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Advantages of Buying |
Home Finance 101 |
Preparing to Shop |
Your Real Estate Team |
Making an Offer |
Getting a Mortgage |
Closing the Deal |
After You Buy
Making an Offer
Negotiating, Transaction Process and Buyer Strategies, Making an Offer to Purchase, Getting a Counter Offer, Negotiating Credits, Major Corrective Work
Newly listed homes that are priced to sell often generate multiple offers in a seller's market. If you really want a home and you know that other offers will be made, here's how to improve your chances of winning in a multiple-offer situation:
- Use comparable sales data to predetermine the upper limit of what you'll pay. Set no-matter-what limits on the amount that you'll bid.
- Put yourself in the sellers' position. Faced with several offers, sellers select the offer that gives them the best combination of price, terms, and contingencies of sale. Find out what the sellers' needs are before making your offer. Their self-interest invariably prevails.
- A high purchase price isn't the only way to sweeten a deal. If you have the money, make an extra-large down payment so the sellers know that your loan will surely be approved. You might offer to let the sellers rent back their house for a month or two after the closing or give the sellers an extra-long closing so they have plenty of time to find another home. You could also offer to buy the home "as is" so the sellers won't have to pay for any corrective work. If you do this, however, make your offer contingent upon your approval of inspection reports so you can get out of the deal if the house needs too much work.
- Make your best offer initially. You may never get a second chance to make your best offer.
- Get pre-approved for a loan. All other things being equal, if you're pre-approved for a loan, you should prevail over buyers whose financial status is not yet determined.
- Don't make your offer subject to the sale of another house.
- If you must sell in order to buy, put your old house on the market before seriously looking for a new home. Ideally, you'll have a ratified offer on your old house before making an offer to buy a new place. Stipulate a later date for closing on the old house and the right to rent it back for several months after the sale so that you'll have adequate lead time to buy your new home.
Transaction Process and Buyer Strategies
Real Estate is a form-rich industry. To help you understand the process, ask your agent to share some of the standard forms and paperwork with you.
Contingencies are conditions that must be satisfied before completing the transaction. Usually, the buyer's offer results in contingencies upon certain things, like financing or inspection.
Common Contingencies Include:
- Financing - even with pre-approval there may be a need for this condition.
- Inspection - a professional review of the condition of the improvements.
- Home Sale - if the buyer is also selling property, this contingency allows for the sale of the property before closing on the new home.
Talk with your agent about what contingencies apply to you as you make the offer on your new home.
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. Your agent or lawyer should use the most current version of the contract.
All good offers have three things in common:
- Good offers are based on a realistic offering price. 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. 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.
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. 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, but rather it means that a sale is pending.
Getting a Counter Offer
A seller may present a counter offer 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 low and 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 respond at $181,000 and ask your agent to make it clear to the sellers that you won't go any higher.
- 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 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.
In a buyer's market, sellers often find that they have to consider 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
A seller may 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 market or when you're in a multiple-offer situation.
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... big corrective-work bills can have an impact on whether or not you close.
Major Corrective Work
We strongly recommend that you and the sellers' agent be present, if possible, during property inspections. Give the sellers copies of the reports for them to review before you meet with them to negotiate a corrective work credit. The outcome of these reports will determine the final sale agreement between you and the seller.
- The sellers may question the impartiality or validity of your inspection reports and order their own inspections to verify or refute yours.
- 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:
- The sellers may give a credit for corrective work directly to buyers at the closing. Lenders may or may not approve of this approach, because it raises uncertainties about whether the corrective work will actually be completed. If it isn't, the security of the lender's loan is impaired.
- You can make the sellers feel better by offering to get competitive bids on the work from several reputable, licensed contractors.