Making an Offer
What are the basic rules of negotiation?
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.
What is a lowball offer?
A lowball offer is one that is far below a property's actual fair market value. Lowballing a well-priced house breaks the first rule of a good offer -- make a realistic offering price based upon the sale price of comparable houses.
As a seller, what conclusions can you form about the lowballing buyers? The buyers obviously haven't done their homework regarding comparable home sales. They think that you don't know what your house is really worth and are trying to exploit your ignorance. They are trying to steal your house based upon a mistaken impression that you're desperate to sell. None of these conclusions is at all favorable.
As a seller, you'd probably make one of the following responses to buyers who lowballed your well-priced house: Let the buyers know that their offer is totally unacceptable by having your agent return it with a message that you you're not interested in selling your house to them, or make a full-price counter offer.
Buyers who lowball a well-priced property listed by sellers who can wait for a better offer destroy any chance of developing the mutual trust and sense of fair play upon which cooperative negotiation is based.
When are low offers justified?
There's a huge difference between submitting an offer that's at the low end of a house's fair market value and lowballing. If your offer is based on actual sales of comparable houses, it won't insult the seller. Such a low offer will, however, spark lively debate as both of you attempt to defend your respective prices. Coming in on the low side of a property's fair market value is fine as long as you have plenty of time to negotiate and reason to believe that the seller is motivated.
Ironically, some sellers provoke low offers by their unwise pricing. These sellers insist on leaving room to negotiate in their price because they "know" that buyers never pay full asking price. Don't play their silly game unless you have time to squander. Make your initial offer at the low end of the house's fair market value and see how the sellers respond to it. If they refuse to accept the hard evidence of recent comparable home sales in the neighborhood, don't waste valuable time trying to educate them.
What constitutes a good offer?
All good offers have three things in common:
- 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.
- 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.
- 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.
What is 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.
What are 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.
How are corrective work credits used in negotiations?
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.
For a more detailed description of corrective work credits, read the section on Major Corrective Work below.