Making an Offer on a House

Few experiences in life are as stressful, time-consuming, and financially significant as buying a home. Are you ready? If so, here's a guide to help you decide how much to offer, whether you should add conditions to your offer, how to deal with multiple offers, and how to respond to counteroffers.

Deciding How Much to Offer

Making an offer on a house is difficult. If you bid too low, others may outbid you. If you bid too high, you may be throwing money away. To safely navigate these potential pitfalls, here are some things to keep in mind when making an offer on a house:

How much house can you afford: This should be the #1 factor when house-hunting. You can't offer more money than you can borrow, so secure a loan before seriously shopping around. Also, don't forget to include the closing costs when deciding how much money to borrow. Closing costs can range from 2% to 5% of the average loan amount. The percentage is variable, depending on the size of the loan and the lenders' financing terms.

The seller's price: Your offer will, of course, be highly dependent on the seller's asking price. Sellers typically follow one of three paths when deciding how much to ask for their home.

• Some sellers overprice their home to give themselves room to negotiate, or because they need to break even on the sale and pay off a larger mortgage, or because homes in their area are in high demand.
• Some sellers price their home according to pricing data from comparable homes sold in their local neighborhood.
• Some sellers underprice their house in the hopes that it will sell fast, or attract many buyers and create a bidding war.

Prices of comparable houses: To really get a good idea of how much you should offer, find out how much comparable houses have sold for in the area. To ensure that it's really comparable, a similar house should have sold within the past six months, be in the same neighborhood, and be similar in terms of age, style, the number of bathrooms and bedrooms, square footage, lot size, and view. The real estate market: The health of the economy as a whole can make a huge difference in the competitiveness of the real estate market.

• When employment numbers are up, and mortgage interest rates are low, as has been the case in the decade after 2010, more buyers are looking for a home. It becomes a seller's market. Home prices rise as buyers compete for a limited number of homes, and homes sell fast.
• When the economy worsens, financially strapped homeowners may need to put their house on the market. If there are more homes on the market than buyers looking for homes, it's a buyer's market. Home prices may fall because buyers are able to walk away and make an offer on another home.

The uniqueness of the home: If a house has some special trait that makes it uniquely valuable to you, you may wish to consider a higher offer in order to increase your chances of obtaining the house. Special traits could be an aesthetic appeal, architectural nuances, proximity to local businesses or a particular school, access to community resources, and relationships with neighbors.

The seller's position: Always consider the seller's position when making an offer on a house. If you were a seller, would you be willing to take a little bit less if someone agreed to:

• An all-cash offer?
• A shorter escrow period to close the deal faster?
• Fewer or no contingencies, such as waiving the buyers' inspection or no contingency for securing a loan or sale of a prior home?

Some sellers need to close quickly, so having everything ready to go can make the difference between a winning offer and a losing one.

Making an Offer on a House: Adding Conditions

You should consider adding some conditions to your offer in order to protect yourself, but keep them to a reasonable number. Called "contingencies," typical conditions to an offer would be that your offer depends on the house passing certain inspections, that the sale of your own house is completed first, or that you qualify for a home loan.

What if There Are Multiple Offers on the Home?

In a hot real estate market, it can get very competitive when you're bidding against other parties.

You may want to make a strategic bid based on how many people are competing for a house. Make a low bid on a house if you're the only bidder, a normal bid if there are only two or three other buyers, and a high bid on a house with multiple bidders.

Set a monetary limit for yourself before you start bidding, and be prepared to walk away if the bidding gets too high.

Consider attaching a cover letter to your offer that briefly describes you and how you plan to take care of the property. Some owners are more interested in a buyer who understands the uniqueness of the house and promises to take good care of it.

Should You Make an Offer on Multiple Homes?

If you've lost out on a number of homes after being outbid, you may be feeling pressure to improve your odds. Friends and family—even some realtors—may tell you to make offers on multiple homes at once. Here's why that is a very bad idea.

In classic contract law, an offer that is accepted becomes a binding contract. If you had multiple offers accepted simultaneously, you could be sued by a seller for breach of contract if you then pulled your offer.

Some realtors tell their clients not to worry about making multiple offers, but the truth is that if the seller is motivated enough to litigate, and if the seller ends up losing other offers as a result of a buyer's noncommittal "offer spree," the buyer could lose their earnest money deposit or end up in court for breach of good faith and fair dealing.

Legally speaking, it's a big risk.

How to Respond to Counter Offers

Sometimes a seller won't accept your offer outright but will instead provide you with a counteroffer that changes the price, the closing date, occupancy deadlines, or other conditions you set forth in your offer. In other words, when you make an offer on a house it's typically the starting point in negotiations.

You can accept, reject, or present your own counteroffer to the new offer. Make sure to set a time limit for accepting your new offer or offering yet another counteroffer. There will be no contract formed until one side accepts the other's latest offer without modification.

Have Questions About Making an Offer on a House? Talk to a Real Estate Lawyer

Buying a house will be one of the most important decisions of your life, and one of the most satisfying. Understand what you're getting into first. If you have questions about the legal implications of making an offer on a house, or would like to learn more about the real estate laws in your state, talk to an experienced real estate attorney near you today.