Home Offer, negotiation tips for house purchase

You’ve visited several properties, debated whether or not something is good with your significant other, and you are finally at the point of thinking to give offer for certain house. How to know whether or not house is really good? How much should you offer? What comes after that? Let’s continue with our journey and find answers to those questions.

In first part of this series, I’ve urged you to go through your list of reasons why want to be a home owner. This is a good place to remind you of that consideration. If you are not truly excited about a property – do NOT buy it! Decision to own a real estate is a big one. When you are renting you are in so much better position on number of fronts. Problems with local economy? Property is due for big maintenance – AC, water heater, kitchen needs replacement? Ratings of local schools are going down? Your new neighbors seem like they’ve came straight from hell? If you are renting, all these and many other problems are, ultimately, resolvable by simply moving away.

But, for sake of continuing this article let’s say you’ve decided – yes, you want to own that particular property. And yes, you’ll learn how maintain stuff around the house, figure out a way to live peacefully with your neighbors and even take that seat on board of local school if need be. How to get from giving an offer for property to moving in?

How to give a good Home Offer?

This is where your agent should shine. Really good real estate agents are sharks when it comes to price negotiation – they’ll latch onto whatever is weakness of other side and try to magnify significance just to get better deal. However, one thing is important here – realtors work on commission, so regardless on whether they are representing seller or buyer, they both benefit on higher prices. Meaning, don’t expect your agent to be fully on your side. If he sees that you like the property and won’t mind moving in, even if the thinks it’s a bad purchase, more often than not your agent won’t raise additional doubts. Why induce doubt with saying that crime rate in area is rising? Or that local schools are getting worse? It could be temporary blip long term… and why bring that up when $10000 commission is waiting?

Another constraint is time. Whether acting as seller’s or buyer’s agent, realtor tries to minimize time spent on client. You’ll rarely see your agent object too much on house purchase because if you think about buying a property and he talks you out of it – he is losing both money and time. Now he needs to find you another property you’ll like. In case you buy, worst case scenario is that you are completely unsatisfied with how he lead you through the process. Considering that average person doesn’t buy house every 5 years, it’s easy to understand why in 80% of cases your agent will go with the flow.

I’ve said all this so that you understand how time is probably the biggest leverage you have over both your (buyer’s) and seller’s agent. I mean, you can see it yourself on real estate market all the time – after failing to sell certain property, what is it that seller’s agents do? They work harder to find prospective buyers? Advertise more? Figure out why property is not selling and target the problem? Of course not, in 80% of cases, all they do is just talk owner into lowering the price. Job done, right?

So, when deciding to give the offer, first thing I would look at is how long property is on the market. Rule of thumb, for every month on the market you should aim at taking down 2% of the initial price off. Obviously this is not applicable on foreclosures. New constructions are also somewhat resistant to such aggressive price degradation.

Another thing related to time that influences the price is the season. Is it winter? If it is, you’ll most likely get better deal, since market is way slower than in summer. Most families simply can’t afford the luxury of moving in winter when kids are in school. If you are without kids or are not constrained by it, you may save quite some money by making home purchase in winter. Again, rule of thumb – you are probably looking at 3% discount if you are making your purchase in winter outside of hectic, spring/summer break cycle.

Another showcase of how Internet and free data destroy competitive advantage is ability of anyone to see price history for any property on the market. I mean, good luck trying to buy low, do few simple renovations and sell high to anyone who knows how to type in www.redfin.com in their browser. I can’t vouch for correctness of data on Trulia and Zillow, but after my experience with house purchase, I think that data on Redfin is pretty spot on. I had some doubts during purchase process since my agent came with different values. But in the end I found that agent’s data was incorrect.

Finally, last, but not least important are results of home inspection. We’ll talk more about it in section that follows, but regardless of price you agreed, keep in mind that you’ll probably need to sink in at least $5000-$10000 on small repairs once you move into house. You know those houses that are advertised as “in top condition, you just need to move in”? They would be better off advertised as “you’ll probably need to spend just $1000-$2000”. I am yet to see a house in which you don’t need to do anything.

Whether or not you want to pay that price out of your pocket, or get seller to pay it – it’s up to you. The issue is that home inspections are not that cheap nowadays, you are probably looking at paying $400 per property. Will seller be willing to give you $300 to paint a wall that’s not perfect? Probably not. And you also don’t want to get to nitpicking. It’s bad for your karma and you don’t to be haggling before your offer is accepted, especially if by then you’ve already lowered the price by using advice I’ve gave previously.

Regarding price in Home Offer, again, be confident that what you are giving is fair. If in doubt and you have nowhere to turn, feel free to leave comments, I’m obviously not real estate professional, but am willing to help and give you unbiased opinion.

Preparing Home Offer

Giving Home Offer is the place where tricky lawyery stuff starts. Also known as “here are some documents, they are all good, you only need to sign them” point. As I’ve said in previous parts, don’t allow to be intimidated by your lack of knowledge and coerced into signing stuff. Chances are that after reading all 20 pages of documents you still don’t know whether you are protected in case things go south or not. That’s completely normal. As a matter of fact majority of legal documents are purposely so long and written in terrible fashion in order to demotivate people from reading them. This is why I recommend that you hire a lawyer before signing anything. Then focus on things that matter and leave form and formalities to lawyer, hoping he’ll do his job.

Regarding Home Offer, you want to be protected against two things:
1. Home Inspection discovering non functional parts of house
2. Failure to come to terms with your lender, i.e. being unable to close the loan

As long as those things are in offer and you are allowed to withdraw your offer without any consequence – you are good. From standpoint of buyer the important parts of Home Offer are:
1. Home Offer will contain the price your agent and seller’s agent have reached through informal negotiation
2. By giving formal Home Offer, if accepted you are required to post certain deposit (earnest money)
3. Deadline by which you need to close the loan, and deadline by which you need to close house purchase

We’ve already discussed price in detail. Once price is in the Home Offer it’s harder to change, but not impossible. Especially if Home Inspection uncovers potential problems with the home. For example, you probably won’t get buyer to lower the price if inspector figures out that dryer in the unit is old. But, if inspection uncovers high levels of Radon, you can be pretty sure that price of home will need to go down to accommodate cost of Radon System installation. I’ll talk more specifically about Radon mitigation systems in separate post, but if you do get high levels of Radon ask that you are given a minimum of $2500 credit. Take charge of Radon system installation since if you leave it to seller, he’ll go with cheapest, easiest solution. This means that you can end up with Radon pipes in places you don’t want them (going through closets or bedroom ceilings).

Rule of thumb – anything that seller is legally obliged to disclose, and was not disclosed before giving Home Offer can easily bring the offering price down. Radon levels are good example, if seller truly never tested for Radon and he didn’t knew the levels, he doesn’t need to disclose it. Once he is informed by potential buyer, and purchase falls through, for every future potential buyer he legally obliged to either fix the problem or disclose it. Same goes for ceiling leaks, basement flooding, toxic materials, and so on. Take a look at this article that gives pretty good overview of the subject – what defects need to be disclosed when selling a home.

Now, onto earnest money. Basically, if your offer is accepted you need to deposit certain amount of money showing good faith – i.e. that you are serious about offer and will work toward closing the purchase by the time specified in the offer. Traditionally, following rules apply when there is earnest money:
1. If deal falls through because of a condition present in the offer, buyer gets back his deposit, seller gets nothing
2. If deal falls through because of buyer, for example he simply drops the purchase or refuses to proceed, seller keeps the money
3. If deal falls through because of seller, for example he got better offer, seller is obliged to give the buyer twice the money he deposited

Now, again, these are traditional rules. Your Home Offer could be completely different – all depends on the wording of the contract. But, if you are a buyer and are confident that you are getting a great price on the property, do this:
1. Make sure that twice the money back condition is enforced in the Home Offer that’s accepted
2. Double check that you are comfortable with conditions under which you can withdraw the offer
2. Agree on deposit amount which’ll prevent seller from looking elsewhere

So, with those conditions present, if you as a buyer deposit $5000, someone needs to outbid your price by at least $5000 for seller to even consider going with the alternative offer. Increase deposit to $15000, and it’s that less likely you’ll lose the property in price bidding war in month or so it’ll take you to close the loan and other details.

Of course, if you are seller, you’ll try to nudge things into your favor. You’ll try to keep conditions under which offer can be withdrawn to a minimum. If you are confident you are getting good deal of course that you’ll ask for bigger deposit. On the other hand if you are not satisfied with price, you’ll try to keep deposit to the minimum and explore the market in the meantime while buyer is dealing with financing.

Comments

3 thoughts on “Home Offer, negotiation tips for house purchase

  1. Coming up with an offer on a home is very difficult. I agree that a good agent will make all of the difference here. One thing to keep in mind is that if it’s the house you’re looking for and you don’t want to take the chance that you’ll miss out, you shouldn’t start negotiating, just accept the asking price.

  2. The biggest problem I’ve had is trying to negotiate with someone that isn’t very motivated to sell. If you’re looking for something to buy quickly because your house has already been sold or your lease is running out on your rental property, and they aren’t in a hurry to sell, it puts you in a tough place to negotiate from.
    I look forward to reading more of your posts.

  3. Good advice, but a word or two of caution and clarification may be in order here. Real Estate law varies from state to state, so be sure that you are familiar with applicable laws in your state regarding when a buyer/seller can back out of an accepted offer (for reasons beyond the back-out stipulations noted what you’ve signed) before a purchase and sale agreement is signed. In some states, when earnest money reaches a certain point and both parties have signed the offer, then the offer is legally binding and backing out can be costly. A good realtor or your lawyer can help clarify, and a bit more info can be found here http://www.bankrate.com/finance/real-estate/can-we-back-out-of-accepted-home-offer.aspx.

    Thanks for the ongoing series! I’m taking notes as I to prep for my next home purchase.

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