Make your offer

Your agent or discount broker will take charge of this, but here's what to expect when you make an offer:

  • You'll be asked to give an offer price for the property.

  • You'll be asked to explain how you plan to pay for the property.  (As I noted earlier, appending a pre-approval letter from a bank costs you little and sweetens your offer.)

  • You'll be asked to write a check payable to the seller as an earnest money deposit, usually enough to cover rent or a mortgage payment for one month, and even more in a hot market.  The broker or agent will hold onto the check during the price negotiations.  If your offer is accepted and you later default on the contract, you'll forfeit the deposit.

  • Your broker will probably add some contingencies to the contract so that will let you walk away from the deal if something goes wrong.  For example, youíll want to get out of the deal if you canít get financing, or if you discover something wrong with the house after inspecting it more closely. This article talks about the importance of these kinds of contingencies.    

  • The contract will specify who pays for various closing costs.  These expenses are often allocated according to local customs, but they're usually negotiable.

  • The contract will establish a timetable for completing the deal.

  • The contract will set a date for when you can move in.

  • The contract will specify who is responsible for any repairs or improvements.

  • The contract will sometimes specify what stays and what goes (e.g., light fixtures, drapes, appliances)

Pre-approval

When considering offers, sellers don't just look at price.  They also care about whether the deal is likely to make it through escrow.  Sellers hate it when deals fall through.  

A relatively painless way to sweeten your offer is to append a pre-approval letter or certificate to it.  The letter says that the bank has reviewed your financial information and that it's willing to lend you enough money to buy the house at the price you've offered.  It won't show the maximum amount you can borrow, though, since that would tip your hand to the sellers.

Getting pre-approved takes just a few days, and involves filling out an application, and submitting documents like paycheck stubs and bank statements.  You may also have to pay an application fee.  

Applying for a loan is no longer an ordeal, since lenders have access to an alarming amount of information about you.  

Pre-qualification is similar to pre-approval, except that the financial information provided by the buyer isn't verified.  Because of this, a pre-qualification letter won't impress sellers as much as a pre-approval letter.  (Click here to read more about the differences between pre-qualification and pre-approval.)
 

Cover letter

Your broker should submit the offer with a cover letter summarizing the terms of the offer and--most importantly--defending your offer price.  This is usually done by looking for low "comps" in the area--similar homes that have sold for low prices--and explaining why those sales prices justify your low offer.


What to do if your offer isn't accepted

If your offer is accepted, congratulations!  But it usually won't be if you've started with a low offer.  Here's how to interpret different reactions to an offer of, say, $830,000:

  • The seller counters with $930,000.  Sellers sometimes devise counteroffers with the hope you'll offer to "split the difference."  In this case, the seller may be hoping you'll bid $880,000.   I recommend countering with a lower value, say $860,000, and see what happens.

  • The seller counters with a firm price of $910,000.  A firm price means the seller isn't willing to entertain a counteroffer from you.  If this firm price is more than the property is worth to you, I'd politely reject the counteroffer and urge the seller to contact me if he or she had a change of heart.  Meanwhile, I'd make offers on other properties.

  • The seller rejects the offer outright.  There are several possible reasons for this.  Sometimes it's because the seller is entertaining or expecting another, higher offer.  Sometimes it's because the seller hopes to press you into coming in with a much higher offer.  Sometimes it's because the seller is inexperienced, and is reacting emotionally to what he or she perceives as an insulting offer.  I recommend urging the seller to reconsider and make a counteroffer.  Send signals that you like the house and that you're a serious buyer.

Sometimes the seller is willing to bend on price, but not on something else.  Some friends of mine were involved in negotiations for a $700,000 home that broke down over whether the drapes would stay or go.  If something (like drapes or the move-in date) matters more to the seller than it does to you, it's wise to bend.


Advanced negotiating tactics

  • Don't fall for statements like these:  "The price is $20,000 below market." or  "It's selling for less than the appraised value."  If the house can only sell for $600,000 in a market, than that's the market value.  If a house is priced below the appraised value, then the appraisal must be off.  

  • Don't rely upon your discount broker for advice about how much to offer.  It's in the broker's interest for you to make as high an offer as possible so that the offer is more likely to be accepted and the commission to be paid.  Figure out how much to offer on your own.  

  • Try to convince your broker that your bargaining position is strong.  One way is to make a show of being interested in more than one house. 

  • If someone else is also looking at the property, give the sellers just a day or two to respond.  This can head off an alternative offer.

  • If things get bogged down, talk directly to the seller.  Agents won't like this, and some sellers won't want to talk with you.  But this might be an effective way of working out a deal.

  • If you can't break an impasse with a seller, consider making an appraisal offer, in which you offer to pay the median appraisal price of three randomly chosen appraisers.

  • If you're short of cash for the down payment and closing costs--but have the ability to borrow more--offer a higher price but ask the seller to pick up all of the closing costs. 
     

Next step:  Escrow.

©Lori Alden, 2008.  All rights reserved.