If your spidey senses have led you to a great house that you’d like to buy, it’s time to get into a negotiating mindset. This article is all about how to make an offer on a house. You’ll learn some key pre-negotiation tips, ideas for formulating an offer amount, insight into earnest money, and strategies for negotiating terms. Let’s get started.
Be Clear About What You Want
Prior to making an offer on a home, you should sit down and contemplate everything you liked and disliked about it. Review the floor plan and square footage of each room, and examine any photos provided by the Realtor or that you may have taken on your tour. Next, think about the neighborhood as a whole and its distance from work, schools, shopping, highway access, etc. Then, if you’re still excited about the property, perform these steps:
– Determine if this is a house that you can truly afford. You may absolutely love it, but that doesn’t mean you should buy it if you can’t afford to furnish and maintain it. Plus, you should have enough of a financial cushion so that you can still save money for your retirement.
– Determine if you’re dealing with a motivated seller. This can be as simple as you or the Realtor asking them why they are selling. Sometimes you can glean bits of information that can help you formulate an offer price.
– Find out if you are entering a real estate market that is rising or falling. For example, if home prices are falling, this could be a sign that you should wait a bit longer before buying. But if nothing else, falling prices are a clear indication that your offer should be much lower as well.
– Confirm the market value of the property. If you’re working with a Realtor, they should be able to tell you what other similar homes in the neighborhood have sold for. This will be the anchor for formulating an offer amount.
– Know everything that will and won’t come with the house when you buy it. Ask about all appliances, window treatments, Jacuzzi, fencing, storage shed, etc. You may be shocked to hear that some homeowner’s have been known to take things with them that buyers assumed were permanent fixtures.
– Identify any items that are not part of the home’s selling price, but you’d like to include them or buy them. This could be appliances, tools, decorations, furniture, etc. Anything goes. If there’s something that you absolutely love, ask the owner if you can buy it.
Formulate the Offer Amount
As you begin to devise an offer amount for the property, there are a few things to keep in mind. First, while you will know the current market value of the seller’s home, they will know it’s value as well. So you’re not necessarily in the driver’s seat.
Second, the degree of pricing flexibility that the seller will entertain will depend on the strength of the real estate market. For example. if the market is strong and the current value of their home is $200,000, you should expect your offer of $175,000 to be quickly rejected. That’s a 12.5% reduction. Even in a slighly down market, you’d be lucky to get a 5% price reduction.
So pay attention to things like the average length of time it takes for homes in the area to sell. If the home has only been listed for a week or two, the owner may be content to sit and wait for better offers.
Third, keep in mind that your real estate agent and the seller’s agent must be paid a commission if you buy the house. The commission is usually 6% of the selling price, and will be split evenly between the two of them.
Depending on how the deal is structured, you may or may not be responsible for contributing to the commission. But this is a good chunk of money that the seller will also factor in when considering your offer.
Finally, as you contemplate the offer, think of other ways to reduce it. For example, you could ask for an appliance allowance if the existing appliances are old or the owner plans on taking them.
Sometimes, you might even get the homeowner to pay for a home warranty for a year. This way, if any of the appliances or the heating and cool system breaks down, you can get them repaired with very little money coming out of your pocket.
Calculate the Earnest Money Amount
When you get to the point of making a written offer on the property, your real estate agent will recommend that you include an “earnest money deposit”. Keep in mind that you may be competing against other potential buyers for the home.
The purpose of earnest money is to convey to the seller that you are serious about buying the home. It’s a good faith gesture. The amount of earnest money can be a fixed amount, such as $500 or $1000, or it could be a certain percentage of the offer price. On average, this percentage could be 1% to 3%. But it could go higher if the real estate market is going gangbusters in your area. Your real estate agent can guide you on how much is reasonable.
Now, when you put up the earnest deposit, it doesn’t go directly to the home seller. Instead, the money will be kept in a joint escrow account, which the real estate agent will probably already have in place. An escrow account is just a temporary holding account.
This way, if the seller accepts your offer, and you back out of the deal, you’ll lose the earnest deposit. But if both parties agree to the deal, then the earnest money will simply become part of your down payment amount. Of course, if the seller rejects your offer, you’ll get your deposit back.
Make Your Offer
Once you decide on the price that you want to offer for the home, you or your real estate agent will present it, in writing, to the seller. Typically, the offer document will include a clause stating that the seller has a certain amount of time to accept or reject your offer. For example, the timeframe could be 48 hours.
In addition, just to protect yourself, it’s a good idea to include another clause in the offer contract that says “agreement to any offer will be contingent on the house passing inspection by a qualified professional of your choice”. Or, if you don’t have a mortgage, it should say “contingent on getting approval for a mortgage”.
In most cases, you can expect your offer to be responded to with a counteroffer from the seller and a timeframe for you to accept, reject, or submit a counteroffer. This is perfectly normal. It’s basic negotiating, and the back and forth could go for a couple of rounds.
Of course, if the buyer accepts your first offer it probably means you could have gotten the home for less. But there’s not much you can do after that without losing your earnest deposit.
And if the seller rejects your offer outright, it could be due to several things. There could be other offers that are a lot higher than yours, for example. Or, your offer and earnest deposit were so low that the seller didn’t think you were serious.
Now, it is possible to submit an offer and never hear back from the seller. There is no law that says they have to respond. But if you don’t hear back within the agreed upon timeframe, the offer is then considered to be null and void.
But again. if the seller accepts your offer, they’ll do so by signing the binding offer contract. This document will get the wheels turning toward the mortgage process and the final closing procedures (discussed in section two of this guide) where you will get the keys to the property. The rule of thumb is that this process could take 6-8 weeks, but could be shorter if you’ve been pre-approved for a mortgage loan.
Home Buying Guide Conclusion
As you can see, after reading this home buying guide, there’s quite a bit that goes into the process of purchasing a home. After all, you first have to decide if it’s the right time to buy. And there’s certainly nothing wrong with renting as long as you’re not paying an exorbitant amount.
But if you have decided to go forth with acquiring a home, then you have to make sure that your credit file is in order and that you aren’t carrying too much debt. The reason these areas are important is because they can impact the interest rate you’ll be charged. And a higher rate can result in you paying tens of thousand of extra dollars over the life of the loan.
Speaking of loans, you have to determine which type of mortgage is right for you. This decision is driven by several things, including your income and price of the home. For example, adjustable rate mortgages start with low introductory rates, which can be good if affording a home is a bit of a challenge initially.
But keep in mind that your first home doesn’t have to be a 10,000 square feet mansion. You have a number of options to choose from including ranch homes, condos, townhomes, mobile homes, and more. And you can find even better deals on them if you’re willing to investigate short sales, foreclosures, and real estate owned properties.
Finally, when you’ve uncovered a gem, make an offer that is based on objective research, sound advice, and clear thinking. Don’t allow an emotional connection to a home to cause you to over pay for it.
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