Submitting an offer on a home and participating in a negotiation for a purchase can be tricky, especially for first-time buyers. However, by arming yourself with some important knowledge, you can set yourself up to appear to be a serious, strong buyer and put yourself in a position to buy your dream home at the best possible purchase price.
With that in mind, here's a quick checklist of what you should do before submitting an offer, followed by what you need to know about each topic.
- Decide how much you want to offer.
- Get proof of funds.
- Determine the best closing date for you.
- Know the three most important contingencies.
- Write a check for your earnest deposit.
- Submit your offer, and get ready for some back-and-forth.
Decide how much you want to offer
The obvious objective during a home negotiation process is to get the best price possible without losing the deal. So, with your first offer, you have to do a balancing act of sorts. You don't want to offer more than the seller is willing to take, but you also don't want to make an offer that's so low the seller doesn't even want to entertain it.
This is where the help of real estate agents (and knowing your local market) can be extremely useful. If your real estate market is particularly hot and homes are going under contract within days of listing, you may need to make a full-price offer or close to it.
On the other hand, if a home has been sitting on the market for months without a sale, you might have a bit more wiggle room to negotiate. Also, it's more customary in certain markets for sellers to price their homes unrealistically high, while other markets tend to have aggressive pricing strategies.
Your real estate agent can also tell you if a particular house is priced right, or if the seller might be a bit too optimistic. They can also help you decide whether to ask the seller to pay for any closing costs or if you're better off covering those expenses yourself. In short, I strongly suggest deferring to an experienced professional when determining how much to offer.
Having said all of that, price is just one component of submitting an offer and negotiating on a home. There are several other things you should do before submitting your initial offer and before any back-and-forth with the seller begins.
Get proof of funds
To be clear, you can submit an offer without proof that you can actually afford the home. However, I can tell you from firsthand experience as both a buyer and seller that proof of funds to close will make your offer far more attractive.
If you're a cash buyer, a statement from your bank or brokerage that shows a balance equal to or greater than your offer price should suffice. One suggestion is to create a separate account to hold the funds, and transfer the exact amount of your offer into it.
Here's why: Let's say that a seller is asking $150,000 for a home, and you submit a cash offer for $130,000. If you show them a bank statement with a $1 million balance, they clearly know you have room to increase your bid. On the other hand, showing them an account statement with exactly $130,000 in it shows that your first offer could indeed be your best.
If you are planning to get a mortgage to buy the home, you'll want to get a preapproval letter to submit with your offer. Keep in mind that a preapproval is a step above a pre-qualification. A mortgage preapproval involves going through the application process -- including a credit check and employment, income, and asset verifications. It represents a commitment from the bank to lend you money.
Just like I suggested for cash buyers, you should request a preapproval letter for the exact amount of your offer, even if the lender approves you for much more (I've never encountered a lender who wouldn't do this). In simple terms, you don't want the seller to know how much you can afford to spend.
Determine the best closing date for you
Depending on where you live, you might be legally allowed to close on a home in as little as 10 to 15 days. Or, you could write a much longer close into the offer. The most common contract period is 30 to 45 days, but contracts with 60 days or more to close aren't unusual. For example, when my wife and I bought our first home, the seller agreed to a 90-day close, on the condition we double our earnest deposit.
Here's the point: With some exceptions, sellers typically want to close as soon as possible. However, it's also important not to commit to an unrealistically short time period. For example, many mortgage lenders advise buyers to allow a bare minimum of 30 days to close. Generally speaking, I'd suggest no more than 45 days, unless you're offering something else (like a big escrow check) to help offset the inconvenience.
Know the three most important contingencies
There are many contingencies that could be written into an offer, but most contain the big three: inspection, financing, and appraisal. These can allow you to back out of a real estate deal in certain circumstances, so they're worth knowing.
The inspection contingency
The inspection contingency gives the buyer the right to conduct whatever inspections or other due diligence they choose on the home for a certain period of time (10 days is the standard in my local market). Prior to the end of this period, the buyer can withdraw their offer without penalty. In practice, the buyer will usually ask the seller to make repairs or reduce the selling price before backing out of the deal.
The financing contingency
The financing contingency makes the contract dependent on the buyer receiving full mortgage approval prior to a certain date (say, a week before closing). If the buyer cannot get a mortgage for whatever reason, they can withdraw from the contract. Obviously, if a buyer is making a cash offer, this contingency isn't needed.
The appraisal contingency
The appraisal contingency essentially says that the home must appraise for the contract price. If it doesn't appraise for the agreed-upon price, the buyer can typically get out of the deal, although they'll usually use this as leverage to get the seller to drop the price.
While I wouldn't necessarily suggest waiving any of the contingencies, you can tweak them to make your offer more attractive. For example, if your market's standard inspection period is 10 days, offer a five-day inspection period.
If anything, you could strengthen your offer by eliminating the appraisal contingency. Just know that you might have to come out of pocket for the difference if the appraisal is low, as banks often won't finance homes that don't appraise for the selling price.