You finally found the perfect house—now what?
Your offer depends on whether the housing market is hot, cold, or balanced. Also affecting your offer is the length of time the house has been on the market. New listings tend to sell close or exceed the listed price...even in a cold market. The following tips will help you purchase a house below asking price.
Making an offer on a house
- Update your pre-approval application and a good faith estimate
- Obtain a pre-approval letter from the lender
- Don't wait to make an offer
- Read the seller disclosure report carefully
- Ask your real agent his or her opinion of the price
1. Update your pre-approval application and a good faith estimate
Before you and the agent write up the sales contract and make an offer to the seller, call your loan officer and have your pre-approval updated. If you have not been pre-approved, seek out a lender who will determine whether you’re qualified to purchase the home.
If you have been pre-approved, you may wonder why it’s necessary to speak to the lender before the offer. The reason is that the loan officer estimated the real estate taxes and homeowner’s insurance during the pre-approval process. But now you know what the exact costs of the property taxes are and the cost of the homeowner’s policy, assuming you called your insurance agent for a quote.
It is possible that you could not qualify for the home if the real estate taxes and the homeowner's insurance are higher than the pre-approval application. Interest rates may also be higher.
The combination of the taxes, homeowner's insurance, and interest rates may throw your debt to income ratio off. The loan officer should tell you the maximum sales price for your income and monthly debts. Before you make an offer to the seller, call the loan officer.
Ask the lender for a loan estimate (aka buyer's cost sheet) for the cash to close and the monthly mortgage payment for your offer.
The cost of homeowner's insurance is based on replacement cost, not the sales price. Old houses tend to cost more to insure than new homes because they are more expensive to rebuild. Townhouses can cost more than single-family homes because of the possibility of a fire migrating to an adjacent unit. Always ask the home seller the cost of their annual homeowner's insurance policy prior to making an offer so that you won't be surprised at the cost prior to closing.
2. Obtain a pre-approval letter from the lender
Most sellers require a pre-approval letter from a lender before considering a buyer’s offer. If your seller requires a pre-approval letter, ask the lender to provide you with a letter that does not state your maximum sales price. You do not want the seller to know how high you can go.
3. Don't wait to make an offer
Every experienced real estate agent will tell you that a house could sit on the market for over a year, and just when you want to make an offer, someone bought the house while you were thinking about it.
4. Read the seller disclosure report carefully
Many states require the home seller to provide prospective home buyers with a disclosure form that states the condition of their home. The question and answer form queries the seller about any water damage, roof leaks, foundation issues, etc.
Read the form carefully and seek more information from the seller if the disclosure form is not complete or answers to the questions are vague or questionable.
5. Ask your real agent his or her opinion of the price
Ask your real estate agent what a reasonable offer price should be. Your agent should have knowledge of the market and should be able to express a helpful opinion. The agent's price opinion should be based on previous sales in the area, time on the market, and any knowledge of previous offers on the house.
Also ask the real estate agent if the multiple listing service provides sale statistics for the area. Most sellers tend to pad the sales price by the real estate commission when they first list their home for sale, and usually sell at the list price minus the customary real estate commission percentage for the area.
Questions to ask before making an offer on a house
Why is the homeowner selling the home?
Determining the motivation of the seller is the most important consideration in calculating an offer. Is the homeowner on the verge of foreclosure? Is the home seller required by the courts to sell the house due to divorce or a court action? How disparate is the seller?
Many homebuyers think they can low-ball bank-owned properties and get a great deal. Usually not. Banks are the worse sellers. You'll hear a heavy sigh when you mention foreclosures to a real estate agent. Foreclosures are difficult sales and are always weighed in favor of the bank.
Does the homeowner have a mortgage?
If the seller does have a mortgage, can the real estate agent determine the mortgage balance relative to the list price? Does the seller need every last dollar of the list price to move on or is there some cushion in the list price due to a low mortgage balance?
If the house was purchased a few years ago, chances are there is little equity and the homeowner is just breaking even at the list price. If the homeowner occupied the home for a number of years, chances are, there is equity in the property and an opportunity for a lower-offered price.
New listings can require a full-price offer
On new listings, you could be forced to offer the seller a full price or exceed the listed price. This is the reason you need the lender to tell you the top-end sales price for the home.
It can be frustrating making a full-price offer; however, you might never find another house like it. A few thousand dollars extra will not cost that much more every month.
Here are some other indications that a seller may be motivated to accept a lower sales price...maybe.
The seller lowered the price at least once
These sellers are beginning to see the reality of the market. They may be flexible in their listed price, but then again, the circumstances may still demand a high offer because of the mortgage balance and other payoff costs.
The seller has an offer pending on another home that is contingent on the sale of the current home
These home sellers may be willing to accept a lower offer, but then again, they just might need a full-price offer to pay off their mortgage and have enough profit to swing the mortgage on the new home.
The seller has changed real estate agents at least once
These sellers may be motivated, but then again, they may have developed a personality conflict with the agent over the marketing of their home. The Multiple Listing Service describes the seller as "motivated" or advertises that the "seller will consider all offers. This may be true, but then, why hasn't the house sold? Is this just sales hype?
The seller has already moved out and the house is vacant
A vacant home can be an opportunity. Why did the seller move out, and when? Did the seller have a life transformation, such as marriage, having a child, divorce, retiring, or relocation due to employment?
The seller needs to get out quick
It's tougher getting a lower price during the home-buying season (March to September), and there is more competition for homes.
Is the seller moving out of the area by a specific date due to employment or a family emergency?
If so, there may be an opportunity to have a lower offer accepted.
The seller had a previous sales contract fall through
These homeowners may have made plans for the moving truck, enrolled their kids in the new school, etc. Sellers are psychologically devastated when a sales contract falls apart and are likely to deal.
Inherited houses can be an opportunity, because the heirs usually want the sales proceeds quickly, unless, of course, greed seeps into the negotiations.
Frequently asked questions about making an offer on a house
Can I make an offer on a house before selling mine?
Homeowners can make an offer on a house, provided they make the offer "contingent" on the sale and close of their home.
Can I make an offer on a house without the pre-approval?
There is nothing stopping a prospective home buyer from making an offer without a pre-approval, however, the seller may require a pre-approval letter before accepting your offer.
A pre-approval letter informs the seller that you are "likely" to obtain financing, but it also tells you what the likely mortgage payment will be and the total cash requirement at settlement.
So how much do you offer to the seller?
As you can see, it all depends on the circumstances of the seller and the market. There is one thing you should never do, and that is to make a lowball offer. Some homebuyers make a ridiculously low offer expecting the seller to reply with a counter offer somewhere in the middle or much lower than the listed price.
An extremely low offer will anger the seller, who will be less willing to give you a reasonable counter offer, if at all. Don't start with a low-ball offer, it rarely works.
A good start is 6 or 7 percent less than the sales price. Over the years, I have found that sellers tend to put the agent's commission "on top" of their desired net from the sale of their home.