The anatomy of a good offer

Hispanic couple outside home with sold sign Hispanic couple outside home with sold sign

At the heart of every real estate transaction is the contract, the agreement between two parties for the purchase of a home.  The contract reflects hours of work on the part of the buyers, sellers and their agents to craft an agreement that works for both parties.  Whether or not it is a “good offer” depends on many factors, including the current market and the respective needs of both parties.

The contract states what the buyer is willing to pay for the house and also spells out any contingencies.  These can include items such as the timing of a home inspection, whether or not the buyers have a house to sell first, how soon they want to close and how they will pay, whether by cash, mortgage or some other arrangement such as seller financing.  The contract may also specify that the buyers want the sellers to leave items with the home such as window coverings or appliances like the refrigerator, washer and dryer.  Finally, it will also name a date and time by which the sellers must reply back to the buyers via their agent.

The sellers may either accept the contract as is or respond back with a counter offer.  This could be anything from a higher price to a refusal to leave the refrigerator.  They may also ask for an earlier or later closing date or any of a number of other items depending on their particular circumstances. The buyers can then accept the changes or suggest alternatives.  The negotiation continues until both parties agree on the terms and conditions of the contract.  If they can’t agree the house stays on the market and the buyers are forced to find another one.

What determines if an offer is a good one?  A big determinant is the current market.   If there are lots of homes on the market to choose from, buyers can take their time and may be able to negotiate lower prices and better terms as sellers are forced to be more negotiable.  If it is a hot market with multiple buyers bidding on the same homes, serious buyers will make higher offers and minimize the number of contingencies. Regardless of the market, a good offer is one that takes into consideration the needs and desires of both parties and results in a final contract that everyone can live with.

The Market is Key

The current market plays a big role in what makes for a good offer, and this can vary somewhat by month, by neighborhood and even home to home within the same community.

The last several years have seen a significant improvement in our residential market. A few years ago during the recession, there were lots of homes for sale and buyers could take their time and demand lots of concessions, while sellers often felt lucky to have an offer.  Today prices are rising as inventories dwindle and days on the market decline. The recent Second Quarter Report from CAAR showed closed sales up 12 percent compared with last year at this time.  In addition, half of the homes sold in an impressive 33 days or less, the lowest median days on the market since 2006.

With 11.2 percent fewer homes on the market than at this time last year good offers looked very different than they did a few years ago.  For example, Inessa Telefus with Loring Woodriff Real Estate Associates described the recent spring market as one in which buyers had to make a decision and write a contract quickly to be in the running for existing homes in popular neighborhoods.  In some hot areas that meant viewing a home and making an offer the day it came on the market.   Even so, the competition was such that many homes received multiple offers, and a good offer was often one in which the price was greater than what the home listed for with a minimal number of contingencies.

Even in a hot market, not every home sells quickly or for over the list price.  CAAR’s recent market report stated that on average during the second quarter, sellers received 95.8 percent of their list price, which was up from a year ago when it was 95.1 percent.

To be taken seriously offers need to reflect an in depth understanding of the current market by neighborhood and by time of year.  For example, in August the market slowed a bit as many people enjoyed vacations or were busy getting their children back to school.  Karen Kehoe, Associate Broker with RE/MAX Regency, called the market “fast,” but added that there are still homes to choose from   However she also said the buyer pool is shrinking since most families will have moved by now in order to be settled when school starts.   This means those still in the market have less competition than during the spring rush and can be more relaxed about finding and making an offer.

Phyllis Novotny with Roy Wheeler Realty Co. described the current market as “spotty,” indicating that a few areas are still hot with sellers receiving multiple offers while some others have slowed down after what she called a “strong spring market.”  In other words, today, whether or not an offer is considered good will vary with the neighborhood in which the house is located.

Telefus recounted a situation in a desirable neighborhood where a home recently came on the market and sold in four days for more than the list price.  On the other hand, Kehoe described a situation where a home had a long stay on the market even though it listed for considerably less than what the seller paid for it a number of years ago.  Sellers in the second situation might well welcome an offer that those in the hot neighborhood would only laugh at.

This market variability means it is critical to work closely with your agent who will be familiar with these kinds of trends and can offer advice on how best to work with the most current conditions when writing an offer.

The Art of Crafting an Offer

Although the two parties don’t communicate directly while negotiating the sale of a home, there are ways for buyers to get information to help them write an appealing offer.

Kehoe said it is important for buyers to “listen and find out what the seller really wants.”  They can do this by directing questions to the seller through their REALTOR®.  Sometimes it is possible to find out why the owners are selling and how quickly they want to move. Sometimes sellers will even indicate if they are highly motivated. This kind of information is very helpful to buyers and their agents when they write an offer.

When buyers don’t ask these questions, a contract may be rejected for unexpected reasons.  For example, Novotny described an all cash contract she received on one of her listings.  Normally sellers like cash contracts since when buyers require a mortgage, their contract is contingent on financing, introducing an element of risk. This is especially the case today given the much tighter standards imposed by mortgage companies that can result in longer approval times and denial of loans in some instances.

However in the case of Novotny’s seller, although the contract specified cash removing this risk, the seller said no because it also required a closing date just three weeks away.  The seller was in a very busy time in her work and was unable to organize a move that quickly so declined the contract.  A good offer in this situation would have allowed the seller enough time to move out comfortably.  However, for a different seller, someone who had already purchased another home, or who needed to move quickly to start a new job somewhere else, this would have been an offer to brag about.

There are a number of steps that buyers can take to increase the chances their offer will be accepted.  A big one is to provide proof they are good for the mortgage.  This means meeting with the lender before they look for a home and getting pre-approved for a loan.  Pre-approval means the lender has looked at the buyer’s financial information including their credit rating.  They then generate a letter stating the amount of loan the buyer would qualify for.  This is not final approval but is a good indication that the buyer is solid.  This letter is presented to the sellers by their agent along with the signed contract from the buyers.

Buyers can also show strength by putting down a larger down payment.  A seller looking at two offers, one with a 5 percent down FHA loan and one with a conventional loan, may choose the latter.  A 20 percent down conventional loan indicates a “stronger buyer,” Novotny said.

While the price may be the determining issue in many contracts, other factors can also come into play.  For example, although home sales are a business transaction, they can also be very personal, especially for someone who has lived a long time in the same house and has many nice memories associated with it.

Kehoe had a seller once who loved her house and wanted to sell it to buyers who would care about it as much as she did.  She received two contracts, one from an investor and one from some individuals who included a letter explaining how much they loved the house and why.  The seller accepted the contract from the individuals even though it was $3000 less than the investor’s offer.  Writing a letter like that is “the only way for the buyer to talk to the seller,” Kehoe said.  On another occasion she encouraged a buyer to write a similar letter and in that instance the seller accepted a contract that was $10,000 under the list price.

Another way for buyers to find favor with sellers is to offer a reasonable turnaround time on the home inspection, Novotny suggested.  With any home inspection there is risk that the inspector will find something the buyer doesn’t like and the seller is unwilling to fix.  In that case if the parties can’t come to some kind of agreement, the contract dies.  Learning about this early on can be a real benefit allowing the sellers to put their home back on the market quickly and the buyers to get on with finding another house.

If you plan to buy a home soon spend time educating yourself so you know what questions to ask, Telefus advises.  She also suggests that when you make an offer, keep some money aside for repairs especially if it is an older home.  If you are a seller, be prepared to “look seriously at offers when they come in,” she said since fall and winter are a slower time of year.

For the best information on your situation, consult your agent for advice.

By Celeste M. Smucker, PhD

Celeste Smucker is a writer, blogger and author who lives near Charlottesville.