Now that you’ve found a property, or several properties that fit your investment criteria, it’s time to make an offer. Making an offer is not as straightforward as you would think. An offer contains several different terms, all of which affect your overall offer. An offer is more than just price.
Components of a Real Estate Offer
- Price – The amount you are offering to pay for the property
- Length of Escrow – Amount of time from offer acceptance until closing
- Financing – Down payment and type of financing: Cash, Conventional Financing, FHA Financing, VA Financing, Other Loans
- Concessions – Credits, Upgrades, Additions, Anything the seller agrees to give the buyer
- Closing Costs – How will things like title insurance, escrow fees, recording fees, doc fees, or transfer taxes be paid
- Contingencies – things that must happen in order to close, such as selling another home, obtaining financing, passing an inspection, attaining an agreeable appraisal
Tips for Making an Appealing Offer
We hear stories all the time from investors, “I’ve made offers on five different properties and none of my offers have been accepted. What am I doing wrong?”
There are many mistakes buyers make when placing offers on properties. First of all, do not wait. If you found the right property, in the right location at the right price, why wait? Believe it or not, in certain markets there are more buyers than there are sellers. You do not want to miss out on a property because you were afraid to pull the trigger.
If you are ready to make an offer and feel uneasy about actually doing it, you are not alone. This happens all the time. Investors spend time and energy tracking down a place; they do all the work and then get nervous. Sometimes it is the fact that they are making the biggest purchase of their life or the fact that they are locking themselves into long term housing payments. Whatever the reason, people get scared, and that’s ok. Just ask yourself “What do I hope to gain by waiting?” Chances are, there is nothing you can actually gain, so make your offer now. Don’t wait for someone else to get an offer in.
Put your best foot forward. Many buyers today make offers for 10-20% below listing price. Why? So they can feel like they got a deal. The problem with that mentality is that list price is irrelevant to getting a deal. If you pay 10% less than the list price on a property listed 30% over value, did you actually get a deal? Of course not!
Determine what you think the property is actually worth and make your offer there. Leave a little room to come up in negotiations, but do not low ball your offer unless it’s actually necessary. Low balling an offer can insult and upset a seller. Once that happens, it will be hard to back track. If you do have to low ball, include your homework along with how you derived at that number so that they can understand where you’re coming from and how you got there.
Keep contingencies to a minimum. Many real estate transactions never actually close; they are cancelled for one reason or another. Sellers know this. Therefore, they want as few contingencies as possible. You need some contingencies to protect yourself, in case you cannot obtain financing or if there is a major defect in the inspection. However, only put in the contingencies you actually need. Discuss your offer in its totality with your broker. Ask him if he feels that it’s a strong offer. Real estate brokers have seen all different types of contingencies and typically can tell you if it will fly or not.
Do you actually NEED those closing costs you requested the seller pay for you? If you do, that’s fine, leave that part in your offer, but add them into the price. For example, if you need $5,000 for closing costs and were considering offering $250,000, make your offer $255,000. However, if you are putting down 20% or more, asking the seller to pay for closing costs could be a bad idea. If you do not NEED the closing cost credit, try not to ask for it. This weakens your offer.
One of the more frustrating things a buyer can do for a seller is to retrade the price. This means you make one offer, but then come back later and offer a new, lower price than was originally agreed upon. The most common reason for this is an issue with an appraisal or inspection item. Appraisal issues come up all the time; appraisers are catching a lot of blame for the housing bubble burst, so they are being much more conservative with their appraisals now. If you offer $250,000 on a property, it should be because you’ve done all your homework and that’s what you think it is worth. If an appraiser comes back and says he thinks it’s worth $240,000, why is that the seller’s problem? Stand by your offer, do not retrade it.
Go make your offers! In the next chapter, we will cover how to best negotiate on the offers you’ve made and the counter offers you will receive.