Once you’ve found the perfect home, you’re now ready to begin the process of filling out an Offer to Purchase form. Though your real estate agent is a trained negotiator, it’s still important to understand the process enough to ensure that you write and develop a contract that wins.
The truth is, developing your offer can be a thing of science. Offer too low and other prospective home buyers will outbid you or the sellers will wait to receive a higher offer. Bidding too high, although it gives you a more likely chance to get the house, can be unnecessary at times when you could’ve saved thousands. Submitting terms that will make all parties in the transaction is what you’re striving to do. Here are a few things to consider when making an offer on a property:
Day on Market
As a real estate agent, this is the first thing that I look at when a client of mine wants to make an offer. How long the house has been on the market tells me how anxious and motivated the sellers are. If the average days on the market are four months and the house has been listed for seven months then I will recommend the buyer bases their offer on 90-91% of the list price. However, if the house has only been on the market for a few weeks then they’re probably going to hold out for a higher price if you come in too low. In this event I recommend closer to 94-95% of the list price.
Earnest money is a deposit that you give when making an offer on a house. The deposit, usually 1% of the overall purchase price, is held with the real estate firm or attorney until closing. Earnest monies are important when making an offer because it provides the seller with a certain level of comfort depending on how high the earnest money deposit is. For instance, if a buyer gives $3000 toward earnest money and defaults on the contract, the seller will get the money. Obviously, the higher the figure lets the seller know that the buyer is more serious about the property. If a seller receives two contracts that are both the same amount, earnest money could be a deciding factor. In a highly competitive real estate market, I recommend between 1-2% for all earnest monies.
Before you submit an offer, your real estate agent should provide you with comparable homes that have sold in the community you’re interested in. The comparables should involve homes that have sold in the last six month and should be quite similar to your home including size, location, age, and number of rooms. This will give you a great idea as to what price level is fair to offer on the house, and I recommend that your agent should submit comparables along with the offer to support your price.
Needs and Wants of the Seller
Keep in mind that price is not the only deciding factor in an offer. For example, your flexibility and sensitivity to the seller’s needs, including extending the closing date for a seller who can’t move until later on or not requiring the seller to fix repairs can be very effective on a contract. Time and energy are two important factors. It could be that submitting a contract is not contingent on you selling your home first could attractive enough to make the seller accept it. You can submit an offer with a lower price in exchange for the willingness to be flexible on time and other terms.
The purchase price on an offer depends entirely on the real estate market conditions. In a hot market, it’s normal to see houses selling for 10% over the asking price. You’ll want to arrive at an amount that is just enough to get you the home. Some buyers will go 30% over the asking price to get the house and stop the searching process, but it’s these buyers that will lose in the end. Stay strong and negotiate the deal out. Obviously, in a cold market you have more room and I suggest negotiating a strong low offer.
The last thing I suggest doing is accompanying your offer with a prequalification letter from a mortgage broker. This assures the seller that you have are a qualified buyer and you have started the process of researching different finance options and talking with mortgage brokers. Buyers that haven’t talked with mortgage brokers tend to raise suspicion with sellers. Get ahead of the game by having your mortgage broker type this letter up. It’s one more tool that makes your offer solid and allows you the power to keep the ball in your court and negotiate on other terms.