The U.S. real estate market experienced a surge in the favor of sellers last year, a trend that is expected to continue into 2021. According to the National Association of Realtors, 65% of metro areas had double-digit growth in home price gains during the third-quarter of 2020, one of many indications that inventory remains low.
During that same time, the monthly mortgage payment on a typical single-family home rose to $1,059. That means a family income of $50,819 is now needed to afford the typical single-family home payment. Part of the reason for the huge increase in sales are the record-breaking low rates on mortgage loans, which have seen several low points since the start of the COVID-19 pandemic. Buyers are anxious to take advantage of the low rates, snatching up inventory across the country.
Competition is clearly tough right now. If you want the best chance of buying the perfect home, you need to know how to make an offer on a house that is attractive to the seller while protecting your own interests. Here’s how you can do that.
What does a house offer contain?
A house offer contains key details about the price you’re willing to pay, any financing information and what types of contingencies you require in order to make it to closing. In most cases, your real estate agent will talk to you about the specifics and then draft an offer for you to review and sign.
If at least part of the offer is attractive to the seller, it’s used as a starting point for negotiations between you both.
Expect your offer to include things like:
- Your offer price
- The amount of your earnest money deposit
- The amount of your down payment
- The type of financing you’ll use (unless it’s a cash offer)
- The amount of closing costs to be paid by seller (if applicable)
- Any contingencies (including financing, the sale of your own home, inspection results and appraisal results)
- Estimated closing date
- Expiration date for the offer
Before you submit the offer to the seller, you should carefully review each element of the offer to make sure all of the details are correct — especially when it comes to dollar amounts.
How to make an offer on a house
There are several steps you’ll take when making an offer on a house. To navigate the process, you’ll need to:
Determine your offer price. Figure out how much to offer on a house by working with both your real estate agent and your lender. Your agent should review comps to figure out a competitive price based on what has recently sold in the area. You should also get a specific estimate of your monthly payment from your lender based on your loan amount, interest rate, mortgage insurance, homeowners insurance, property taxes and homeowners association fees (if there are any).
Outline any contingencies. A contingency is anything that must happen in order for the deal to move forward and close. Your offer may be contingent upon your mortgage approval or selling your current house. You may also add a contingency that the inspection must be to your satisfaction or that the appraisal at least matches the purchase price.
Choose timing details. Your offer also includes a proposed closing date, which should be based on your personal needs as well as your lender’s estimated time to close. You can also add an expiration date to your offer, which ensures the seller responds within that period — usually within 24 to 72 hours.
Include any recommended documentation. Include your pre-approval letter from your lender to strengthen your offer and show you’re serious about quickly moving forward. If you’re offering a large earnest money deposit or paying cash, you may need to show proof of funds.
Review and submit your offer. Your real estate agent will send you an offer letter to review and sign, which will then be submitted to the seller’s agent. This is usually done electronically.
Mistakes to avoid when making an offer on a house
If you want a home in a competitive housing market, you have one shot at making your strongest offer. Homes in these areas fly off the shelves, so you need to bring your most competitive offer to the table the first time. To do this, you should avoid the mistakes below, including:
Skipping the mortgage pre-approval
A pre-approval letter from your lender shows that you’ve already gone through the initial vetting process to qualify for a loan. Without it, you may be overlooked in lieu of a buyer with a stronger profile and funding ready to go.
Making a low offer
A lowball offer should only be made in certain situations, like when the house has been sitting on the market for a long time or when the sales of homes in the area are sluggish. In most areas right now, housing inventory is extremely low and above-price offers are common. Talk to your real estate agent about a smart offer strategy while also keeping your budget in mind.
Requiring excessive contingencies
Contingencies are meant to protect you, but they can also scare off sellers. You do need a financing contingency if you’re taking out a loan or need to sell your house before closing on another, but be careful about adding any other contingencies to your offer. Your real estate agent can guide you on how to approach other necessary contingencies to still give you some wiggle room, but do what you can to try to make the seller feel confident with the offer as well.
Getting too attached to the home
Don’t get overly excited about the home you’re placing an offer on. You could very well be competing with dozens of other buyers for that home, so there’s a chance it won’t go your way even if your offer is strong. Getting too emotionally attached can also cloud your judgment about the purchase price and the inspection results, so be smart about handling your emotions — even when you think you’ve found the perfect house.
What happens after a seller accepts an offer?
It’s a great feeling when a seller accepts your offer, but don’t celebrate for too long. You’ve got some work to do before you reach closing. You should start by scheduling your inspection. Your contract should say when this needs to be done by, which is usually within five to 10 days of a ratified contract.
After you receive the inspection report, you can negotiate with the seller for repairs, cash at closing or a lower purchase price if you need to. You may go back and forth with the seller a few times. Alternatively, you may decide to walk away completely if the repairs are more significant than you expected.
You should also let your lender know that you’re under contract so your loan officer can send your mortgage application to underwriting. Your lender will schedule the appraisal to make sure the property value isn’t lower than the sales price. If it is, you can either walk away, renegotiate the purchase price with the seller or pay more of your own cash to make up the difference.
What’s next when a seller declines an offer?
There are a few different ways to respond if the seller doesn’t accept your offer. If there were no other offers or the seller extends the offer period, you can submit a revised version. You may be able to offer more money or waive some of your contingencies if you think that will get the deal done. You could also make a larger earnest money deposit to reassure the seller that you’re committed to closing.
In many cases, you may just need to move on. Most areas in the country are experiencing seller-friendly markets. A whopping 30% of buyers reported being outbid on a home in the second quarter of 2020 — a 12% jump from the previous year. Navigating the real estate market as a buyer requires resilience and perseverance, especially right now. It may take offers on multiple homes before you find the one you’ll actually end up buying.
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