First-Time Home Buyer Tips - Making the Offer

Start With Confidence  Dealing with Realtors 
House, Job, and Income  Finding the House
When Renting is Better  Making the Offer
When Buying is Better  Closing Time
Income and Mortgage Size     

 
 
Making the Offer

Good real estate agents are invaluable when it comes time to make an offer on a house. Invariably the agent will provide you with a preprinted form of a purchase contract, which together you rework to fit your needs. The contract begins by identifying the focal points, buyer, seller, property location, brokers, etc., then quickly moves to the crux of the matter: the purchase price offered, the down payment, the loan amount, and the deposit. Time limits are set for a response to the offer, for obtaining financing, for closing on the home, and for moving in. In addition, contingencies or terms are outlined, such as the offer being conditional on an inspector's report.

In The Complete Idiot's Guide to Buying and Selling a Home, Shelley O' Hara and Nancy D. Warner define the offer process as "a combination of price and terms. If you give something up on price, you can expect to take something on terms. Everything is negotiable - the price, the terms, the occupancy date, what personal property is included, everything. You can ask for what you want. You may not get it, but you can ask. Unless you are in a very competitive seller's market, don't offer your best price first. Leave room for negotiating."

Price
A buyer should understand with confidence what comparable properties in the neighborhood are selling for. Assuming your agent is a busy local player, he or she should know very well what a fair price is for the house of your choice. Ask your agent for statistics of list price versus sales price for the neighborhood. Compare the price and quality of other homes you've seen with the one you wish to purchase. Experts estimate that most homes sell for about 6 percent less than asking price, but that's just an average and it varies widely from market to market. While no buyer should be afraid to offer below asking price, it's not realistic to expect a seller to go below 5 percent of the list price unless the property has been on the market for a long time and the buyer has set very few contingencies.

Certain indicators can clue you in to the seller's motivation to sell quickly. Find out how long the house has been on the market. Has the price already been reduced? If yes, and more than once, you may be dealing with a highly motivated seller. When did the seller originally buy the home and for how much? If you can't ask directly what their equity is, your agent may be able to come up with a ballpark estimate, not to mention other valuable information such as whether the seller is going through a job transfer, or has already purchased a new home. If either is true, the seller is unlikely to have time and money to wait for a buyer who will meet the asking price.

Terms
Sellers are said to focus on price more than anything else, so if you're offering full or close to asking price you may have an opportunity to improve your terms. There are many reasonable requests you might make with an offer. For instance, you may ask the seller to contribute to closing costs, or to provide a home warranty in case something wrong is not detected during escrow or goes wrong in the following year. Ask that the seller check the boxes warranting that all appliances are working. Then, if you find something not working during escrow, the seller will have to fix it. Most offers will be contingent upon the buyer getting financing and on a professional inspection and lender appraisal. Even here you have an opportunity to play with the terms. You could ask for 60 days to secure financing and then set a date for the seller to be out of the property. You may also ask for assistance on the prorating of taxes, club dues, homeowner's association fees, and so on.

House inspection
A thorough, professional property, roof, and termite inspection should be completed during escrow. This should not replace a buyer's own inspection, trying every appliance, inspecting faucets and sinks for leaks, etc. In most states the seller is obligated under law to disclose all known defects of the property in written form as part of the purchase contract. This should divulge material facts that could affect the property's value, such as noisy neighbors or a spate of recent home burglaries. If you want the offer to become null and void if an inspection turns up major structural damage, make sure that is a clear contingency in the purchase contract. Check to see what sort of permits have been issued for the property. This is easy since the city usually keeps them all in one file. These permits can tell a lot about the work that was necessary on a property, which gives you an opportunity to double-check if the problem was repaired properly or just executed as a stopgap measure.

Money
A fairly complete financial portrait of the buyer is revealed in a purchase contract, which works to both parties' advantage. An offer is far more attractive to a seller if the buyer is preapproved for a loan. Preapproval is not to be confused with prequalification. Prequalification is merely the result of a loan officer asking a few questions and typing up a superficial letter. Preapproval from a lender is far more meaningful because the mortgage company has done the same due diligence necessary for full approval. The only thing missing is the appraisal and title search on the house. Being preapproved turns a buyer into someone akin to a cash buyer, which resonates much better with the seller. A buyer could save thousands of dollars having this advantage in the negotiations. Many mortgage companies will preapprove at little or no cost if they can check your credit and verify your income and assets.

When you write up a purchase contract, define the maximum interest rate at which you are prepared to finance. This is to protect yourself against volatile, escalating interest rates, which could land you with a much higher mortgage payment than you had anticipated. At the same time, the seller will probably want to see that you have some flexibility in the financing terms you are willing to accept.