Congratulations – You found the perfect home! It’s taken a lot of time and preparation to get to this point, but now it all gets real.
Once you make an offer on a home you cannot change it; the seller can accept it, decline it, counteroffer, or let it expire. When you receive a counteroffer, it is then your time to either accept it, decline it, let it expire or send a counteroffer.
It can take a few rounds of counteroffers from both sides before both an offer is accepted by both the buyer and the seller. It is during this process that many prospective homebuyers get caught up in the moment and forget about their plan, which opens them to making expensive mistakes.
Here are 11 things every home buyer should do before extending an offer.
To avoid making expensive mistakes during the offer stage, you’ll need to know what to expect; here is how making an offer on a house typically goes:
There are three main components you will need to understand; these are:
The listing price is just the start point, so you’ll need to decide on what your starting bid is going to be. That number will be based on many factors such as your budget, the local market, the reason why the seller is selling, the condition of the home, and most importantly, what other similar homes in the area have recently sold for.
Your real estate agent will prepare a comparative market analysis with the prices of similar homes that have sold in the area. The reason why comparable prices are important is that if a similar home sells for, say $600,000, a seller will expect to sell for a similar price or more.
A good comparable property should be of similar condition, price, and it should be on the same street or in the same neighborhood. Also, because the market changes frequently, a good comparable is a property that was sold up to 3 or 4 months ago.
Here is where hiring an experienced real estate agent will pay off because knowing the market is the key to getting a home for a good price. You will also have to decide the maximum amount you are willing to pay
When deciding what price you are willing to pay, gather as much information as possible about the property such as the general condition of the home, and appliances. Ask questions to the seller or seller’s agent such as what are the seller’s motivations to sell the property.
Some sellers need to sell quickly because they need the funds as their down payment for another property they are buying, or because of other urgent reasons; those are referred to as “motivated sellers” and they would be willing to accept substantially less money if it means you can complete the purchase quicker.
What exactly are conditions or contingencies? They are things that must happen between the day the contract is signed by both parties and the closing day; the most common conditions home buyers add when making an offer to purchase a home are:
Conditions protect you, the buyer. As a savvy homebuyer, you too should give yourself the option to walk away from the deal if you are not satisfied with a particular item.
At the very minimum, you should aim to at least include a home inspection condition. If after completing a home inspection you’re not happy with the condition of the home, you will have the option to ask the seller for a better price, to fix repair the issue(s) or you could cancel the agreement and you won’t be penalized in any way as long as the agreement is canceled within the time frame specified on the purchase and sale agreement.
There are many reasons why you might want to cancel an offer to purchase a home; some of those reasons include:
Whatever the reason could be if you want to cancel the agreement but there are no conditions or contingencies included in the contract that would allow you do cancel the agreement legally, you are out of luck and at the mercy of the seller.
Not only do you stand to lose your entire deposit, if the seller ends up having to sell to another buyer at a lower amount than what you offered, you will also be left having to pay the difference. That amount can easily be tens of thousands and in some cases hundreds of thousands.
There are a few elements of the offer that are the most important such as the offer price, the amount of the deposit, the move-in day and the contingencies that you wish to include. When it comes to contingencies, at the very least, you should include a home inspection.
It also helps to find out why the seller is selling. Knowing these things will allow you to know ahead of time how to respond to counteroffers from the seller.
Here is an example of a home I recently sold; this transaction shows a series of counteroffers until both parties reached an agreement. The property was listed for $799,000, which was a price that would attract multiple offers much higher than the list price.
The buyer’s starting offer came at $830,000 which was a low ball offer.
The seller accepted the buyer’s 3rd counteroffer.
In most cases, the counteroffer will include changes to the sale price, but other items that could be included are:
In a buyer’s market, you have the leverage to control what happens during the negotiation because there are more homes available for sale than buyers in the market willing to make an offer on a home.
As a result, homes are typically sold for less than the list price and your offer might be accepted by the seller without making many counteroffers.
In a seller’s market, however, sellers are likely to receive multiple offers so they tend to choose the best offer from a pool of buyers instead of negotiating with you.
While buying a home can be an exciting process, it can be risky to get emotionally connected before you make an offer. First, aim to get a sense of what the seller thinks, their motivations for selling, and what it will take for him/her to make a deal.
Also, find out details about the property as well such as the following:
This is a big purchase so don’t decide on your own; ask feedback from family members and friends about the neighborhood, the property and make sure you understand what other nearby homes have recently sold for so you can validate the offer amount that you have in mind.
Here are 3 main issues you, the home buyer, should address ahead of time:
To determine the home’s market value look at what other similar homes in the area have sold for in the past 6 months. Do not include list prices on current homes available for sale as those prices reflect what the seller thinks the list price should be.
Instead, focus on sold prices of similar nearby homes since those will reflect the true market value and not what sellers think their home is worth.
The location of a home is the most important factor that determines a home’s value. Do your homework, look into the quality of the local schools, the average house prices in the area, amenities, parks, shopping centers, crime rates, and how well neighbors maintain their homes.
Remember that you can renovate the home, but you can never renovate the neighborhood, so be certain that the area is an area where you see yourself living in.
All homes need repairs; some need more and some fewer repairs. You move in and find out that you have to change the furnace, the AC, the roof, and make repairs because that can put a significant strain on your finances at a time when you just went all in for the home.
The issue is many home buyers fall in love with a property and then become blind to potential flaws the home might have. Instead, you should go in with the mentality that all homes have things that need fixing; your goal is to know those things ahead of time so that you are not surprised with expensive repairs later on.
“All homes have flaws. Be sure you’re not blinded by the nice décor or your eagerness to buy.”
During the negotiation, I often see buyers mainly being concerned with when they get the keys. That’s a mistake! When preparing the offer for the home and during the negotiation you should never lose sight of these four numbers.
Write down those four numbers and keep them close to you during the negotiation.
The best way to estimate a home’s market value is to base it on a Comparative Market Analysis (CMA) of similar sold homes in the area. This means is a house of similar size, layout, and condition, within the same area sold for say $600,000, the house you are considering to buy should be worth an amount equal to or close to the same amount.
People that base a home’s present value on a future potential price growth end up overpaying for the property.
You now have a good idea of how much the home will cost, the closing fees, property taxes, utilities, and other housing costs, do these costs fit within your budget? Remember that your housing costs should not exceed 1/3 of your after-tax family income. Keep in mind that you might need to do some renovations or repairs, and once you become a homeowner you might need to adjust your spending habits.
Step back and think about your priorities; think about how long you plan to stay in the home and reflect on whether this home meets your needs now and well into the future. If there are items that you had to compromise on, is it worth to buy this home, vs. finding one that meets all your must-haves?
The goal of going through this process is to prevent rash decisions, and ensure you have considered your alternatives while giving enough credit to the things that are important to you.
Knowledge is power in a negotiation. Try to find out why the seller is selling; a job transfer, unemployment, moving to another house or other motivating factors might mean that the seller would consider offers that they would decline if time was on their side.
To increase your negotiation power don’t limit your options to just one house, and don’t impose false limitations on yourself such as move before the end of the summer and so forth. People that fall in love with a house or that impose false limitations on themselves end up overpaying for the property because they lose the leverage of having more options.
Gather all the data, think about the concessions you are willing to make and establish your bottom line. For example, if the seller wants $550,000, you offer is for $500,000, and establish but you are willing to go as high as $515,000 (that’s your bottom line). Once you offer $500,000, the seller might suggest you meet halfway and split the difference at $525,000; you might be tempted to think that is fair, but remember that your walk-away point is $515,000
What are your options if you don’t get this house? Is there another house you could equally like? How important is it that you buy this specific house? Savvy buyers create options for themselves, so you should always have a plan B. Knowing what your plan B allows you to negotiate with leverage.
Let’s face it buying a home is an emotional process, and it can be easy to fall in the trap of thinking you have found THE ONE and ONLY. That’s not a recipe for a successful purchase. Having a plan B is what makes your decision rational.
Knowledge is power! To succeed in the home buying process you’ll need to know what to expect at every step of the way. You should check out our Home Buyer’s Online Course.
This is an interactive course designed in an easy to understand format; you will learn the eight steps you will need to take to achieve successful homeownership.