10-Step Guide to Financing Your Dream Home
Step #7 – Make a Fair Offer
Return Tomorrow for Step #8
The Basics of Making an Offer on a House
Like marriage, home-buying is one part love, one part legal transaction, and starts with a proposal. When you’re ready to buy a home, making an offer is important: oral promises are not legally enforceable in real estate sales.
REALTORS® usually have a variety of standard forms (including Residential Purchase Agreements) kept up to date with the changing laws.
In many states, sellers must comply with certain disclosure, and a REALTOR® will ensure that they do, as well as answer any questions you may have during the sale.
If you are not working with a REALTOR®, keep in mind that your purchase offer or contract must conform to state and local laws. State laws vary, and certain provisions may be required in your area.
Besides addressing legal requirements, making an offer should specify price and all other terms and conditions of the purchase. For example, if the sellers said they’d help with $2,000 toward your closing costs, include that in your written proposal and in the final contract—or you won’t have grounds for collecting it later.
After the offer is drawn up and signed, it will usually be presented to the seller by your real estate agent, by the seller’s agent, or often by the two together.
In a few areas, sales contracts are typically drawn up by the parties’ lawyers.
What to include when making an offer
Your purchase offer, if accepted as it stands, will become a binding sales contract—also known as a purchase agreement, an earnest money agreement or a deposit receipt. It’s important, therefore, the offer contain every element needed to serve as a blueprint for the final sale. These purchase offers should include the following:
Address and sometimes a legal description of the property
Terms—for example, this is an all-cash transaction, or the deal is subject to you obtaining a mortgage for a given amount.
Seller’s promise to provide clear title (ownership)
Target date for closing (the actual sale)
Amount of earnest money deposit accompanying the offer—whether it’s a check, cash or a promissory note—and how the earnest money will be returned to you if the offer is rejected (or kept as damages if you back out of the deal for no good reason)
Method by which real estate taxes, rents, fuel, water bills and utilities are to be adjusted (prorated) between buyer and seller
Provisions about who will pay for title insurance, survey, termite inspections and the like
Type of deed that will be granted
Other requirements specific to your state, which might include a chance for attorney review of the contract, disclosure of specific environmental hazards or other state-specific clauses
A provision the buyer may make a last-minute walk-through inspection of the property just before the closing
A time limit (preferably short) after which the offer will expire
Contingencies (these are extremely important matter and discussed in detail below)
If your proposal says, “This offer is contingent upon (or subject to) a certain event”, you’re saying you will go through with the purchase only if that event occurs. The following are two common contingencies contained in a purchase offer:
Financing. You, the buyer, must be able to get specific financing from a lending institution. If you can’t secure the loan, you will not be bound by the contract.
Home inspection. The property must get a satisfactory report by a home inspector “within 10 days after acceptance of the offer” (for example). The seller must wait 10 days to see if the inspector submits a report that satisfies you. If not, the contract would become void. Again, make sure all inspection conditions are detailed in the written contract.
Negotiating the price
Is the listed price the right price? A REALTOR® can give you a Comparative Market Analysis (CMA) of the home’s value, or you can check local listings on realtor.com® to see what similar properties sold for. Based on the home inspection, you might also ask for a lower price or repair contingencies if the home needs fixes.
You’re in a strong bargaining position—meaning you look particularly welcome to a seller—if the following conditions apply to your situation:
You are an all-cash buyer;
You have been pre-approved for a mortgage;
You don’t have a house that must be sold before you can afford to buy.
In those circumstances, you may be able to negotiate discounts from the listed price. On the other hand, in a hot seller’s market, if the perfect house comes on the market, you may want to offer the full list price (or more) to beat out other early offers.
It’s very helpful to find out why the house is being sold and whether the seller is under pressure. Keep these considerations in mind:
Every month a vacant house remains unsold represents considerable expense for the seller.
If the sellers are divorcing, they may just want out quickly.
Estate sales often yield a bargain in return for a prompt deal.
Earnest money is a deposit you put down with your offer on a house. A seller is understandably suspicious of a written offer not accompanied by a cash deposit to show good faith. A REALTOR® or an attorney usually holds the deposit. The amount varies from community to community, and it becomes part of your down payment.
Buyers: The seller’s response to your offer
You will have a binding contract if the seller, upon receiving your written offer, signs an acceptance just as it stands, unconditionally. The offer becomes a firm contract as soon as you are notified of acceptance. If the offer is rejected, that’s that. The seller cannot change their mind later and hold you to the deal.
If the seller likes everything except the sale price—or the proposed closing date or the basement pool table you want left with the property—you may receive a written counteroffer with the seller’s preferred changes.
You can accept or reject it or to even make your own counteroffer—for example, “We accept the counteroffer with the higher price, except we still insist on having the pool table.”
Each time either party makes any change in the terms, the other side is free to accept or reject the offer or counter again. The document becomes a binding contract only when one party finally signs an unconditional acceptance of the other side’s proposal.
Buyers: Withdrawing an offer
Can you take back an offer?
In most cases the answer is yes, right up until the moment it is accepted—and in some cases even if you haven’t yet been notified of acceptance.
If you want to revoke your offer, be sure to do so only after consulting a lawyer who is experienced in real estate matters. You don’t want to lose your earnest money deposit or get sued for damages the seller may have suffered by relying on your actions.
Sellers: Calculating net proceeds
When an offer comes in, a seller can accept it exactly as it stands, refuse it (seldom a useful response), or make a counteroffer with the changes they want.
In evaluating a purchase offer, sellers estimate the amount of cash they’ll walk away with when the transaction is complete. For example, when they’re presented with two offers at once, they may discover they are better off accepting the one with the lower sale price if the other asks them to pay points to the buyer’s lending institution.
Once a seller has a specific proposal, calculating net proceeds becomes simple. From the proposed purchase price, they subtract the following:
Payoff amount on present mortgage
Any other liens (equity loan, judgments)
Legal costs of selling (attorney, escrow agent)
Unpaid property taxes and water bills
If required by the contract: cost of survey, termite inspection, buyer’s closing costs, repairs, etc.
The seller’s mortgage lender may maintain an escrow account into which they deposit money to pay property tax bills and home owner’s insurance premiums. In that case, remember sellers will receive a refund of money left in that account, which will add to their proceeds.
When sellers receive a purchase offer from a would-be buyer, remember that unless they accept it exactly as it stands, unconditionally, the buyer will be free to walk away. Any change the proposed buyer makes in a counteroffer puts the seller at risk of losing that chance to sell.
Who pays for what items is often determined by local custom. Sellers can, however, arrive at any agreement they and the buyers want about who pays for the following:
Buyer’s closing costs
Points to the buyer’s lender
Repairs required by the lender
Home protection policy
Sellers may feel some of these costs are not their responsibility, but many buyers—particularly first-timers—are short of cash. Helping a buyer may be the best way to get a home sold.
Whether you’re buying or selling, make sure a REALTOR® and/or an attorney evaluate all terms in the offer and counteroffers.
As soon as both parties accept the written offer, you have a legal contract.