The Offer

Preparing to negotiate

Prequalification
If you are prequalified, the seller has some assurance that the sale will go through. A prequalification letter from your lender for a loan amount equal to or exceeding the seller's asking price is a strong indication that you can buy the home.

Down Payment
A down payment of 20% or more is another demonstration that you are prepared to buy. It also means you don't need a loan involving the VA or FHA, which usually slows the transaction.

First-Time Buyer
If the sale is not contingent on selling your current home, the sale can proceed more quickly.

Chemistry
If you hit it off with the seller, that can be a plus. Many people prefer to sell their home to someone who has similar interests and philosophy, who will take care of the home the way they have.

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Settling on a price

Before making an offer, consider two points:

(1) How does the seller's asking price relate to the market value of the home?
(2) How many other prospective buyers are bidding on the home?


Assessing Fair Market Value

If your real estate agent has performed a comparative market analysis, he or she can tell you the property's fair market value. Otherwise, real estate sections of your local papers are good sources of information. They usually list recent sales of homes by neighborhood.

If you don't find anything in the newspaper, you can drive around the neighborhood and look for homes that have sold recently. (They'll have signs with "Sold" stickers.) Call the real estate agent and ask for the sale price of the home. If the agent won't tell you, he or she may be willing to talk to your agent.

It is important to investigate the fair market value before you make an offer. Even though you may be willing to pay a price out of line with those for similar homes in the same area, the lender may not approve a loan large enough for purchase at that price. Most loans are contingent on an appraisal. If the appraisal comes in at $20,000 less than the price you are willing to pay, you will have to come up with $20,000 more out of pocket if you want the home.

A high asking price can indicate that the seller:

(1) Wants to leave room for negotiation
(2) Isn't motivated to sell
(3) Is unrealistic about the market

Other Bids

The seller or the seller's agent will usually tell you about other bids. If there have been few bids, or none at all, you should make an offer lower than the asking price. If there's a lot of competition, you may want to meet or exceed the asking price if you really want the house.

Bidding Procedures
Your offer may include other terms and conditions in addition to price, as discussed in Price Isn't Everything. After you make the offer, the seller can accept it, reject it or propose a counteroffer with a different set of terms and conditions. Each offer or counteroffer is just a proposal. This back and forth process continues until buyer and seller agree. Offers and counteroffers have time limits (usually 24 to 72 hours) forcing each party to respond in a timely manner.

The seller can consider only one offer at a time. The buyer can make multiple offers simultaneously. However, any offer accepted is binding and you could find yourself with more than one home. To prevent this possibility, you can include a contingency covering this situation in your offer. For more information on contract contingencies, refer to Understanding Contingencies.

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Price isn't everything

Other terms and conditions can alter the price you pay, and sometimes make the difference in a deal. The items mentioned in Home Hunt: Buyer Beware Checklist can be important points of negotiation. Go through the list. Below are some additional examples:

(1) If you don't own appliances, you may want to offer a bit more (less than the cost of buying them new) and ask the seller to include them in the deal.

(2) If you can make required repairs yourself, you might offer a lower price since you'll be sparing the seller a bit of hassle.

The issues that are important to you will depend on your situation. However, if a home has a major and costly flaw, such as structural damage or the need for an earthquake retrofit, you should insist that the seller pay for it. If he or she won't, you should walk away from the deal.

You may also want to make concessions to obtain seller financing, which is usually cheaper than what you can get from commercial lenders.

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The sales contract

When you and the seller have reached an agreement, a formal document is drawn up. This document is generally referred to as a sales contract or deposit receipt. It is a legally binding document which contains details on every aspect of the transaction. If any disputes arise while funds are in escrow or after the close, the sales contract is the governing document.

Your agent, if you have one, will prepare the contract. You should read it carefully and may want to show it to a real estate attorney. Make sure that you understand all the terms and that the contract contains exactly what you want and nothing more.

Usually, the buyer delivers the contract to the seller. The seller then has a specified amount of time to accept or reject the offer. Once accepted, the contract is legally binding and cannot be altered unless both parties agree to it.

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Understanding contingencies

A contingency is a part of your formal offer which specifies that the offer is subject to certain conditions. Customizing the Sales Contract generates contingencies for you based on your specific situation. The worksheet will give you an idea of the type of contingencies your offer should contain. You should work closely with your agent and/or an experienced real estate attorney to develop the actual contingencies, as the legal language is important. Common types of contingencies are:

Financing
You need to find a loan with reasonable terms. Specify the maximum interest rate, minimum loan term, maximum fees and any other parameters you require, such as loan type.

Property Appraisal
Most lenders will require a professional appraisal of the home. If the home is worth less than the price you have agreed to pay, the bank will use the appraised value in determining your loan to value ratio. If the value is significantly lower, your loan may not cover the purchase price. Specify that the appraised value should be greater than or equal to the purchase price.

Inspections
The property should be inspected by you personally, and by trained professionals. You should make a personal inspection without the seller present, and a final inspection to ensure that no changes have been made during escrow. Refer to the Inspections topic for more information and a list of different types of inspections.

Approval of a Third Party
If you receive part of your financing from friends or relatives, you may want them to approve the property.

Sale of Existing Home
You may need the funds from the sale of your current home to buy the new one. This condition can put you at a disadvantage, because it could take weeks or months to sell your home. If another bidder does not have this contingency, the seller will probably prefer his or her offer.

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