In a nutshell
Making an offer on a house is more than coming up with a figure and submitting it to the seller. The process requires preparation, teamwork and strategy to achieve success. Learn how to make an offer on a house to yield the most benefit for both the buyer and the seller.
Written by: Megan Wells
Apart from the detailing how much you’ll pay for a home, making an offer on a house also shows the seller what they can expect leading up to closing. A strong offer provides:
? Proof that you’re able to pay for the home
? A timeline of how long the buying process should take
? What ancillary costs you will cover in the process
? Anything the sale would be contingent on
Additionally, every real estate market is different, which means the motives and attitudes of buyers and sellers are also different. Therefore, making an offer on a house also becomes a game of strategy.
Consider these four steps to making an offer on a house.
Step One: Do your research
First and foremost, know what the home you’re looking at is worth. Apart from knowing what homes are within your budget, the research phase helps you make a competitive offer. Your research should allow you to:
? Have an idea of the fair market price
? Understand the local market and the seller
? Identify the history of the property (like when the seller purchased it, and for how much)
Step two: Assemble the players on your team
Though it’s possible to go at a home purchase on your own, it’s not advised. There are many details to pan out when making an offer on a house, and without expert insights and advice, you could get a raw deal.
Introducing your starting line-up:
Real estate agent
Realtors can pull comparables, which is an estimate of the fair market value based on other homes of similar size, condition, age, etc. to help you assess the accuracy of your offer. Additionally, your realtor may have connections in the community that can help your chances of sealing the deal. Not to mention, realtors are professionals, and landing buyers their dream home is their job.
When you construct an offer, the sellers will want to know you are capable of financing the purchase. By teaming up with a lender to get pre-approved (or pre-qualified) for financing —before you make an offer — you can improve your position with the seller.
Working with a lawyer offers protection for both parties and is very important. A lawyer can help navigate a variety of aspects of the offer like:
? Purchase agreements
More on the particulars of a purchase agreement later, but suffice to say that your written offer is legally binding, so having a lawyer look over the details can protect you from making a deal you weren’t looking for. Additionally, there are many states, and sometimes local, laws to consider while purchasing a home. Hiring a lawyer can ensure you’re covering all the bases.
? Tax questions
Even if a lawyer is not needed during the course of negotiations, the buyer and seller each may have to consult with a lawyer to answer tax questions, like if there are any consequences of the transaction.
? Closing costs
An attorney is helpful in explaining the nature, amount, and fairness of closing costs to ensure both the buyer and seller are protected.
? Unusual contingencies
If your property requires contingencies that aren’t commonly on purchase agreements, using a lawyer to hash out the details would be in both parties best interest.
Step Three: Start crafting the offer on a house
The purchase offer is the first formal communication that leads to the final deal. Many factors within a purchase agreement can be used as bargaining chips to make your offer more attractive to the seller.
Let’s first cover the basics included in a purchase agreement.
Basic elements of an offer letter
The beginning of most standard purchase agreements includes:
? Date of the offer: When the offer is formally placed
? Offer expiration date: When the offer no longer will be recognized
? Buyer and seller names: First and last
? Contact information for the seller, buyer and broker: Address, email address, phone number
? An address and description of the property: Description and quantity of the land
? Closing date: When the ownership of the property is transferred to the buyer
? Possession date: When the buyers can officially move in
? Delivery: How buyer and seller will communicate with one another
A written offer may also contain these elements, among others:
Purchase price and earnest money
Most purchase agreements will state the total offer price, like $400,000 as one line item, and then a second line item to include earnest money.
Earnest money is the cash buyers commit to show sellers they’re serious about completing the sale. The amount of the deposit is negotiable but is typically between 1% and 3% of the total purchase price. In a seller’s market, it’s possible to adjust the amount of earnest money you contribute to catch the seller’s attention.
This section of the purchase agreement will also discuss what happens to the earnest money if an offer is accepted (usually either forfeited or used for the seller’s election of remedies). It also addresses if this money will be paid as a check, note or other, and who will hold the funds once the offer is accepted.
Escrow is the neutral “holding area” for items like earnest money, checks and contracts during a real estate transaction. Once the deal is closed and the house officially changes hands, the aforementioned items are released from escrow. The purchase agreement should detail what happens to funds held in escrow if the offer falls through (for whatever reason) or if the offer is accepted.
Closing Costs and prorations, charges and assessments
In addition to the closing date, the buyer and seller should include details regarding any buyer’s participation in closing costs or other fees, as well as how certain taxes and expenses will be prorated between the buyer and the seller at closing like:
? Who pays for inspections and surveys
? Who will handle the taxes for the current year
? Who will pay for the remaining fuel in the fuel tank, if applicable
? Who will cover the existing utility charges
? If the charges will be prepaid or collected later
These costs—and who covers them—can vary significantly from one property to the next.
Apart from who the title company is for both the buyer and the seller, this section should also mandate that the seller will provide clear title to the property and if it wasn’t covered in the closing costs, who covers the title insurance.
Counter offer terms
If a seller wants to counter an offer, the initial purchase agreement should outline the stipulations, like the date a counteroffer must be presented by, and when the counter offer will expire.
Step 4: A purchase agreement should include contingencies that the deal is subject to.
Contingencies to consider
Contingencies are clauses that allow a buyer to cancel a contract without penalty. There is a fine line between how many contingencies a buyer should include in their offer. Removing contingencies from your purchase offer can expedite the real estate transaction (which can be attractive to sellers) but could result in unexpected financial curveballs for the buyer.
Including too many contingencies on an offer can convolute the process. The extra language could deter a seller from accepting your offer due to the risk of delays or costs the changes would force them to incur.
Common contingencies are:
? Contingent upon financing – This clause protects a seller if a buyer cannot obtain financing within a period of time after closing, usually less than a month.
? Contingent upon appraisal – As a buyer, if you’ve done your research or trust your realtor, you can seal the deal before an appraisal takes place. This can make your offer more desirable to sellers, but also means an appraiser could value the property to a lesser amount than your purchase offer.
? Contingent upon inspection – This contingency is an important one. Upon an inspection, you may discover your future house has water damage, mold, or another issue previously unnoticed. This contingency allows the buyer to readjust or withdraw their offer based on the cost of the damage. Waiving this can make your offer more desirable, but could end up costing you in the long run.
? Buyer’s Home Sale Contingency – This contingency says, if the buyer’s house sells by the specified date, the contract moves forward; if it doesn’t sell by the specified date, the contract is terminated.
? Attorney Review Contingency – This clause says the offer is contingent on attorneys review—from both parties. It provides a time for lawyers to make suggestions for changes to protect their clients.
Bump clause – In short, a bump clause is a contingency that allows a seller to accept a buyer’s offer but continue receiving offers from other prospective buyers. If another offer does not contain a particular contingency (like depending on a buyer’s home sale) the seller can “bump” the first offer.
Step Four: Make the offer a little sweeter
Sometimes the contract needs a little extra sugar to appeal to a seller. Especially in a competitive market.
The handwritten letter
A handwritten letter to the seller can be an effective way to make your offer stand-out and shed a little light into who you are as a buyer. For some sellers, the process can be emotional, especially for those who have lived in their home for decades or raised a family there. Some sellers think who buys the house is just as important as the dollars and cents they offer. By sharing your eagerness to start a family or build your own memories in the house, you could win the sellers over through emotion.
Cash offers are clean offers. For example, a finance contingency would be obsolete with a full cash offer. And as mentioned above, the fewer contingencies, the faster the closing process is, which can be desirable for sellers. If an all-cash offer isn’t an option, pre-approval is the next best thing.
Closing date flexibility
Closing generally takes place within 30, 45, 60, or 90 days. Ask the seller what closing period would suit their needs best. Showing flexibility can seal the deal over a higher-priced offer.
Possession date flexibility
Similar to the closing date, the date you take possession over a home is negotiable. By showing flexibility, your seller may favor your offer. For example, if the seller needs a few extra months to find a new place to live, extending your possession date to suit their needs can make your offer more attractive.
The bottom line
Making an offer on a home has a lot of room from creativity and flexibility. From the initial offering price to the small details like writing a letter to the seller, there is more to the process than dollars and cents. Learning the game, asking for advice, and being prepared are the best ways to make an offer on a house.