be submitted on a standard real estate offer form that's prepared by your agent and is legally binding. If you want, you can have a real estate attorney check the offer before you sign it, but unless the purchase is a complicated one or it's required in your state, a lawyer usually isn't necessary.
Your letter will tell the seller your offer price, of course, but it will also contain a number of other important clauses or pieces of information:
- Date and time when the offer expires (usually 24-48 hours)
- Specifics on the down payment amount, and how your loan will be financed (if you're not paying cash) – a copy of your mortgage pre-approval letter should also be attached
- How large an earnest money deposit (a good faith deposit) will be paid, and who will hold it in an escrow account
- A breakdown of which side is responsible for various closing costs
- Proposed closing date
- Contingency clauses and dates when the contingencies must be met – common ones include the deal hinging on final mortgage approval, acceptable results from a home inspection and lender appraisal, and the seller providing clear title to the property
- Other terms of the sale and state-required disclosures
You want to make the offer as attractive to the seller as possible, so limiting the number of contingencies is a good idea. And, of course, an all-cash offer that doesn't hinge on financing will always be attractive.
Counter-Offers and Bargaining
Once you've signed your offer and your agent has given it to her counterpart, all you can do is sit and wait until the seller responds. They can accept the offer (congratulations!), decline the offer (if they think it's too low even to consider – you can always submit a new offer if this happens), or, most likely, make a counteroffer.
Their counteroffer will be made on the same purchase offer form you gave to them initially. The most common negotiating points are price, contingencies, and closing date. You'll be given a deadline (usually 24 hours) to accept their counter, or make your own new counteroffer.
If both sides want to reach a deal, there may be a somewhat lengthy negotiation involved, with a number of counteroffers going back and forth before a final agreement is signed. That's another good reason to have an agent; the negotiations won't get personal with intermediaries involved.
After the Offer Is Accepted
Needless to say, you can't just move in after both parties have signed the purchase agreement. You'll have to complete the rest of the home-buying process details, such as arranging the home inspection and finalizing your home loan financing. At this point, you're able to negotiate with mortgage lenders for final mortgage rates and terms. And there could still be more bargaining to come.
That's most likely to happen after the home inspector provides his report. If he finds major issues with the home, you may want to come back to the seller (through your agent) and ask for specific repairs or a reduction in the purchase price (commonly done in the form of “credits”) in order to compensate you for work which will need to be done. That's why you include an inspection contingency on the offer; once you're satisfied with this secondary negotiation, you can remove the contingency.
When contingencies are removed, and your financing is ready, you can breathe easy; Trulia says that fewer than 5% percent of all home purchases fall through. All that's left is the final walk-through, the closing, and settling into your new home.
Need help with any other portion of the process? Our buyers' guide includes all of the questions to ask when buying a home.