Typically, your initial offer should be below the seller's listing price, should be based on your analysis of the value of the property compared to similar properties, and should be below the top price you are willing to pay. You want room to negotiate.
Should you discuss these factors with your agent to arrive at a strategy? If you are working with an exclusive buyer's agent, such discussion can be very helpful. But keep your strategy and the top price you're willing to offer to yourself when talking or working with a dual agent or seller's agent; they are legally required to pass along such info to the seller.
Can you make an offer below listing price and negotiate the cost for new construction?
Most developers and builders will say that because they are building homes "on spec" that they have fairly small profit margins and their list price for the home is fair and not negotiable. In the real world, you may be able to negotiate a number of things including the price of the home. Many builders list a price with a small profit margin for the basic model of the home, then offer a number of upgrades for which they typically charge a bundle. In practice, the average cost for upgrades is typically inflated enough that many experts recommend that you purchase the basic model and then later install upgrades such as flooring or countertops by contracting with independent suppliers/contractors. If you wish, you might try to negotiate for "free" upgrades as part of the purchase price. In some cases perhaps the builder needs to sell the model quickly or just has a couple of homes left in a slow market and would be willing to come down on his price. You'll never know unless you make that lower initial offer.
A tip: Many developments have on-site agents who exclusively represent that development. You would be wise in such cases to have your own representation, a buyer's agent or real estate attorney, and not work solely with the development's exclusive agent. This is particularly important if you wish to negotiate price and other terms.
How do you make the offer? What terms and contingencies should your offer include?
Theoretically, you could make an offer to buy a property by writing a simple statement such as "I offer to buy ____ property for $_______ by such-and-such a date." But in reality, to protect both you and the seller, you will make in writing an "offer to purchase" or "contract to purchase" using a formal document that serves as a legal contract that contains the terms, conditions, and contingencies under which both buyer and seller agree to the sale.
A contingency, by the way, is a condition that must be in place for the contract to go through. If the condition is not met, you have the right to withdraw your offer. It's one of the ways you have to make sure that you are protected financially and that you get the house you think you are getting.
You need to consider several terms and contingencies as seriously as you do the price you're willing to pay.
Recommended contingencies for inclusion in your offer to buy.
- Your ability to get a loan for purchase. An offer typically contains not only the price that you are offering for the house but the size and terms of the mortgage loan that you are applying for. And the offer specifically states that your offer is contingent on obtaining this financing. Obtaining pre-approval for financing your home before you start house shopping not only helps you confirm what you have to spend on a home but it also lets the seller know that your loan application will probably be trouble free. The contingency clause says that if, for any reason, you are not able to get a mortgage at the terms stated in the contract, then you may withdraw your offer.
- The house passing a home inspection. Whether your intended home is an existing resale or new construction, failing to have it inspected by a certified professional home inspector is asking for trouble. A thorough home inspection assesses the structural condition of the property, including inspecting roof, basement, crawl space, electrical, plumbing, appliances, and heating and cooling systems. The inspector looks at any signs of previous problems as well as current existing problems; the inspector also looks at positives. You should plan to go along on the inspection visit so that you can ask questions and hear what the inspector has to say. Given the readiness with which many folks file law suits, inspectors may be more expansive informally than in their written report.
The inspector may make notes during the inspection and provide you a written report within 1 to 2 days or may enter his or her observations into a computer and produce a report on site. You, the buyer, pay for the inspections. The average cost ranges from $300 to $500, some of the best dollars you can spend.
If you have observed some potentially big problems with specific structures or mechanicals (such as cracks in the foundation, possibly leaky plumbing or heating/cooling system that seems on its last legs), you may wish to include clauses requiring inspection by specialists in these areas.
Requiring a "termite or wood pest infestation" inspection, even in areas where these are not required by law, is certainly a good idea. Depending upon the home's age and the geographical location you may wish to consider requiring testing for other toxic substances such as asbestos or radon gas.
If the home inspection results reveal the home does not meet your criteria or approval or the inspection reveals problems that the seller refuses to fix, then you can withdraw your offer. If the problems are fixable, then you may ask the seller to fix them or perhaps negotiate a new lower offer/price that takes into account the estimated cost to make the repairs. If you are making an offer on new construction, then you typically would create a "punch list" of work that needs to be completed or corrected that the builder agrees to perform.
In all cases, but particularly when the seller agrees to make repairs or when certain property (including appliances) is to remain with the home, you should also request in your offer the right to a walk-through inspection right before closing. If you are buying a newly constructed home, a walk through to check that the "punch list" has been completed properly is important.
Because the inspection must take place quickly after your offer has been accepted (usually within about 5 days), it's important to evaluate and select the home inspector you wish to use before you suddenly need one. See Tips for Finding a Professional Home Inspector.
- Having the offer or contract to purchase reviewed by your attorney. Many experts recommend that you have your offer-to-purchase contract reviewed by a qualified real estate attorney—even if you are working with a buyer's agent and particularly if you are a first-time buyer. Experts insist this step is a must if you are working without help and buying a FSBO home.
For any offer, it's a good idea to have the attorney look at the contract before you sign it if time allows. Even if your attorney looks at the offer before you sign it, experts still recommend including a contingency that requires that your attorney approve the contract.
- Making your offer subject to your approval of the home after you've viewed it in person. We recommend that you never offer a contract to purchase a home or property that you have not seen in person. But if you think you've located just the right home via the Internet and are convinced it might be snatched out from under you, then at least protect yourself by reserving the right to withdraw the offer if you find problems after you see it in person. This same contingency clause may be advisable even if you have seen the house and your spouse has not, but you think you'd better immediately offer a contract because other prospective buyers are drooling over the house. Include a clause that says something like, "subject to the approval of my spouse Judy (or Joe)."
Other common contingencies included in offers to purchase
Here are a few other contingencies that buyers have found useful in certain instances. Just remember not to go overboard with a load of frivolous contingencies that could work against the seller's accepting your offer. If you are adding a contingency that is not on the contract form you are using, then having your real estate attorney check the wording can be a good idea.
- Your approval of the seller's disclosures about the property. For example, you may wish to have the seller provide you with a copy of the CLUE "loss history report" for the property. CLUE stands for Comprehensive Loss Underwriting Exchange, a database to which most companies providing homeowner's property insurance report claims. Recently a number of buyers have been finding that they may not be able to get insurance on the home they wish to purchase or may have to pay much higher rates to insure the home if the property has a history of problems and insurance claims. Although many consumer advocates find this trend alarming, it may be a while before any changes take place in these underwriting practices and you should protect yourself. Only the homeowner, insurance company, or lender can request the CLUE report, which is why you must request it from the seller. A-PLUS is another company that provides loss history reports.
- Sale of your current residence. If you are trying to buy a new home before you are able to sell your old home—this situation often occurs when you must relocate due to your work—then you may wish to include this contingency.
- Approval by the board of the co-op or condo you wish to purchase. Where board approval is required for you to "buy into" a co-op or condo, then this contingency is a must.
- Compliance with the building codes. When considering new construction or an extensively remodeled existing home, such a contingency may be wise even if the property has a "certificate of occupancy" indicating the government inspectors have signed off. The home inspector you hire should be qualified to check such compliance in this case.
- The home appraises at or above your agreed upon offer. Perhaps you are afraid that the fact that home backs up to the buffer zone of a shopping center makes it worth less than you've agreed to pay. Or you've gone a little higher than you think the home is worth because you badly want the house. In such cases this contingency clause can protect you and may in the second case help the seller say yes to your offer.
- Certain timing may be of the essence. For example, you may wish to say that the seller has only a certain amount of time to respond to your offer or you might indicate that you must be able to take possession by a certain date or the deal is off. Sellers typically desire a limit to the time you have to obtain a mortgage. If you're pre-approved by the credit union when you start shopping, you've probably already answered that requirement.
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