Understanding the Offer Process: Advice on Preparation & Strategy

A family reviewing offer details with their real estate agent

What this article is all about:



About the Home Offer Process & Article Overview

A real estate transaction is much more complex than anything you've bought or sold in the past. There are piles of paperwork, volumes of laws and rules, and the general emotion involved with either buying or selling a home.

Once you've decided on the home you want to buy, your real estate agent or attorney will draft a purchase offer in your name. The offer is submitted to the seller's agent, or directly to the seller when it's a "for sale by owner" (FSBO) listing. The seller can respond in one of three ways: accept the offer, counter the offer, or reject it.

Drafting a solid offer, or purchase contract, is like successfully cooking a new recipe. As a buyer, you want to pay the lowest possible amount for your new home, and have flexible terms for items such as earnest money deposits, mortgage commitments, and closing dates. As a seller, you want to get as much as you can for the property, with few contingencies and a quick timeline.

It's not an easy process on either party, but it can be a smooth one if you plan and prepare in advance.

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Price Bidding, Best Offers, & Bidding Wars

Making an offer on the home you want can be intimidating. Although there's little risk of making a fool of yourself during the bidding process, you should play your cards right before you tip your hand.

Bidding below listing price

Bidding for a property below its asking price is very common during a buyer's market. A buyer's market occurs when there's a surplus of homes on the market relative to demand from sellers.

Many experts advise against bidding more than 10 percent below the asking price. However, you can sweeten a relatively low offer price by guaranteeing the seller a quick closing and a large earnest money deposit. Or, if you accept the present state of the home without demanding free upgrades and repairs, you could sway the owner in your favor over other bidders.

Highest and best offer

Sometimes sellers or their agents get restless during negotiations and ask you to quote them your highest and best offer for the home, meaning it's a take it or leave it contract and there won't be a counteroffer. Don't go out on a limb if you are not 100 percent sure you want this particular property. You can always reconsider if you feel you made a mistake after researching comparable properties.

Full price offers

There's no shame in agreeing to pay the seller's full asking price without bartering. If the home you want is worth its price tag, offer to pay the full asking price. Another buyer may show up five minutes after you eager to pay that difference, sending you back to your search for a perfect home.

Bidding wars

Engaging in a bidding war for a property with other buyers can be stressful. As one of an unknown number of rivals in a bidding war, you're blindly competing against each other. Neither you nor your agent will know how many offers the seller has on the table.

You may end up having to cough up a lot of extra cash for the down payment if you're the winner with the highest bid. Instead, you could keep your cool and stay off the multiple offer- and counteroffer-carousel.

Sometimes all rivals for your dream home may call the bidding war quits. Who knows, the seller may then come knocking at your door to ask you to submit your purchasing offer. In that case, you'll end up the real winner, possibly holding the power to barter with the seller for a lower purchase price.

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Making an Offer & Offer Contracts

There are many parts to an offer and all of them are negotiable. Remember to choose your battles carefully. You can be flexible with some items, while firm on others that you have deemed non-negotiable. Expect the process to be a give and take.

Start preparing when you begin your home search and ask your agent for a blank copy of their standard contract. Familiarize yourself with its provisions and you'll feel comfortable when it's time to draft your own.

Most contracts have standard, or boilerplate, language. There will usually be space for you to fill in the exact terms and negotiating points of your offer. If you don't want to fill in parts of the contract you can simply cross them out and they will be excluded.

It's always a good idea to hire an attorney to review your contract before you submit it. Learn more in our "Real Estate Attorneys: Why You Need Them When Buying A Home" article.

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Home Valuations & Appraisals

An appraisal is an unbiased estimate of what a buyer might expect to pay for a property. Most home buyers and sellers assume that when they agree to a home's value, or fair-market value, it becomes written in stone as the contract price.

However, the real estate appraiser, usually hired by the buyer's mortgage lender, comes up with his own value. This appraised value may be equal to, lower, or higher than the agreed price.

In determining a property's current value, an appraiser will consider recent sales of similar homes in the area, comparing those that have sold recently – usually only in the last six months.

How the home appraisal process works

A licensed appraiser is contracted to provide an accurate estimate of a home's value. If the home appraises for less than the contract price, the mortgage lender will only loan the amount of money that is based on the property's appraised value. The buyer and seller must then agree on how the shortfall will be met. The buyer can put down more money, the contract might be modified to reflect the lower appraised price, or some combination of both.

The appraiser visually inspects the features, number of bedrooms, bathrooms, location, condition, remaining useful life of appliances, and other factors that could affect a home's value. Rooms are measured, diagrams are drawn, photos are taken of the property, and then the appraiser prepares his report.

After the inspection, the appraiser establishes value by using either the cost approach or the sales comparison:

The cost approach takes available information, such as local building costs and labor rates, to determine how much it would cost to build a comparable home.

The sales comparison approach relies on recent sales in the area and assesses properties that are comparable in age, configuration, condition, and location, adjusting for unique features and nuances by raising or lowering the value.

The appraised value is then used as a benchmark for lenders who don't want to loan a buyer more money than the home is actually worth.

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Handling Counteroffers & Stalemates

There are three possible outcomes once a purchase contract is presented to the seller: they can accept the terms as initially presented and agree to the contract, counteroffer by modifying some or all of the terms, or reject the terms in entirety and either start over or walk away.

Savvy home buyers who understand the seller's perspective can pay less or be granted more favorable terms in the purchase contract.

You may need to go back to the seller and ask for a closing date extension or inspection repairs, after reaching an agreement. In the end, goodwill pays dividends during these negotiations.

The counteroffer is the most common scenario in a contract. Many buyers and sellers like the back-and-forth of counteroffer negotiations. Be aware that some people have a low tolerance for prolonged negotiations. A good rule of thumb is to limit the back and forth to a few turns before reevaluating if you want to consider alternate properties, or give on some of your non-negotiable terms.

Sometimes negotiations arrive at an impasse, or a stalemate. If you developed a strategy, stick to it. Your strategy made sense when you came up with it and before the emotions started to kick in.

If you feel you can find something else, or can wait a little to see if the other party will budge, then take advantage of that flexibility. Don't get stuck with a deal that makes you feel uncomfortable.

Never rush through negotiations. Contract acceptance can be a few hours or a few weeks. A good negotiation should take no more than a few days, with a couple rounds of counteroffers. Give reasonable response deadlines for all your counteroffers.

When you and the seller accept the terms through the counteroffer process it's known as "acceptance". Most states require all contracts and offers of price and other terms to be in writing. Each counteroffer should be presented in writing to the seller or their agent; avoid verbally throwing out a number to the seller.

At all stages of the buying process, keep a written record of negotiations between you and the seller, as well as changes to agreements made with any involved parties. In the heat of the home buying process, you may not remember that you wanted the seller to throw in his basement refrigerator or to check on the size and location of a high-rise condo's storage unit.

Bottom line: develop a strategy and stick to it, but don't let an amazing home slip through your fingers because of what you might consider to be a nominal difference in contract terms or price. Be diligent with your preparation and you'll end up happy with the final agreement.

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Resource Center & Glossary

Key terms - in plain English

Acceptance - An agreement of the contract terms by the buyer and seller.

Appraisal - The value of a property set by a licensed or certified appraiser.

Attorney approval period - Your attorney reviews and makes changes to the contract, typically within five to seven business days.

Cash offers - In lieu of mortgage financing, cash offers should be confirmed with a letter from your financial institution stating that money is in deposit to close the contract.

Closing/escrow date - The last day of the transaction process, when the deed is delivered, documents are signed, and funds are dispersed.

Contingency - Can refer to multiple scenarios in which the closing of the transaction is dependent on the outcome of something else. E.g. buyer must sell existing property.

Contract length - 45 days from contract to closing is a good rule of thumb, but inquire about typical contract lengths in your area.

Earnest money deposit - The money you give the seller at the time the offer is made as a sign of good faith. Earnest money deposits vary. The contract should provide for a refund of the entire earnest money deposit within an agreed period.

Local disclosures - Local requirements of disclosure, including certificates of occupancy, that the seller gives to the buyer.

Mortgage commitment - A document by a mortgage lender that commits him to provide a loan at agreed terms and conditions.

Personal property - Usually an itemized list in the contract detailing what is included with the sale, such as appliances.

Possession date - The date when the buyer can move into the property, as agreed in the contract.

Property inspection period - The period in which the buyer can conduct an inspection and receive an inspection report.

Real estate contract - A binding agreement between buyer and seller. It consists of an offer and an acceptance, as well as a consideration of money to make the contract legally binding.

Real property disclosures - Written statements by the seller that discloses any known defects.

Tax prorations - A credit given to a buyer at closing for unpaid property taxes, when taxes are paid in arrears. Prorations should always be more than 100 percent.

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