Offers, Counter Offers and Negotiations
The Basics of Making an Offer
A written proposal is the foundation of a real estate transaction. Oral promises are not legally enforceable when it comes to the sale of real estate. Therefore, you need to enter into a written contract, which starts with your written proposal. This proposal not only specifies price, but also all the terms and conditions of the purchase. For example, if the seller offered to help with $2,000 toward your closing costs, make sure that’s included in your written offer and in the final completed contract, or you won’t have grounds for collecting it later.
REALTORS® have standard purchase agreements and will help you put together a written, legally binding offer that reflects the price as well as terms and conditions that are right for you. Your REALTOR® will guide you through the offer, counteroffer, negotiating and closing processes. In many states certain disclosure laws must be complied with by the seller, and the REALTOR® will ensure that this takes place.
If you are not working with a real estate agent, keep in mind that you must draw up a purchase offer or contract that conforms to state and local laws and that incorporates all of the key items. State laws vary, and certain provisions may be required in your area.
After the offer is drawn up and signed, it is usually presented to the seller by your real estate agent, by the seller’s real estate agent, if that’s a different agent, or often by the two together. In a few areas, sales contracts are drawn up by the parties’ lawyers.
What is in an Offer?
The purchase offer you submit, if accepted as it stands, will become a binding sales contract (known in some areas as a purchase agreement, earnest money agreement or deposit receipt). So it’s important that the purchase offer contains all the items that will serve as a “blueprint for the final sale.” The purchase offer includes items such as:
Address And The Legal Description Of The Property
Sale Price
Terms: For Example, All Cash Or Subject To You Obtaining A Mortgage For A Given Amount
Seller’s Promise To Provide Clear Title (Ownership)
Target Date For Closing (The Actual Sale)
Amount Of Earnest Money Deposit Accompanying The Offer, Whether It’s A Check, Cash Or Promissory Note, And How It’s To Be Returned To You If The Offer Is Rejected – Or Kept As Damages If You Later Back Out For No Good Reason
Method By Which Real Estate Taxes, Rents, Fuel, Water Bills And Utilities Payments Are To Be Adjusted (Prorated) Between Buyer And Seller
Provisions About Who Will Pay For Title Insurance, Survey, Termite Inspections, Etc.
Type Of Deed To Be Given
Other Requirements Specific To Your State, Which Might Include A Chance For An Attorney To Review The Contract, Disclosure Of Specific Environmental Hazards Or Other State-Specific Clauses
A Provision That The Buyer May Make A Last-Minute Walkthrough Inspection Of The Property Just Before The Closing
A Time Limit (Preferably Short) After Which The Offer Will Expire
Contingencies, Which Are An Extremely Important Matter And That Are Discussed In Detail Below
When you are ready to buy, you will need to make a written offer. REALTORS® have standard purchase agreements and will help you put together a written, legally binding offer that reflects the price as well as terms and conditions that are right for you. Your REALTOR® will guide you through the offer, counteroffer, negotiating and closing processes.
How Much Should You Offer?
You sometimes hear that the amount of your offer should be x percent below the seller’s asking price or y percent less than you’re really willing to pay. In practice, a successful offer depends on the basic laws of supply and demand: If many buyers are competing for homes, then sellers will likely get full-price offers and sometimes even more. If demand is weak, then offers below the asking price may be in order. Your REALTOR® will help you determine a suitable offer price and terms.
Terms and Conditions
While much attention is given to offering prices, a proposal to buy includes both the price and terms. In some cases, terms can represent thousands of dollars in additional value for buyers – or additional costs. Terms are extremely important and should be carefully reviewed; they may include an escrow deposit, contingency deadlines for inspection and/or mortgage approval, payment of closing costs, etc.
Contingencies – “Subject to” Clauses
Buyer offers often contain contingencies or “subject to” clauses that must be met before the contract is considered binding. This gives you time to take care of final details. If your offer says “this offer is contingent upon (or subject to) a certain event,” you’re saying that you will only go through with the purchase if that event occurs. Here are two common contingencies contained in a purchase offer:
The buyer obtaining specific financing from a lending institution: If the loan can’t be found, the buyer won’t be bound by the contract.
A satisfactory report by a home inspector: for example, “within 10 days after acceptance of the offer.” The seller must wait 10 days to see if the inspector submits a report that satisfies the buyer. If not, the contract would become void. Again, make sure that all the details are explicitly stated in the written contract.
Contingencies can include the following:
Approved Financing
Buyer Selling An Existing Home
Satisfactory Home Inspection Report
Test Results For Environmental Factors Including Radon, Mold And Water Quality
Termite Inspections
Easements
Liens
Work with your REALTOR® to determine which contingencies you should include for your home buying situation. You will likely be required to include a time clause, also called a kick-out clause, which limits the contingency to a short time period (say 12, 24 or 48 hours) should the seller receive another acceptable offer.
How Do You Make an Offer?
When a home is made available for sale the owner is essentially making an offer to buyers: for a given number of dollars and other terms you can acquire this home. Buyers, in turn, can respond with several options:
Accept The Offer
Decline The Offer
Make A Counteroffer
The process of making offers varies around the country. Typically, you complete a written offer that the REALTOR® will present to the owner and the owner’s representative. The owner, in turn, may accept the offer, reject it or make a counteroffer.
What is a Counteroffer?
A counteroffer is nothing more than a new offer with different terms. Offers and counteroffers reflect the back-and-forth activity of the marketplace. It’s a common, efficient and practical process, but also one that may contain tricky clauses and hidden costs. Because of this, and because counteroffers are common, it’s important for buyers to remain in close contact with a REALTOR® during the negotiation process so that any proposed changes can be quickly reviewed.
How Do You Negotiate?
No aspect of the home buying process is more complex, personal or variable than bargaining between buyers and sellers. This is the point where the value of an experienced REALTOR® is clearly evident because he or she knows the community, has seen numerous homes for sale, knows local values and has spent years negotiating realty transactions.
Real estate bargaining typically involves compromises by both sides. It’s not war; it’s not winner-take-all. Instead, negotiating should be seen as a natural business process: buyers should be treated with respect, and owners should never lose sight of either their best interests or their baseline transaction requirements, which must be met before the home can be sold.
There are a lot of considerations, not just price, in making and negotiating offers. This is where the working with an experienced REALTOR® can guide you to a win-win negotiation.
Negotiating Tips
You’re in a strong bargaining position, that is, you look particularly welcome to a seller, if:
You’re An All-Cash Buyer
You’re Already Have A Preapproved Mortgage And You Don’t Have A Present House That Has To Be Sold Before You Can Afford To Buy
You’re Able To Close And Take Possession At A Time That Is Especially Convenient For The Seller
In these circumstances, you may be able to negotiate some discount from the listed price.
On the other hand, in a “hot” seller’s market, if the perfect house comes on the market, you may want to offer the list price (or more) to beat out other early offers.
It’s very helpful to find out why the house is being sold and whether the seller is under pressure. Keep the following considerations in mind:
Every Month A Vacant House Remains Unsold Represents Considerable Extra Expense For The Seller
If The Sellers Are Divorcing, They May Want To Sell Quickly
Estate Sales Often Yield A Bargain In Return For A Prompt Deal
Earnest Money
This is a deposit that you give when making an offer on a house. A seller is understandably suspicious of a written offer that is not accompanied by a cash deposit to show “good faith.” A real estate agent or an attorney usually holds the deposit, the amount of which varies from community to community. This will become part of your down payment.
Buyers: the Seller’s Response to Your Offer
You will have a binding contract if the seller, upon receiving your written offer, signs an acceptance just as it stands, unconditionally. The offer becomes a firm contract as soon as you are notified of acceptance. If the offer is rejected, that’s that – the sellers could not later change their minds and hold you to it.
If the seller likes everything except the sale price, or the proposed closing date, or the basement pool table you want left with the property, you may receive a written counteroffer including the changes the seller prefers. You are then free to accept it, reject it or even make your own counteroffer. For example, “We accept the counteroffer with the higher price, except that we still insist on having the pool table.”
Each time either party makes any change in the terms, the other side is free to accept, reject or counter again. The document becomes a binding contract only when one party finally signs an unconditional acceptance of the other side’s proposal.
Buyers: Withdrawing an Offer
Can you take back an offer? In most cases the answer is yes, right up until the moment it is accepted, or even in some cases, if you haven’t yet been notified of acceptance. If you do want to revoke your offer, be sure to do so only after consulting a lawyer who is experienced in real estate matters. You don’t want to lose your earnest money deposit or find yourself being sued for damages the seller may have suffered by relying on your actions.
Sellers: Calculating Your Net Proceeds
When an offer comes in, you can accept it exactly as it stands, refuse it (seldom a useful response) or make a counteroffer to the buyers with the changes you want. In evaluating a purchase offer, you should estimate the amount of cash you’ll walk away with when the transaction is complete. For example, when you’re presented with two offers at the same time, you may discover you’re better off accepting the one with the lower sale price if the other asks you to pay points to the buyer’s lending institution.
Once you have a specific proposal before you, calculating net proceeds becomes simple. From the proposed purchase price you can subtract the following costs:
Payoff Amount On Present Mortgage
Any Other Liens (Equity Loan, Judgments)
Broker’s Commission
Legal Costs Of Selling (Attorney, Escrow Agent)
Transfer Taxes
Unpaid Property Taxes And Water And Other Utility Bills
If Required By The Contract: Cost Of Survey, Termite Inspection, Buyer’s Closing Costs, Repairs, Etc.
Your present mortgage lender may maintain an escrow account into which you deposit money to be used for property tax bills and homeowner’s insurance. In that case, remember that you will receive a refund of money left in that account, which will add to your proceeds.
Sellers: Counter Offers
When you receive a purchase offer from a would-be buyer, remember that unless you accept it exactly as it stands, unconditionally, the buyer is free to walk away. Any change you make in a counteroffer puts you at risk of losing that chance to sell.
Who pays for what items is often determined by local custom. You can, however, negotiate with the buyer any agreement you want about who pays for the following costs:
Termite Inspection
Survey
Buyer’s Closing Costs
Points Paid To The Buyer’s Lender
Buyer’s Broker Fees
Repairs Required By The Lender
Home Protection Policy
You may feel some of these costs are none of your business, but many buyers – particularly first-timer buyers – are short of cash. Helping them may be the best way to get your home sold.