The offer you make to buy a home should not just be a heart decision based on your love of the property, but a head decision based on what you can afford.
When determining whether to move forward, you'll need to consider whether the asking price fits your budget. You'll want to consider whether the asking price is in line with similar properties in the neighborhood. And you'll want an idea of how strong your bargaining position might be, by looking at whether the price changed over time and how long the home has been on the market.
Comps are critical to making offer
Among your best tools for determining the fair market value of the home you want to buy is the comparative market analysis that your agent typically prepares. The data-driven report evaluates how the home stacks up against similar listings in a neighborhood or area.
There are several factors that are compared:
- Location: A good market analysis should compare properties in the same neighborhood and school district.
- Property type: The comps should compare apples to apples — a single-family home, condo or townhouse to another.
- Size and layout: Compared homes should be close in square footage and have the same number of bathrooms and bedrooms. They also should be similar in style, layout and lot size.
- Age and condition: These should be similar and account for updates or renovations.
- Amenities: Comparable properties should have similar features and amenities.
An agent will account for differences to make price adjustments to each comp's sale price. These adjustments will result in a more accurate comparison between the comps and the subject property. Buyers can check the accuracy of a market analysis through a home valuation report provided by Homes.com. This estimate compares the value of a home calculated by four valuation models: Collateral Analytics, ICE Mortgage Technology, First American Data & Analytics and Quantarium.
Writing the purchase agreement
With the help of your agent, you'll determine, based on market conditions, whether to offer the asking price, above asking or below asking. If the house is in a buyer's market, you could offer less than the asking price and be firm about it, since there are not many competitors to your bid. If it's a seller's market, a full-price offer is more appropriate.
If you're in a seller's market, you might consider whether to include an escalation clause. An escalation clause states that you will pay more than the highest proposal, usually in $1,000 increments, up to a maximum price.
Another way to make your bid more attractive in a seller's market is to waive contingencies or clauses which nullify the sale if they are not met. An example would be if an appraisal falls below the contracted price. If that happened, a lender would limit the size of the mortgage to the appraised amount. The buyer could walk away from the deal.
They also could negotiate a new price or agree to make an additional payment to cover the difference between the sales price and appraised value.
Another contingency is making the sale dependent on an acceptable home inspection by a third party. If an inspection were to uncover expensive repairs or defects with the home, the buyer could walk away or negotiate the cost of repairs with the seller.
Vivian Lehman, a broker at You Have Realty in Maitland, Florida. said she takes as many contingencies as possible out of the offer if the market is competitive instead of using escalation clauses. She also tells the seller that a buyer is flexible on terms such as closing dates.
Lehman, who also hosts a weekly television show on a local CBS affiliate that discusses real estate issues, said an escalation clause could be risky because it signals a buyer's bottom line.
"It's like keeping your cards close," said Lehman, who is serving a two-year term as director of the Florida Realtor Board of Directors. "Sometimes an escalation clause tells the seller, 'Hey, I'm willing to go up.'"
After determining the amount of the offer, you'll include that figure in the purchase agreement. The agent likely will use a templated contract, so you might want to show it to a real estate attorney to ensure it is accurate and fully expresses your wishes.
The offer also will include an earnest money deposit. The deposit is an amount of cash, often 1% to 3% of the sales price, that can be forfeited by the buyer if they do not purchase the home. It is typically in the form of a check.
The deposit shows the seller that the buyer is serious enough about purchasing that they will place their own money behind the deal. The deposit is credited at closing, lowering the sales price by that amount.
Here's what's typically included in the purchase agreement:
- Names of the buyers and sellers
- The address of the property
- How you plan to pay for the house and proof you can
- Amount of offer
- Earnest money or deposit, which is deposited in an escrow account
- The inspection period, usually 10 to 14 days
- Contingencies
- The closing date, usually in 30 to 45 days
- Date the offer would expire
The agent submits the offer to the seller or their agent with a request that they fill out a form disclosing any known defects or problems with the property. In a competitive market, some buyers opt to include a "love" letter to the sellers to stand out. The buyers typically provide personal details about themselves and describe features of the home they're drawn to.
But the National Association of Realtors discourages such letters, saying they could create bias concerns and, therefore, violate the U.S. Fair Housing Act, which prohibits housing discrimination based on race and gender.
Seller counteroffers
If the seller counters, be prepared to revisit and negotiate price, contingencies, repairs, closing dates and earnest money.
“A lot of inexperienced buyers/agents fumble negotiations and miss out on the property,” said Darren Robertson, an agent with Northern Virginia Home Pro in Arlington, Virginia. “Your agent will help you navigate through negotiations, as this is by far the most overwhelming part of the deal.”
Negotiations require give and take. A good way to prepare is to know exactly how much you are willing to pay and what terms you cannot give up. A discussion with your agent beforehand will help you set bargaining limits to negotiate from a logical, not emotional, standpoint.
Negotiations also are stressful and time-consuming. Give yourself personal time to consider bargaining positions and counteroffers instead of making snap decisions.
Once both sides sign the agreement, the buyer heads to the next stage: the inspection.