Making an Offer on a Home

You've saved money to buy a home. You've researched mortgages. You've been watching the market. And you’ve finally found a house you love.

Now what?

It’s time to start the process of making an offer on that house.

While buying a home can be exhilarating and anxiety-inducing, preparing even before you start house hunting makes the entire experience easier. Working with the right team — including a trusted real estate agent and a dedicated mortgage lender — can help smooth the way to smart financial choices that result in a happy conclusion.

Here are the general ins-and-outs of making an offer on a home.

 

How Is an Offer Made on a House?

When you’re thinking about how to buy your first house, upgrade to a new house or buy a second home, it’s important to research the town, community or neighborhood where you want to buy. The more you know about home values in an area and what’s available at different price points, the easier it will be to make an offer.

While working with a real estate agent isn't required, it's often a wise decision to do so. A real estate agent will help guide you through the often complicated and stressful process of buying a home.

Qualities of a Good Real Estate Agent

While it’s not required to have a real estate agent represent you, buyers typically benefit from the professional insight and local market knowledge of an agent. Often, a real estate agent can help you save money in the long run by negotiating on your behalf and identifying the value in various features and properties.

When you find a real estate agent with expertise in your price range and preferred neighborhood, you can decide with your agent’s help how much to offer for the house you want and other terms of the purchase.

Your agent should work within your needs and financial situation. A good agent should be ready to work with you whether you're ready to buy immediately or in the future.

Qualities to look for in your real estate agent:

• Expertise & Market Knowledge: A strong agent has an in-depth understanding of the local real estate market, including property values, trends and neighborhoods.
• Honesty & Integrity: Trust is paramount in a real estate transaction. A good agent is transparent, ethical and always puts their client's best interests first.
• Strong Communication Skills: Effective communication is crucial. An agent should be responsive, readily available to answer questions and keep their clients informed throughout the process.
• Negotiation Skills: Real estate transactions often involve negotiation. A skilled agent is adept at securing the best possible deal for their client.
• Proactive & Organized: A successful agent is proactive in their approach, anticipates potential issues and stays on top of all transaction details. They are organized and efficient, ensuring a smooth process.
• Empathetic & Patient: Buying or selling a home can be emotionally charged. A good agent is understanding, patient and supportive throughout the journey. They should never make you feel obligated to buy a specific property at any point in the process.
• Resourceful & Connected: An agent with a strong network and access to resources, such as lenders, inspectors and contractors, can provide valuable assistance to their clients.

Your agent should explain the process of making an offer on a home, which can vary depending on local practices. After you make an offer on a home, the seller may accept the offer or submit a counteroffer. Your real estate agent will help you negotiate until a deal is struck or one or the other party walks away.

Understand the New Real Estate Commission Rules

If you hire a real estate agent to represent you, you’ll need to sign a buyer’s agent agreement. This will explain how your real estate agent gets paid. Be sure to understand that fee and your responsibility to the agent before you sign.

Recently, the rules surrounding these agreements have changed. Traditionally, a buyer's real estate agent was paid by the seller at the close of escrow. Sellers would split a 5% - 6% payment between their agent and the buyer's agent.

This practice was challenged as part of a federal antitrust lawsuit that resulted in new real estate rules from the National Association of Realtors. The new rules make Realtor commissions negotiable, so that sellers and buyers now need to work out who pays the buyer's agent commissions.

The rules also require buyers to sign an agreement with their agent before viewing homes with them. The agreement will put in writing how much the agent will receive from the buyer if they purchase the home being viewed.

 

What to Do Before Making an Offer on a House

While you may want to rush forward, find a house and make an offer, it’s best to take your time. Start with getting preapproved for a mortgage.

When you meet with a lender you can discuss the budget you’re comfortable with for your housing payment and review your loan options. A preapproval for a mortgage relies on full documentation of your income, assets, credit history and job history. Your lender can estimate your closing costs and help you determine how much you want to spend on your down payment.

After you establish your budget, you can move funds into a checking or savings account so they will be accessible for your closing costs, down payment and something called an "earnest money" deposit that will accompany your offer letter.

How do Earnest Deposits Work?

An earnest money deposit is a percentage of a home's cost that you pay after an offer is accepted. It's meant to show sellers that buyers are interested in following through with a deal. Earnest deposits are often around 3% of the home's sale price. So, if a seller accepts an offer of $400,000 for a home, the seller might have to pay a $12,000 earnest money deposit.

Importantly, an earnest deposit is counted as part of a home's down payment. In other words, the earnest money deposit is applied to the final down payment a buyer makes when finalizing the purchase of a home.

 

Who Writes the Offer Letter for a House?

In most areas, your real estate agent will work with you to help you decide how much to offer and what to include in the offer letter. To be sure your offer letter is compliant with local regulations, your agent usually writes the offer letter that you sign.

Some states require an attorney to write the offer letter on your behalf. Depending on local practices, your real estate agent may present the offer letter to the seller’s agent or directly to the seller. Often, the buyer’s agent and the seller’s agent present the offer letter together.

 

Steps for Making an Offer on a House

While making an offer on a house sounds simple, there are several phases of the process, from finding a house you love to the deal closing. Depending on local market conditions and whether there’s competition for the home, you and your agent will typically receive a response to your offer within a few days.

Step 1: Determining the Offer

Once you have your cash in an accessible account, you've secured a preapproval letter from your lender and have identified the house you want to buy, it’s time to determine how much money you want to offer and under what terms and conditions.

If you’re working with a real estate agent, your agent can provide a comparative market analysis that reviews recent sales of similar homes in that area and price range to determine the average price per square foot. You and your agent can take into account how long the house has been on the market, the age of the home and its condition.

In addition, you’ll need to know how quickly homes are selling in your market. Be prepared to make a quick offer – and the best offer possible – if you anticipate facing competition.

Step 2: Calculate Your Earnest Money 

Your earnest money deposit will be provided with your offer letter to show the sellers you are serious about buying their home. The deposit will be held in an escrow account until the closing date and will then be used toward your full down payment if the deal goes through.

It’s important to realize that if you back out of the deal in a way that’s not compliant with the details of the purchase agreement, the sellers could be legally allowed to keep your deposit.

Your real estate agent can help you decide an appropriate amount to offer as an earnest money deposit depending on market conditions and home values in your area.

Step 3: Determine Contingencies

When making an offer on a house, buyers set a price along with some conditions of the sale, called contingencies. A contingency refers to a condition in the purchase agreement that needs to be met within a specific timeframe. If the contingency isn’t met by the deadline, the buyer or seller may be able to back out of the contract, depending on its terms.

While nearly any contingency can be written into an offer letter and negotiated, the most common contingencies in real estate contracts include loan approval, home inspection, an appraisal and a title search.

For example, if an inspection reveals serious issues with a home's condition, an inspection contingency might allow a buyer to back out of the contract and recover their earnest deposit.

In a highly competitive market, buyers sometimes waive contingencies to make their offer more favorable to sellers. Before you waive any contingencies, be sure you understand the potential consequences, including the loss of your deposit if the deal falls through.

Step 4: Writing Up an Offer Letter

You and your real estate agent, or your attorney, should include an array of information in your offer letter based on a comparative market analysis and market conditions.

When making an offer on a house, your letter should include:

• The property address.
• Names of the buyers.
• Price offered.
• Contingencies requested.
• Concessions requested, such as repairs, a contribution to closing costs or payment of your buyer’s agent fee.
• Items you’d like to get with the house, such as window treatments or light fixtures.
• A loan pre-approval letter from a lender.
• The amount of your earnest money deposit.
• Your preferred move-in date.
• Your preferred closing date.
• A deadline for the seller to respond to your offer.
• A requested walk-through inspection.
• Confirmation of how real estate agent commissions will be paid.

Step 5: Negotiate and Close or Walk Away

Every real estate transaction begins with the same challenge: the sellers naturally want to receive the highest possible price for their home and the buyers naturally want to spend the least amount of money to purchase their preferred property. Once you provide your purchase offer, there are three possibilities: the seller accepts your offer, the seller rejects your offer, or the seller makes a counteroffer.

If the seller accepts your offer, you’re all set and ready to plan your move.

If the seller rejects your offer, typically they have accepted another offer or feel your offer is too far away from their preferred price to bother negotiating. Usually, it’s best to move on to another property.

If the seller provides a counteroffer, then you and your agent can review the terms and conditions to determine if you’re willing to accept the offer. If not, you can make a counteroffer. You and the seller can continue to negotiate until you reach agreement or one of you decides to walk away from the deal.

If you decide to walk away, be certain you follow all the timelines and requirements to avoid losing your earnest money deposit.

Your team, including a wealth advisor, real estate agent and lender, can help you navigate your potential home offer and move on to the closing process.