Chances are, your first home purchase is when you learn how to make an offer on a house. You either learn on the fly or you rely heavily on a real estate agent.
But it’s worth investigating how to make a solid offer well in advance of showtime. This empowers you to comprehend the process so you can get a better deal.
Plus, you’ll probably have to make multiple offers before one’s accepted. So you might as well start practicing now.
In this post, we’ll go over what you need to know before you make an offer, what to include in the offer letter, and what to expect after your offer is in.
Before You Make the Offer
Once you’ve decided you’re in the market for a house, you should get pre-approved for a home loan. This requires going to a bank and providing some personal financial information so they can assess whether they’re willing to lend to you and how much.
Bank officers will want to verify your employment and income, run a credit check, and know about your assets and debts. After studying this information, the bank will issue a pre-approval letter that states how much it is tentatively willing to lend you for a house purchase.
Now you know how much you can afford and sellers will be more confident about your ability to pay. Next, you’ll want to find a reputable real estate agent.
Don’t worry about losing money here. Real estate agents only charge for a successful sale on commission. Most of the time, the seller will pay the commission for your agent.
This means that as the buyer, you basically get a real estate agent for free. If you don’t know where to find one, search online or ask for recommendations from your neighbors, friends, or even your mortgage lender.
Once you have a pre-approval letter and an agent, you can start identifying potential homes. Your agent can help you perform market research and run price comparisons with any adjacent homes that were sold recently. That will tell you what a competitive offer would be.
Once you’ve identified a house you’d like, make sure you have earnest money and the down payment ready in cash. Earnest money is a way to show sellers you are serious by putting cash on the line.
It’s usually about 1 to 3% of the total purchase price and gets placed in a third-party account called an “escrow” once the offer is accepted. The down payment goes to the mortgage lender as soon as the deal closes.
To avoid paying private mortgage insurance (PMI), you should set aside a 20% down payment. When you’ve done all of the above, you’re set to draft your formal offer.
What to Put In an Offer Letter
Of course, your real estate agent can help you do the letter. He or she will have lots of experience with this and can tell you what to include and what not to.
Here’s a list of everything an offer letter should contain:
- Address—This may seem obvious, but you need to list the address of the property in your offer to be utterly clear about what you are making an offer on.
- Price—Your bid price should be less than the amount pre-approved by your lender. This leaves you some room to negotiate. The more competitive your market is, though, the closer to the asking price your offer should be.
- Earnest money stipulations—To show sellers you are serious, cite provisions for earnest money. You should detail under what conditions it will be applied to the down payment, refunded to you, or forfeited.
- Title provisions—A title is a document that gives you an official right to ownership of the property. Your offer should specify precisely how the title will be transferred to you. Without it, you won’t legally own the home.
- Closing cost arrangements—Your offer should list which closing costs you desire the seller to take responsibility for, including fees, taxes, and expenses.
- Timing—Your offer should include a timeline for the sale. Some sellers regard the timeline as more important than the price if they are moving or changing jobs. You should also include an expiration date on your offer, after which you will no longer be interested.
- Contingency clauses—Before you buy the house, you’ll probably want to make sure it meets certain conditions. You can do this by including contingency clauses in your offer. For example, you might state that an appraisal and inspection must be performed before the sale can go through. Or your current home must sell first. You may also tie failure to meet contingencies to an earnest money refund.
In addition to the above, here are some optional items you could include in your offer letter:
- Market analysis report—If your offer is lower than the asking price, you may want to include a market analysis report to explain why you arrived at your bid price. Your market analysis can factor in the amount of time the property has been on the market, whether it’s currently occupied, comparable sales in the neighborhood, and how many offers are on the house at the moment. Your agent can help you put all this together in a tidy format.
- Escalation clause—If you find yourself in a bidding war and you’re afraid of offering more than is necessary to stay in the running, your offer may state that you’ll automatically increase your bid a certain amount over the next bidder’s offer.
- Personal note—Finally, you may include a personal note if you like. These aren’t usually important in the grand scheme and you should be wary of turning yours into a “love letter” that might violate anti-discrimination laws. Don’t include personal demographic information or suggest a bribe for the seller, both of which violate the Fair Housing Act and possibly other anti-discrimination laws.
Before you mail your offer letter, ask your real estate agent and a trusted friend or family member to review it. You may even consult a lawyer to ensure everything is accurate and you’re not missing anything vital. Some states even require a lawyer to review offer letters.
Once it passes scrutiny, you can place the offer in the mail. You could send it by email as well, but a physical document on quality stationery may create a better impression.
After You Make An Offer
Once your offer is in, sit back and wait patiently. This can be a tense period for buyers, but it’s critical that you give the seller enough time to consider your offer seriously.
Eventually, you’ll receive one of three responses:
- Yes—The seller has accepted your offer and you can apply for the mortgage and move forward with closing.
- No—The seller has declined your offer and you can either generate a new one or move on to a different property.
- Counter offer—This means the seller will accept your offer with adjustments. You may either accept the counter offer or tender another counter offer of your own, which launches a negotiation. Just make sure you don’t get carried away and exceed your budget.
It’s not a done deal until both parties sign the purchase and sale agreement, which makes it legally binding. Then you can start the closing process, which entails signing a lot of other documents.
Usually one to two months pass between when the offer is accepted and you receive the keys to the house.
There you have it! That’s how to make an offer on a house so you should be better prepared for the home purchase process.