Step 6: Making an Offer on a Home

Once you have your preapproval letter, the clock is ticking. While preapprovals will last anywhere from 60 to 120 days, most expire within 90 days. But don’t rush into making an offer just because of the time constraint. When you make an offer on a home and the offer is accepted, you’ve entered a legally binding contract, and you’d be at risk of losing your earnest money if you simply change your mind. Since home buying is a big decision, let’s review some things you might want to do before making an offer.

What to Do Before Making an Offer

Tour the home again with friends or family members. Your friends and family know you well and likely won’t hesitate to give you some honest feedback. Even if you’re purchasing the home with your significant other, your friends and family can provide another perspective since they aren’t as emotionally invested as you might be. You can tour the home several times if you like. If it’s been several weeks since you saw the home and you’ve toured several others after, it’s a good idea to go back and look at the home again, this time with a more critical eye.

If you’re unfamiliar with the area, spend some time in the neighborhood. Take a walk around the block, run a few mock errands, or even do a dry run of your commute to get a better understanding of what it will be like to live there.

Ask your real estate agent to show you the comparables (often called “comps”) for the area so you can compare the home you are interested in with similar houses that have sold in the area. Make sure you’re comparing apples to apples: the homes you are comparing to the one you want to buy should be about the same size and age, have the same number of bedrooms and bathrooms, and be in relatively the same condition. This will show you what people are willing to pay in your market and you’ll be able to craft a fair offer that stands out to the seller.

Take another look at your budget, review your finances, and think about the property taxes, home maintenance, HOA fees, and other expenses that come with buying a home beyond the closing costs and mortgage payments. Does the offer you are about to make truly fit within your budget?

Finally, reconsider your priorities. Are you still okay with the things you decided to compromise on? Can you picture yourself living in the home for years to come? Owning a home is a big step, so think it over one last time before making an offer.

What’s Included in an Offer on a Home?

You’ve thought about it and you’re ready to move forward. Your real estate agent will work with you to craft the offer, which usually includes the following:

  • The amount of the offer
  • The address and description of the property
  • Terms (Is it an all-cash transaction or will a mortgage be obtained?)
  • The time limit on the offer
  • The seller’s promise to provide a clear title
  • A target date for the closing
  • The type of title deed that will be granted
  • State and local details
  • Earnest money (This is a deposit that buyers offer sellers to show they are serious. If accepted, the earnest money will go toward the down payment or the closing costs.)
  • Agreement by which any utilities, real estate taxes, rent, or fuel is paid for or split between the buyer and seller
  • Agreement to which title insurance, survey, and/or termite inspection is paid for or split between the buyer and seller
  • Agreement for any last-minute inspections of the property
  • Contingencies

What Are Contingencies?

Contingencies are stipulations put into the offer. If these stipulations aren’t met, the buyer can back out of the home purchase without penalty. Here are some contingencies you might want to put in your offer:

  • Home inspection contingency: The home inspector will look for any serious issues, like structural deficiencies or problems with the electrical system. If any issues are discovered, the buyer can require the seller to make repairs. If the seller refuses, the buyer can back out of the home purchase.
  • Sale and settlement contingency: If you have a current home you need to sell in order to purchase the new home, you’ll want to include this contingency. It states that if you don’t sell your home within a certain time frame, the agreement is null and void.
  • The kick-out clause: This may be added by the seller in the event of a home sale contingency. This clause states that the seller can continue to market and accept offers on the home while the property is under contract. If another buyer makes an offer, they can “kick out” the previous buyer if they don’t remove the home sale contingency within a certain time frame.
  • Appraisal contingency: An appraiser will ensure that the home is valued at or above the offer price. If the home is valued below that amount, the buyer can back out of the home purchase.
  • Mortgage contingency: This contingency stipulates that if the buyer can’t obtain a mortgage loan by a certain date, the buyer can terminate the contract. If they don’t terminate by the date, however, the sale can proceed even if the buyer didn’t obtain the necessary funds for the purchase.

Offers with Personal Letters Attached

Personal letters to the seller, often called “love letters,” have gained some traction, especially in competitive markets. The buyer writes a letter telling the seller about themselves and how the seller’s home will impact their lives. The intent of the letter is to make the buyer stand out for the seller. But a letter could influence the seller in a way that violates federal law. The Fair Housing Act protects people from discrimination in the housing market based on race, color, national origin, religion, sex, familial status, and disability. While it may seem harmless, such as explaining how much your kids will love playing in the big back yard, providing personal details about yourself could put the seller and even the real estate agents in jeopardy of violating the law if it can be proven that protected characteristics, such as familial status, were the basis for an offer being accepted or rejected. Many seller’s agents won’t even allow offers with personal letters attached.

Letters can also backfire on you. If the seller sees the letter as manipulative or an attempt to play on their emotions, they may reject your offer because of that. Since rejections are difficult enough to take, knowing you were rejected after sharing your personal story with the seller could make a rejection even worse.

Presenting the Offer and Negotiating

Hopefully, your agent will present the offer, the seller will accept, and you can celebrate! But it could go another way. The seller could reject your offer or come back with a different price than what you offered. If this happens, it’s time to negotiate. How far south will you be able to drive the sale? At what point will the seller walk away? Here’s what to keep in mind when negotiating a home’s sale price.

  • Home value is greater than listing price. Your real estate agent is an asset during the negotiation phase because they usually have a clear picture of the home’s true market value. If the listing price is above that, you may have some room to negotiate. If the house has been on the market for some time, that also provides you with negotiating power.
  • A lot depends on the market. Again, your agent is an invaluable resource. They’ll know if homes in the market are selling above or below listing price – and to what percentage. In some markets, a seller may be insulted by an offer that’s five percent below the list price. In other markets, an offer that’s 15 percent below is common. Ask your agent if this is a house to negotiate on, and how far you should go.
  • The home inspection may not change anything. If the inspection turns up problems that are serious enough, the responsibility of repair could find its way to the negotiating table, or the home buyer may choose to walk away completely. But more often, the inspection doesn’t turn up anything deal-shattering. While the home inspection is crucial, it usually isn’t a negotiating tool.
  • You may need to compromise. Whether it’s the sale price, the terms, repairs, or possession, if you want the home, you’ll likely have to negotiate at least one of these items. Before going to the negotiating table with the seller, know where you have some wiggle room and be ready to compromise to get what you want.

What to Do If Your Offer Is Rejected

Buying a home can be an emotional roller-coaster. The joy of finding a home! The tense waiting while your offer is considered. The dismay when your offer is rejected. While it stings, rejections are very common. Here are some things to know about rejected offers:

  • Some seller’s agents tell their clients to reject all first offers. This is a common tactic, especially in a seller’s market. They want to see who is truly interested and willing to work to get the house.
  • Don’t overanalyze the seller. It’s always an advantage to know a few things about the seller, such as why they’re selling or what they plan to do next. But don’t waste time trying to get into the seller’s head. The reason they rejected your offer is often the simplest one: they think they can get a better price.
  • You can make another offer. Don’t think that once your offer is rejected, you’ve lost the house. Make another offer as quickly as you can, and make sure you get advice from your agent and your family while doing so. If you started with a particularly low offer, your agent may already have a backup offer prepared. If you’d rather not deal with the back-and-forth, you can skip the negotiations and simply offer your max price. If the seller rejects your best possible offer, you know it’s time to move on.
  • Don’t wait too long to move on. If you’ve done all you could to reach an agreement with the seller to no avail, it may be time to put that house behind you. Don’t waste time anguishing over what could have been. Instead, start searching for another home to put an offer on. While it’s easy to get caught up in the emotion of it all, and you think that house was “the one,” there’s another, better house out there. It’s your house, and it’s waiting for you to find it.