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Buying a home can feel daunting, not only for first-timers but for experienced buyers, too. Learning about a competitive home offer is a good way to familiarize yourself with home buying procedures and also gives you a little more confidence going into the process.
Use this guide to familiarize yourself with what components are needed for a successful home offer and how it affects your negotiating powers with the home seller.
3 Things You Need Before Making a Home Offer
Before making an offer on a home, there are a few things you’ll have to take care of, especially if you’re a first-time home buyer and just starting to learn the process. Ultimately, the goal is to craft an offer that’s beneficial for you while at the same time making it easy for the seller to say yes. So, it’s essential to start with a good foundation.
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1) Pre-approval from a Mortgage Lender
A pre-approval letter is the go-to indicator of your readiness to buy a home. Not only does it solidify how much house you can afford to buy, but it also helps you determine if you should buy a house for the total amount you’ve qualified for. Plus, when you can supply a preapproval letter with your offer, the seller knows you mean business and are ready to get the deal done. In competitive real estate markets, it's basically guaranteed that you need a preapproval letter to have a chance at catching the seller’s eye.
The article, Home Financing Overview for Military Home Buyers discusses different ways military buyers can find financing.
2) Cash at the Ready
You may have tucked away a down payment and money for other costs, but if it’s not readily available, then it isn’t working in your favor. If making a competitive offer is your goal, don’t ask the seller to wait any longer than necessary to hand over the keys.
Make sure you have quick bank access for:
- A down payment
- Earnest deposit
- Closing costs and fees (appraisal, inspection, insurance)
3) A Real Estate Agent
There are many reasons why most buyers work with a real estate agent to help them buy a house. Buyers benefit from their expertise for everything from researching the MLS to representation at closing day.
Finding an experienced agent (real estate is a popular career for military spouses and veterans) is as easy as asking your network for recommendations. Successful agents have passionate clients who love sharing their experiences, so you shouldn’t have any problem finding a couple of names to schedule informational interviews.
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Do I Need a Buyer's Agent?
Sometimes inexperienced home buyers fall in love with a house and immediately rush in and call the listing agent representing the sellers to help them with their purchase. This usually isn’t in your best interest. Remember, the seller’s and buyer’s agents work to get the best deal for their clients. Conflict of interest can easily pop up if one agent handles the deal.
Throughout their careers, most agents represent buyers and sellers. But, did you know you can hire a buyer's agent who only works with buyers? For more details, read Do I Need a Buyer's Agent to Buy a Home?.
The Components of a Good Home Offer
To start, know that state and local laws play a big part in customizing your offer, which is a legally binding document, so it’s important you’re familiar with the legal forms. Your agent will probably use a Residential Purchase Agreement during your transaction. Note that your state might require a real estate lawyer to prepare or review the offer.
Here’s the information you need to make an offer on a home.
You’ll need to add your full legal name and the same for any other person who you want on the title, like your spouse.
Property Address and Description
Include the legal address of the house and, depending on your state, the legal property description.
The Purchase Price You’re Prepared to Offer
After your agent has talked to you about the information they’ve researched, including comparative market analysis and comparable sales, it’s time to offer the sellers a purchase price you’re comfortable with.
According to the local market conditions, your agent may suggest offering less than the list price to secure space for negotiating your home offer. Or, in the case of buying a home in a hot sellers market, they may suggest offering the full asking price or more, depending on how badly you want to buy the house.
Offers include an earnest money deposit (usually one to three percent of the total purchase price) into an escrow account and a description of what happens to the money if you or the seller backs out of the deal.
Your offer should describe what conditions (like an unfavorable home inspection) make it okay to back out of the deal with your earnest money intact. Once the sale goes through, your earnest money goes toward your down payment.
Sometimes making a competitive offer includes adding a greater amount of earnest money. It lets the seller know your finances are strong, and there shouldn’t be any problems with the upcoming loan.
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A Clear Title Stipulation
As the potential buyer, you’ll want the property to have a clean title search to avoid problems in the future. Some issues like liens or foreclosures or even disputes with the rightful owner of the property can derail a sale. For more peace of mind, you can buy title insurance if you’re worried about potential issues even after a clean report comes back.
Closing Costs Details
Although you’ll present your offer with your preferences, be prepared for negotiation in your closing cost details. You’ll hash out if the buyer or seller pays the costs and other fees and how the taxes are prorated between the parties. You’ll also list:
- Date and time of the offer’s expiration
- Projected closing date, usually 30 to 60 days, but depends on the underwriter
- Move-in date
Often required by law, seller disclosures give buyers more information, but the required information varies from state to state. For example, sellers usually have to share information about issues that affect the property’s value, like structural issues and the propensity for natural disasters. Sellers also disclose HOA obligations and which house amenities come with the purchase, like appliances, lighting fixtures, and window coverings.
In your offer, you’ll ask for the seller disclosures and a specified amount of time to read them over and decide if you want to withdraw your offer or adjust your price.
Most offers have a few standard contingencies included. Contingencies are the circumstances that need to happen before the offer can go through. Although contingencies can help buyers make a secure purchase, contingencies may also prevent a sale if the seller isn’t willing to entertain the demands.
Final Loan Approval
Your offer is only applicable if your mortgage application comes through, usually within a set amount of time.
Homebuyers usually insist on a home inspection for a few reasons. Many times, their lender requires the report. Some buyers want one for informational purposes only, but most want one to help decide who will pay for repairs or if the seller will allow credit at closing to address the repairs later. Have a home inspector ready to keep the timeline moving and the sellers happy to stay competitive.
It’s a pretty good bet that your lender, especially if you're using your VA loan benefit, will want an appraisal before they authorize the loan. They want to make sure they’re not lending you more than what the house is worth. If your appraisal comes back for less money than the offer, you’ll have to find a way to bridge the gap between your approved amount and the offer price.
Pending Property Sales
Sometimes buyers and sellers want to build security into the offer. They may add a contingency stating that they must have completed another real estate translation. For example, the seller must find another house to move into before the deal can go through.
After months and months of searching, you’ve found your absolute dream house and put in an offer. The trouble is that several other potential buyers feel the same way and also submit offers. By adding an escalation clause, you agree to increase your offer by a certain amount if higher bids come through. An escalation clause also means the seller must reveal the competing offers, so you know where you stand against the competition.
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Should I Write a Home Love Letter?
Some agents and buyers think that adding a personal statement to your offer helps buyers connect with the seller and helps the offer stand out in a crowd, thanks to the emotional charge. Most of the time, buyers include what they love about the house and a little about their lifestyle and family. Military members stuck in tough bidding wars often mention their service as an appealing character point.
Love letters are controversial (and may be illegal in your area) because they can contribute to housing discrimination. Talk over the pros and cons with your agent before adding the note to your offer.
What Happens After the Offer Is Submitted
The Seller Accepts Your Offer
In the best case scenario, the sellers are thrilled to take your offer, and you’ll continue with the mortgage application, then the closing process begins. Be careful, however. Even though you’ve received a verbal acceptance, the deal isn’t complete until both parties sign the offer.
The Seller Counters Your Offer
There’s a good chance the seller will counter your offer. This gives you a couple of options: you can take the offer or write a counter offer. This time your agent can dig into the details of what it will take to get the deal closed. Some sellers simply want the best price, others want a fast turnover, and others want a longer amount of time to close. Your agent and the listing agent will talk and hopefully come to a new agreement both parties can live with.
The Seller Refuses Your Offer
A flat-out refusal can be hard to swallow, but you’ll have learned from the process and can move on to the next perfect house you find with more experience. You can’t know the reasons for rejection; it may just be that the owner isn’t quite ready to sell. Your agent certainly has dealt with rejected offers before and will help you overcome the disappointment.
Now that you’ve seen the breakdown of a home offer, it should help you feel more comfortable navigating the buying process. Knowing what to expect from your agent, the home seller, and yourself puts you in a better position to buy a home with solid knowledge and hopefully a little less trepidation.
By Dawn M. Smith
Learn more about making an offer on a home and what to expect on closing day with our free guide below.