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You've stalked the listing for weeks and now you've seen the home in person - twice. You love it and are ready to make a move. At least, you think you are. But how quickly do you need to make a decision? What if you change your mind? And what's the risk of waiting it out? Read on to find out!
Step One: Determine how quickly you need to act
The process of determining your best offer is a critical step in securing the home of your dreams. BUT even before that, you need to know how quickly you need to act, which will depend greatly on the current type of market: a buyer's market, or a seller's market?
In a buyer's market, you will have more time to think about and craft about your offer, as you wouldn't expect lots of competition for the property.
In a seller's market, you will need to act faster. If it's a super hot seller's market, you will need to submit your offer with lightning speed, expecting the property to receive multiple offers.
Pro tip: NO MATTER WHAT TYPE OF MARKET, always make sure your agent asks the listing agent if they are expecting any offers, or have any offers in hand. In a hot market, sometimes sellers set an offer deadline, so know that, too.
Step Two: Draft your initial offer
And I call it an initial offer because you should always expect the seller to counter your offer, whether it's a buyer's market or a seller's market. Once you've determined how quickly you need to act, it is essential to collaborate closely with your real estate agent, who will guide you through the intricacies of formulating a competitive offer, and this is when having a superior, experienced agent will really make a difference. Your agent should know the type of offer that is likely needed to snag the home. They should be able to tell you what to expect when it comes to negotiating, and how that process typically unfolds.
The details of your initial offer includes not only deciding on the offer price for the property but also considering other crucial terms that can enhance your proposal.
Terms are refer to the specific conditions and stipulations outlined in a property offer or contract.
Financing Terms:
Financing terms refer primarily to the type of financing you are using for the purchase of your home.
Financing terms might be: a conventional loan, an FHA loan, a VA loan, or more unusually for a first-time buyer, cash. Other financing terms are related to the earnest money deposit (sometimes called a good faith deposit), and the appraisal of the property.
Earnest Money Deposit (EMD) is a deposit you give to your agent's brokerage or the title company (only if your offer is accepted) which is credited to you at settlement. Depending on your market, the EMD can be 1-2% of your offer price or more, if the current market is competitive.
Appraisal is a professional assessment of a property's value, required by a mortgage lender in order to approve your loan amount.
Inspection Terms:
Inspection terms include the types of inspections you plan to have and the timeline for those inspections (within how many days you will have those inspections completed). Some types of inspections are: general home inspection (often called structural & mechanical), mold inspection, termite (and wood destroying insect) inspection, chimney inspection, pool inspection, etc. Obviously this largely depends on the property type.
In a buyer's market, the seller is more likely to accept an offer with multiple inspections, whereas during hot seller's markets, you will often see offers with no inspections. I would almost never advise a first-time buyer to waive inspections. It's just too risky. Another option is to have a home inspection, but not to make your purchase *contingent on the results of that inspection. Which again, is a risk, but at least you have a picture of the property before you purchase it.
*What is a contingency?
A contingency is a condition that must be met in order for the purchase to take place. So typically, a real estate contract will have a home inspection contingency, which means that the purchase of the home is contingent on the home inspection and successful negotiation of the inspection results.
More on contingencies later in a separate blog post.
Settlement Terms:
Settlement terms state when (and in some cases where) settlement will take place. It is helpful in a seller's market to know how quickly (or slowly) the sellers would like to settle. If they have already moved, they will likely prefer a quick settlement, maybe 30 days, whereas if they have not yet found a new home, they may ask for a longer settlement, say 60 days.
Offer Price:
Your agent should conduct thorough research on comparable properties, often referred to as "comps," which are similar homes that have recently sold in the area (within the last six months). A good agent will also be able to tell you if homes in this particular area are selling at, below, or above their asking price so you know where to start.
Again, your offer price will largely depend on the type of market. In a buyer's market, you can typically come in at a lower offer price with negotiations expected, but in a seller's market, that's not usually the case. In a seller's market, you may come in at asking price or even above, and/or you may include what's typically called an escalation clause, which states the maximum price you are willing to raise your offer to in a competition scenario. Sometimes in a hot sellers market, you may even be asked to submit your "best and final" offer, which means that the seller is expecting to receive multiple offers and they do not plan to negotiate. In that case, you will need to decide ahead of time what your best offer will be, and present that first.
Step Three: Submit the offer and wait
This will be the hardest part. So how long does a seller have to make their decision? Is there a deadline?
Most real estate contracts state "Time is of the essence" which means that all parties are expected to act in a responsible and timely manner. So technically, there is no deadline. BUT most sellers, no matter the type of market, will typically respond to offers within 24 hours, as long as they have a good agent advising them.
What if it takes them longer than 24 hours to respond?
You, as a buyer, can rescind your offer in writing at any time before the seller signs the contract, so it's always in the seller's best interest to respond quickly so they don't lose any offer that is on the table. If the seller takes longer than 24 hours to respond and your agent has not heard anything from the listing agent, they should definitely reach out.
Can I make an offer on more than one property at once?
This is a pretty common question from first-time home buyers, especially in competitive market conditions, and the answer is a pretty simple: NO. Unless you are prepared to purchase more than one home at a time, which you likely are not. The risk in submitting more than one offer at once is that the seller of both properties could technically sign your offer as is, and then you would be legally responsible for purchasing both homes. Yikes!
Can I write an expiration date in my offer?
Yes, you can, but be careful. You wouldn't want to do this in a seller's market because the seller likely has other competitive offers, but in a buyer's market you could consider it. I always advise buyers NOT to do this, but rather just keep in touch with the listing agent so you know when to expect a response from the seller. Offer expirations have the potential to send a negative message to the seller, so like everything else, you need to be strategic.
Step Four: Draft a counter-offer and negotiate
Sellers will often come back with a counter offer, either in price, terms, or both. As always, having an experienced agent on your side will help you determine how to respond to the counter offer. Your interest in the property will also determine your response. If you have decided that this is your dream home and you don't want to lose it, then you are going to respond differently than if you've seen other homes you like and are willing to move on.
Keep an eye out for a separate blog post completely dedicated to real estate negotiations, because there's lots to discuss on that topic!
If you've gotten this far, congratulations! You are ready to move onto the next stage: owning your first home. Check out this blog post for a 12-month guide to caring for your home and getting the best return on your investment.
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