It can be hard to find the sweet spot when making an offer on a home, but the home-buying process involves more than naming a price.
Assuming that you’ve been preapproved for a mortgage and that you’re finding homes in your price range, there’s a usual method to follow in submitting an offer that stands out but also protects you.
In a red-hot market chock-full of bidding wars, waived contingencies, and cash buyers, a house hunter may end up making multiple offers without success and getting caught up in the frenzy.
But, as interest rates climb, the market is showing signs of cooling a bit. So let’s imagine a less heated market. Here’s a general guide to submitting an offer that can take you from homebuyer to homeowner. Read on to learn:
• What making an offer on a house involves
• The steps for making an offer in real estate
• What to do if you change your mind when making offers in real estate
Making an Offer on a House
So let’s say you’ve found that mid-century ranch or sleek townhome of your dreams. You’re ready to go for it. Here’s how the process of making an offer in real estate typically goes.
1. Determine Your Offer Price
A home’s listing price is often determined by comparing it to similar homes in the area that are for sale, then adjusting up or down based on additional amenities or detrimental issues. But as the old saying goes, “A home is generally worth what someone is willing to pay for it.”
You might find a property that’s fairly well-priced and consider coming in close to asking, but you may want to adjust your offer if you feel that it’s priced too high or needs a lot of work.
There are lots of things to consider when trying to find the right offer price.
• A common way to break down a listing amount is by price per square foot, but that often includes only the heated, livable spaces. A home can (and should) be priced higher than average for the area if it includes extra rooms like a garage or attic, outbuildings, or extra land, which add to its value. Superior workmanship or permitting in place for potential changes can also play a role in increasing a price.
• Check the home’s history on the multiple listing service. It records every transaction related to the house, including previous buy and sell dates, price fluctuations, and how long the home has been on the market. It can give you a good idea of where the sellers are coming from in terms of what they paid for the property.
• Take a look at other properties in the area that have recently sold. Is the price per square foot more or less than the home you have your eye on? One key to an accurate read on the local market is to ensure that you’re comparing apples to apples when it comes to the number of bedrooms, bathrooms, square footage, garage space, and other amenities. Your broker can likely provide what are known as “comparables” for the area to help with this process.
Recommended: Mortgage Pre-Approval Need to Knows
2. Incorporate All the Fees
It can also be important to look at factors not directly related to the price of the property that could affect your overall cash flow. One big consideration is closing costs, which typically average 2% to 6% of the total cost of the home. So let’s say you are considering a $400,000 mortgage; the closing costs (origination fees, title search, any points, and more) would be between $8,000 and $24,000.
Some closing costs are traditionally split by the buyer and seller, but if you’re short on cash, you may consider a higher offer price as long as the seller pays your portion of the closing costs.
It’s also important to estimate the amount of money you’ll spend making repairs or changes to the property once you move in. As long as the repairs are not related to health or safety issues, which could affect financing, one tactic could be to lower your offer price in order to free up cash for future upgrades.
Or you might plan on getting a home improvement loan or home equity line of credit after buying the house, provided you have enough equity to access those funds.
3. Determine Your Earnest Money Deposit
The next step in making an offer in real estate is to figure out your earnest money. What’s earnest money? It’s a good-faith deposit that buyers place with the offer up front, usually amounting to around 1% to 3% of the offer price, to show that they are serious, especially when there are multiple offers on a property.
It’s held in escrow by the title company. Showing purchase intent in this way can help a buyer get to the top of the seller’s list.
Customs and laws pertaining to an earnest money deposit can vary from state to state, and even from county to county, so it’s important to understand the rules that determine when the money is (and isn’t) refundable.
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4. Protect Yourself With Contingencies
The time between a signed offer and closing day is called the due diligence period, and it’s when the buyer will normally set up a home inspection and possibly a land survey or other inspections for specialty items, such as a septic system or a pool, and the lender will order an appraisal.
Because the contract is signed before inspections and the appraisal take place, contingencies give you an out if you discover a deal-breaker.
Here are the most common contingencies when making offers in real estate:
• Financing. This lays out the specifics of the financing that will be used by the buyer, which must be fully approved by the lender within the contingency period. This protects the buyer in case financing falls through.
• Appraisal. If the appraisal comes back lower than the agreed-upon price, the seller and buyer may find themselves renegotiating.
• Inspection. The buyer usually has 10 days after signing the contract to order an inspection, and the contingency remains in place until it comes back without uncovering any major issues with the property that were previously unknown. Based on the findings, the buyer can cancel the contract or negotiate repairs or the purchase price, which may be referred to as seller concessions if they agree to pay.
• Title search. A preliminary title report shows the home’s past and present owners and any liens or judgments against the property. If any title disputes are unable to be resolved before closing, you have the option to exit the sale.
In some situations, the list of contingencies can be long. But once they’re all satisfied and lifted during the given timeframes, the option to buy turns into a binding commitment to purchase the home.
5. Submit a Written Offer
In real estate, the best way to make an offer official is to put it in writing. If you’re working with a real estate agent, the agent will have a form that you can fill out together that lists the offer price and contingencies and covers all the state rules and regulations.
If you’re flying solo, working with a real estate lawyer or title company can help to ensure that your offer covers all the necessary legal language and is legally valid.
This concept goes both ways. As the buyer, it’s a smart idea to make sure all correspondence, counteroffers, and property disclosures are put in writing by the seller as well.
Recommended: How to Win a Bidding War
6. Move Ahead, Move On, or Move Things Around
Once you submit your written offer, one of three things is likely to happen: The sellers sign the document and enter into a binding contract, they reject the offer outright, or they submit a counteroffer.
In this last case, the sellers might counter back with changes that are better suited to them. (If your offer includes a price reduction to accommodate repair costs, for example, the seller might ask for the full asking price and offer a credit back at closing instead.)
A counteroffer puts the ball back in the buyer’s court for approval, rejection, or another counteroffer, and it can keep going back and forth until both parties agree to the terms and sign the document or one party calls it a day.
What If You Change Your Mind About Buying a House?
Contingencies give you a way out in the event of some unforeseen issue, but what if you just decide you don’t want the house? Cold feet can be a real thing!
Although the laws vary by state on this topic as well, in most instances a buyer is allowed to withdraw an offer until the moment the offer is accepted, However, once the offer document is signed by both parties, it’s considered a binding agreement.
At that point, the sellers may be well within their rights to walk away with your earnest money if you don’t decide to move forward.
The Takeaway
How to make an offer on a house? It pays to understand comps, contingencies, the temperature of the market, earnest money, and counteroffers. Then, you consider your price, keeping track of all fees that will be involved, and make your bid in writing, typically with what’s known as an earnest money deposit, and await the seller’s response.
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