As a prospective homebuyer, knowing how to create a winning offer to purchase a home can be a daunting task. To make it successful, it's essential to understand key elements in a strong offer, including the offer price, time frame/escrow, contingencies, amount of earnest money, and other requests. You’ll work with your Realtor to write the offer but having a basic grasp of the overarching components keeps the focus on getting your dream home, instead of decoding the pieces.
Offer Price
Offer price is the most crucial component of the offer. The right amount is one that is attractive enough to the seller while being within your budget. Work with your agent to determine the appropriate offer price based on comparable properties and market trends. Your Realtor will provide a comparative market analysis (CMA). The CMA estimates market value. In a seller's market, you may need to make an offer that's above the list price to be competitive. However, it's important not to overextend yourself and stay within your budget. A winning offer is well-tailored to the seller’s priorities beyond price. It's the most prominent piece of the offer, but not all homes are won with dollars.
Time Frame/Escrow
The time frame for the purchase and the length of the escrow period are critical components. Typically, escrow periods are 30-60 days, but it's essential to be flexible with the time frame to accommodate the seller's needs. A shorter period may be more attractive to the seller, but it may not give you enough time to arrange financing and complete any inspections.
Considerations to Appeal to a Seller
All Cash Offer or No Contingent Funds: This type of offer is attractive to sellers because it eliminates the risk of financing falling through, but it's a riskier option for the buyer.
Offer Price Greater Than List Price or Escalation Addendum: This strategy involves offering a price above the list price or including an escalation addendum that increases the offer price automatically in response to competing offers.
High Earnest Money Amount: A higher earnest money deposit shows the seller you're serious about the purchase and willing to put more money at risk.
Non-Refundable Earnest Money: This option involves making your earnest money non-refundable, meaning you'll lose the deposit if you back out of the contract for any reason.
Pre-Inspection: This strategy involves having the property inspected before making an offer to eliminate the need for an inspection contingency.
Contingencies
A contingency allows you to get out of a contract and obtain a refund of your earnest money deposit under certain conditions. While removal of a contingency may be attractive to a seller and aid in the buyer's offer being accepted in a multiple-offer situation, consider the risks.
A Financing Contingency: This contingency allows you to cancel the contract and get your earnest money deposit back if you cannot obtain financing for the property purchase. It's important to understand that lenders require an appraisal, which is an estimate of the property's value. If the appraisal comes in lower than the purchase price, you may need to either pay the difference in cash or renegotiate the purchase price.
An Inspection Contingency: This contingency allows you to cancel the contract and get your earnest money deposit back if you find any material defects in the home or other systems on the property. It's essential to hire a qualified home inspector who can provide a thorough inspection report, and you should also consider including contingencies for additional inspections, such as for the septic system, well, or other specialized inspections if applicable.
A Title Contingency: This contingency allows you to cancel the contract and get your earnest money deposit back if there are any issues with the property's title, such as liens, easements, or other encumbrances. Reviewing the preliminary title report with your real estate agent or attorney and obtaining title insurance to protect against any title defects is important.
An Appraisal Contingency: This contingency allows you to cancel the contract and get your earnest money deposit back if the property does not appraise for the purchase price. As mentioned earlier, this is a common issue when the purchase price exceeds the appraised value, so it's important to consider this contingency carefully when making your offer.
Sale of Property Contingency or Pending Sale of Property Contingency: If you need to sell your current home to purchase the new home, you may want to include a contingency that allows you to cancel the contract if you cannot sell your current home. Alternatively, you may want to include a contingency that allows you to cancel the contract if the sale of your current home is pending but has not yet closed.
Earnest Money
Once you have determined the contingencies you want to include, you need to consider the amount of earnest money you want to put down. Earnest money is the deposit that you put down as a sign of good faith that you are serious about purchasing the property. The earnest money deposit typically is around 1% to 3% of the purchase price. However, in a competitive market, you may need to increase the amount to make your offer more attractive to the seller. In some cases, buyers may also consider making their earnest money non-refundable, which means that if the deal falls through, the seller keeps the money. This tactic can make your offer more attractive to the seller, but it also increases the risk for the buyer.
Other requests
In addition to the contingencies and earnest money, you may also want to include other requests in your offer, such as requests for appliances, repairs, or other work to the home. These requests can be negotiated between the buyer and seller and included in the purchase agreement. However, it's important to keep in mind that including too many requests can make your offer less attractive to the seller and could ultimately cost you the deal.
Offer price, time frame/escrow, contingencies, other considerations, amount of earnest money, and other requests are all part of a winning strategy. They should be carefully considered before presenting to the seller. It's important to work with a real estate agent who can help you navigate the complexities of the process and write an unabated offer. A good agent will have experience in the local market and can help you craft a competitive offer while still protecting your interests as a buyer. They can also help you understand the risks and considerations associated with each contingency and help you decide which ones to include in your offer.
If you’re thinking of buying a home and need a Realtor to represent your interests, I’d love to hear from you.
