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Making an Offer

Making an Offer

Basic Rules of Negotiating

If you follow these basic negotiating guidelines, your deal will practically take care of itself:

Get everything in writing. Written contracts evolved from the muck and mire of legal quicksand because people have lousy memories. If you want your deal to be enforceable in a court of law, put all the terms in writing. Make a habit of writing short, dated MFRs (Memos For Record) of important conversations (such as, "June 12—seller asked to extend closing one week").

Make sure that deadlines are met. Real estate contracts are filled with deadlines for everything from contingency removals and deposit increases to the ultimate deadline, your closing. Failure to meet each and every deadline can have dreadful consequences. Your deal may fall apart. However, most deadlines are remarkably flexible. They can usually be lengthened or shortened by negotiation if the need for revision is properly explained and handled promptly with adequate lead time.

Making an Offer to Purchase

After you find your dream home, you're ready for the next action step in the negotiating process—making an offer to purchase. No standard, universally accepted real estate purchase contract is used throughout the country. On the contrary, purchase contracts vary in length and terms from state to state and, within a state, from one locality to another. A good agent or lawyer will use the most current version of the contract.

All good offers have three things in common:

  1. Good offers are based on a realistic offering price. You shouldn't pull the offering price out of thin air. Instead, base your offering price on houses (comparable to the seller's house in age, size, condition, and location) that have sold within the past six months. Sellers' asking prices are often fantasy. Actual sale prices of comparable houses are facts.
  2. Good offers have realistic financing terms. Your mortgage's interest rate, loan-origination fee, and time allowed to obtain financing must be based upon current lending conditions. Some offers get blown out of the water because a buyer's loan terms are unrealistic.If you've been prequalified or, better yet, preapproved for a loan, you or your agent should stress that advantage when you present your offer. This proves to the sellers that you're a creditworthy buyer who's ready, willing, and financially able to purchase their house.
  3. Good offers don't ask the sellers for a blank check. At the time that your offer is initially submitted, you won't know the degree to which corrective work is needed unless property defects are glaringly obvious. Under these circumstances, it's smart to use property inspection clauses that enable you to reopen negotiations regarding any necessary corrective work.

Remember that negotiation is an ongoing process. After the action of having your offer accepted, your property inspectors gather information. After they've determined what is actually required in the way of corrective work, you and the sellers can renew your negotiations armed with hard facts.

If the sellers agree with the price and terms contained in your offer, they'll sign it. Their agent should give you a signed copy of the offer immediately. When you actually receive a copy of the offer signed by the sellers, you have what's called a ratified offer (that is, a signed or accepted offer). This doesn't mean that you own the house or that it has been sold. All you can say for now is that a sale is pending.

Getting a Counter Offer

It's highly unlikely that the sellers will accept your offer as it's originally written. Sellers use counter offers to fine-tune the price, terms, and conditions of offers they receive.

Suppose, for example, that you offer $175,000 for a home that you like and you ask to close 30 days after the sellers accept your offer. Because they had the house listed at $189,500, the sellers think that your offering price is a mite low. Furthermore, they need six weeks to relocate.

Instead of rewriting your entire offer, they give you a counteroffer. It states that they're willing to accept all the terms and conditions of your offer except that they want $185,000 and six weeks after acceptance to close.

You don't mind a six-week closing, but you don't want to pay more than $180,000, so you give the sellers a counter-counter offer to that effect.

The sellers come back to you with a firm $184,000. You grudgingly respond at $181,000 and instruct your agent to make it clear to the sellers that you won't go any higher. Two can play the firm game.

If you really want the home, this phase of the game can be nerve-racking. You worry about another buyer making the sellers a better offer and stealing the house away while you're trying to get the price down that last $3,000. The sellers are equally concerned that they'll lose you by pushing too hard for the final $3,000. You don't want to pay a penny more than you have to. The sellers don't want to leave any money on the table.

You and the sellers are close to agreement on price. Your offering price and the sellers' asking price are both factually based upon recent sales of comparable houses in the neighborhood. An equitable way to resolve this type of impasse is to split the difference 50-50. The mutual $1,500 concession equals less than 1 percent of the home's fair market value based on a $182,500 sale price.

Splitting the difference won't work in all situations. It is, however, a fair way to quickly resolve relatively small differences of opinion so you can make a deal and get on with your life.

Negotiating Credits

Especially in a buyer's (weak) market, sellers often find that they have to give buyers money in the form of seller-paid financial concessions in order to close the deal. The two most common concessions are for nonrecurring closing costs and corrective work.

Nonrecurring closing costs

Some sellers come right out and tell you that they'll pay your nonrecurring closing costs if doing so will help put a deal together. Nonrecurring closing costs are one-time charges for such things as your appraisal, loan points, credit report, title insurance, and property inspections. Closing costs can amount to 3 to 5 percent of the purchase price.

Even if the sellers don't offer to pay your nonrecurring closing costs, asking for this concession as one of the terms in your offer usually won't hurt. Two general exceptions to this rule are when it's a seller's (strong) market or when you're in a multiple-offer situation.

Corrective work

Typically, neither you nor the sellers know how much, if any, corrective work is needed when you submit your offer. Therefore, purchase contracts have provisions for additional negotiations regarding corrective work credits after all the necessary inspections have been completed.

If the property inspectors find that little or no corrective work is required, you have little or nothing to negotiate. Suppose, however, that your inspectors discover the $200,000 house you want to buy needs $20,000 of corrective work for termite and dry-rot damage, foundation repairs, and a new roof. Big corrective-work bills can be deal killers.

Major Corrective Work

We strongly recommend that you and the sellers' agent be present, if possible, during property inspections, so that you both actually see the damage. Give the sellers copies of the reports for them to review before you meet with them to negotiate a corrective work credit. This is the moment of truth in most home sales. Sellers usually don't want to pay for the corrective work. Neither do you. The deal will fall through if this impasse can't be resolved.

The sellers may refuse to pay for repairs found by inspectors that you have hired. The sellers may question the impartiality or validity of your inspection reports and order their own inspections to verify or refute yours.

Sellers who try to punish the messenger are usually making a big mistake. If they drive you away, they may still have a legal obligation to tell other buyers what you've discovered. That disclosure will probably lower the price that any future buyer will pay for their house.
Lenders also participate in corrective work problems. They get copies of inspection reports when borrowers tell them that a serious repair problem exists, when their appraisal indicates a property obviously needs major repairs, or when the purchase contract contains a credit for extensive repairs.

You can solve repair problems in a variety of ways: