Understanding Mortgages: Making an Offer

by Amy Lillard

In the midst of one of the most uncertain real estate markets in history, it’s more important than ever to be informed. In a continuing series, we take a look at some of the most pressing questions about mortgages, refinancing, home equity, and other real estate options available to you.

(9/27/2012) You’ve found the home you’ve been searching for. Whether it’s a condo or a single-family home, the next step is to make an offer to purchase the property.

For people new to home purchasing, and to those who have been around the process multiple times, making an offer can be a bit intimidating. Potential buyers must balance competing factors — offer too much, and there could be difficulty in obtaining an appropriate appraisal and loan, and offer too little, and the seller may reject it.

The key to making the best offer then is following a smart process from beginning to end.

BUDGET
Before making an offer, and before even looking at properties, buyers should know exactly what they can afford and what they can’t. The tricky part here is that many buyers may pre-qualify for a loan that’s bigger than their budget, which can encourage some to offer more than they can afford. By understanding firm numbers that are reasonable on a monthly basis, and gearing offers towards that, buyers can avoid getting in over their heads.

AGENT
Another smart move is enlisting a real estate agent as a resource and guide. Particularly for those new to the home buying process, an agent can provide data about comparable properties and their selling prices, which can help buyers hone in on an appropriate offer. They can also provide a strategy of offers and counteroffers that can get you a good deal.

OFFER
With budget and comparable data in hand, and with the guidance of a real estate agent, buyers can then provide an offer for a home. Typically, you will need to present “earnest money” along with the offer — a certain sum that demonstrates your seriousness as a potential buyer.

In most cases, the offer you present will be less than the asking price — sellers will often ask for more than they expect to sell for, and even more than market value. The offer will occur in the form of a written proposal, which is often provided by your real estate agent to the seller, the seller’s agent, or the seller’s attorney. For some properties, like those in bigger condo developments, there may be a form that offers must follow.

COUNTER-OFFER
After making the initial offer, sellers will either accept it, reject it, or provide a counter-offer. The last option is very common — usually the offer is the starting point of a negotiation. Since sellers often inflate home prices, it’s expected that there be a series of offers and counteroffers before agreeing on a price. Each time either side presents a counteroffer, the other party is free to accept, reject, or provide an additional counteroffer. During the negotiation, buyers and sellers may discuss the price of the property as well as any concessions or special agreements, including:

• Price
• Terms (whether the purchase will be cash or subject to mortgage approval)
• Target date for closing
• Closing costs, and any funds provided by seller towards these costs
• Repairs needed and who is responsible
• Amount of earnest money deposit, and the process for refunds if the offer does not go through
• Details around real estate taxes, rents, fuel, water bills and utilities, including who will pay and until when
• Provisions about who will pay for title insurance, inspections, and more

All of the back and forth should be captured in written form, which your real estate agent will ensure.

Important to remember throughout the entire process is to remain logical and keep emotion out as much as possible. Becoming overly emotionally attached to a property before purchase can cloud a buyer’s judgment, resulting in a missed opportunity or a deal that could have been better.

For Additional Reading:

The Art of the Aggressive Offer
http://articles.marketwatch.com/2007-08-28/finance/30735381_1_home-sellers-home-prices-exclusive-buyer-agents

How Low Can You Possibly Go on a Real Estate Bid?
http://realestate.msn.com/article.aspx?cp-documentid=13107841

Why Some Low-Ball Real Estate Offers Work — And Others Don’t: http://moneyland.time.com/2011/08/31/why-some-lowball-real-estate-offers-work-—-and-others-don’t/