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What You Should Know About Making an Offer
The offer is the first step in the negotiation process. A good basic offer includes the price you're willing to pay for the house, your financing terms, and contingencies, such as specifying what will happen if negative findings come up during the inspection. Purchase contracts vary from state to state. Regardless of where you live, if you're making an offer, you want it to be carefully worded and well thought out. In the book "Home Buying for Dummies (Hungry Minds Inc., 2001)," authors Eric Tyson and Ray Brown say there are three key elements to a good offer. Begin, they say, with a realistic offering price. Your REALTOR® will help you with this, but basically you want to come up with a price based on similar houses sold in the neighborhood in the past six months. You'll also want to keep the local conditions in mind. In other words, if houses are selling quickly and many houses are receiving multiple offers, you'll need to bid competitively. The second element to include in your offer is realistic financing terms. If you're pre-approved for a loan, be sure to include that in the offer so the seller knows you're serious. It will also give you an edge over any other offers that don't have a pre-approved loan. And finally, include a property inspection clause. What if it's determined the roof needs to be replaced, or the heating and cooling system is faulty and it will take $3,000 to fix it? "It's smart to use property inspection clauses that enable you to reopen negotiations regarding any necessary corrective work after you've received the inspection reports," the homebuying Dummies book says. Meanwhile, Freddie Mac says there are additional items that should be covered in the offer:
Also, most offers include a deadline for a response, perhaps three days. Finally, put everything in writing. Don't rely on verbal agreements. If the seller tells you he'll provide a carpet allowance for the shabby avocado-colored carpet but it isn't specified in the offer, then you may not get the money - and be stuck with green carpet. Multiple Offers: How Can You Compete?
The best way is to gain an understanding of how multiple offers work and how they benefit the seller. Multiple offers mean that the seller has his/her pick of offers, but that doesn't necessarily mean a disadvantage for you as a buyer. You just have to determine how badly you want this particular home. If you want to compete in a multiple offer situation, here is what you will need to know: Price and terms There are two things that matter to the seller -- price and terms. They want the highest price possible, and the best terms available. Both of these areas leave room for negotiation. Just because a seller is entertaining multiple offers doesn't mean you don't have a chance. You just have to hit the right note with the seller that the other contracts don't. Just to give you an idea of how important terms are to the seller, let's look at a hypothetical situation. You offer a seller the highest price for his/her home, but you put in the contract a contingency that you must sell your home first before you close on the seller's home. It may seem reasonable to you, but these are terms that the seller has no reason to accept. Why would s/he wait for you to sell your home first? The seller will only accept terms which meet his/her own needs, so keep contingencies to a minimum. Ask your agent to find out from the seller's agent what terms will be most favorably viewed by the seller. If you can't get there first, get there the best way you know how In a multiple offer situation, the seller is not under any obligation to negotiate with the first buyer who submits an offer. So, if your offer is not the first offer, don't panic. Because the seller has the liberty of choosing the best offer to negotiate, your offer stands a chance of being noticed. As you already have learned, the seller will accept the offer that best reflects his/her needs. They not only consider price, they also look at such things as financing, closing dates and possession dates. That means room to negotiate for you. Believe it or not, the highest price doesn't always buy the home. Sellers have a number of needs aside from price; they want a quick closing, or a delayed possession, or they may wish to exclude items in the home, and so on. Any offer which puts any of these goals at risk will not be accepted. A buyer may make the highest offer, but perhaps has not been qualified by a lender. A seller who accepts an offer from an unqualified buyer is taking a substantial risk. Should the offer fall through because the buyer fails to qualify, the home will lose valuable marketing exposure and advantage. In a hot market, many sellers won't even entertain offers presented by unqualified buyers. (Hint: Get pre-approved for a loan. Not only will you know exactly what you can spend, you will demonstrate your seriousness to the seller.) Your seller may have a special need that is more important to them than price. For example, your seller may have a need to sell quickly, but remain in the home for a period of time until school is out or until a transfer takes place. Your ability to negotiate on this point may be more important than coming up with the highest dollar amount. You can offer a short-term lease post-closing or offer to delay possession to accommodate your seller. You can do a number of things to get the seller's attention -- offer to pay all closing costs, to pay full price, or a little above the asking price. Work with your agent to determine the seller's "hot" buttons, and act accordingly within your budget and your own needs. Deadlines can be deadly Don't assume that the seller has to respond to your offer by your deadline. Deadlines are only important to the seller if s/he plans to either accept your offer or wants to keep the negotiations going. By the same token, if the seller counters your offer and gives you a deadline for accepting, and another offer comes in that is more attractive than yours, the seller can withdraw his/her counter offer to you in writing and accept the other offer. Don't falter in the negotiations Don't assume that because your seller is negotiating with you that s/he can't entertain other offers. All it takes is for one party to make a change that the other party doesn't accept and negotiations are over. In fact, the seller's agent is under no obligation to let your agent or you know if there are other contracts on the table or not. The seller may be waiting to see your best offer before accepting another offer that may already be on the table. Multiple offers are often used by sellers to improve upon the asking price or terms. The seller's agent may be instructed by the seller to ask the buyers to "submit improved offers." This is the time another offer can slip in and take your momentum away. Answer promptly and with as much generosity as you can muster. Don't nickel and dime the seller with requests for small repairs, or complicate the contract with contingencies. Just ask for a repair allowance and take care of the problems yourself. Buy yourself some peace of mind with a home warranty if the seller isn't willing to purchase one. Hot markets don't stay hot forever Hot markets may be hot for a while, but there may come a time when they will cool. The home you are so anxious to get now may level off in value very shortly. Make sure that this is the home you want no matter what the market conditions say. The home's history may be helpful here. Ask your agent to provide you with the home's history or a history of comparables in the area. The CMA report is generated from MLS information and should include historical data going back at lease five to ten years or more. If a home has been sold several times in the last few years, the history can tell you why and how much was gained or lost by the sellers involved. Also look at the affordability of the home. Are the extra considerations you are offering to stay in the contract really worth it? Do they price the home out of your range? Will you be able to afford the other costs associated with move-in such as furniture and updates? Does the CMA support the kinds of changes you may want to make in the home over and above what you are willing to pay to get into it? Know when to throw in the towel There may come a time when it is wise to simply give up and move on to another home. Some sellers, in a multiple offer frenzy, will simply make unreasonable demands. Some will even demand offers beyond those which can be justified by comparables or local lender guidelines. Lenders have a ceiling on what they will lend on homes in a given area and it can be broken down by square foot, age, history, and other factors. This ceiling is based on an appraisal formulated from CMA information, tax roll data, and gut instinct. If the comparables don't justify the price, the lender may refuse to take a chance on being the first to raise the loan limits on a certain neighborhood or home. You might as well throw in the towel. Sometimes a lender's refusal can be the kick in the pants a seller needs, however, and s/he may agree to your price when confronted by the voice of reality. The best way to position yourself as the buyer whose offer is accepted is to work closely with your REALTOR® who can help you step by step from getting pre-qualified for a loan, to helping you find homes in your pre-approved price range, to helping you negotiate the home of your dreams. Real estate not always secured with highest bidHome sellers covet fewer contingencies, faster closingsTuesday, June 01, 2004 By Dian Hymer Inman News Most sellers would be delighted to receive multiple offers. However, figuring out which offer to accept is not always as simple as you might think. Suppose you receive three offers. One is for $495,000: your asking price. Another is for $10,000 more. And the highest offer is for $525,000-$30,000 over the list price. If you look at price alone, you'd have no reservations about accepting the highest offer. However, there's more to consider about an offer than the price. The $495,000 offer might be from a preapproved buyer who has a $250,000 cash down payment and no appraisal contingency. This means that if the house appraises for less than the offer price, the buyer cannot use this to back out of the contract without risking losing his deposit.
The lender should have no problem granting the buyer a mortgage for approximately 50 percent of the sale price, even if the appraisal comes in low. The more cash down, the more likely the lender will approve the loan. The highest-price offer might be from a buyer with a 5 percent cash down payment and an appraisal contingency. This means that if the property appraises for less than the purchase price, the buyer has an automatic out of the contract. Even if he doesn't want out, the lender won't be willing to grant a mortgage in the amount the buyer needs to complete the sale. With only 5 percent down, there's a good chance that the buyer won't have enough extra cash to make up the difference between the appraisal amount and the purchase price. The third offer could be contingent upon the successful close of the buyer's home that is currently under contract. If the deal on his house falls apart, the buyer can withdraw from your contract without penalty. If this happens, you'll be back on the market searching for a new buyer. So, in terms of a risk analysis, the lowest price offer appears to be the best offer. One option would be to counter the lowest offer with a higher price, based on the fact that you have two offers higher than his. Before making a counter, however, consider that the buyer could say no and disappear form the scene leaving you with two riskier offers to choose from. If you have already purchased another home, you might be better off leaving the price alone on the lowest offer and simply ask for a quick close. A quick close could save you the cost of interim financing, which would effectively put more money in to your pocket. HOME SELLER TIP: To simplify the task of comparing multiple offers, make a chart including a grid of all the variables that could effect your decision. On the far left make a column for the offers. List them by the buyer's, or their agent's, name. Then create a row at the top of the chart for the most important elements of the offers. Each element will head a separate column on the grid chart. Elements might include: the price, the amount of the down payment, whether or not the buyer is preapproved, the closing date and the contingencies. When analyzing offers, the fewer the contingencies, the better. Contingencies can complicate a contract by providing more opportunities for a transaction to fall apart. THE CLOSING: In general, you're looking for the highest price, the quickest close and the least number of contingencies. But, a lower-priced offer with a quick close and few contingencies could be better than a higher priced offer. Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers," and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
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Once you're preapproved for a loan and you've survived the rigors of house hunting, the time will come when you find a house that you'd like to call home. But first, you'll need to make an offer. 
In a hot market there are more buyers than homes for sale. Prices may rise, and the days a home is on the market may shorten to a week or even less than a day. Some homes will sell before they are even registered in the local MLS. That means that sellers are often presented with multiple offers. How can you position your offer to be the one the seller accepts?
