First Time Home Buyer Article 9 Writing an Offer to Purchase a Home

Posted on | August 27, 2009 | Written by: Diane Donnelly

If you’ve been following my blog for the most recent 8 blog posts, you will have given yourself the opportunity to set yourself up for a great first time home purchase. Actually, most of what I have blogged about here can be well served for the first time home buyer, a move up buyer, or even a move down buyer. In any case, I want to talk today about writing an offer to purchase and how to make it a strong offer whether you are in a buyer’s market or a seller’s market.

First things first. What is a buyer’s and a seller’s market?

There are actually three types of real estate markets. They are :

A buyer’s market which means there are more than 7+ months of homes (inventory) on the market for sale.
A balanced market which means there are 5-7 months of homes on the market for sale.
And finally a seller’s market is less than 5 months of homes on the market for sale.

How do these markets impact you? HUGE!

Logic dictates if you are buying a home in a “buyer’s market”, you are able to reap the rewards of a competitive environment. A buyer’s market to the consumer means there are more houses for sale than there are buyers to buy them? Remember the laws of supply and demand? If the supply (number of homes on the market) is greater than the demand (the number of buyer’s for these homes), then prices go down. This translates to a win for the buyer! Seller’s are forced to sell their home at a better price than they would if it were a seller’s market.

Conversely, you can guess what buying in a seller’s market would mean. In this case, there are fewer homes on the market than there are buyer’s to buy them. Simple supply and demand in action again - Now the supply is lesser than the demand and prices go up. In this case, the buyer’s have to compete to buy the home and seller’s generally reap the benefit of this market. In this situation, you will often hear about a home with multiple offers or a bidding war.

Today, we are in a “buyer’s market”. You are getting ready to purchase your home in a near perfect situation. Here is what you, the buyer, are able to experience when you purchase your first home today:

Near historically low interest rates. This translates to you being able to buy more house, a larger house, a more expensive house than you could if interest rates were higher.
Large supply of homes on the market. This means you have more choices and can take more time to make a decision and not feel rushed like you would in a seller’s market.
Competitive pricing - Seller’s are competing for your business. They have to be realistic with their price in order to sell their home.
For the first time ever - an $8,000 tax credit given to you as an incentive to buy before the end of the year (see blog for details). This is an incentive to buy in order to help quell the ailing market, an effort by the government to help strengthen the market.

It is an absolutely terrific time to buy your first home. The stars are aligned for you. Congratulations! Your timing is impeccable!

Now with all of that said, let’s talk about how to write a great offer to purchase a home. There is more to consider when writing an offer than price alone. Price is a big one. Probably the biggest, but not always. The three components to writing an offer are:

Price - what price will you offer the seller to buy his home?
Terms - financial and non financial factors that will be included in the offer.
Contingencies - something that would need to happen in order for you to go to closing (settlement).

We all know what price is but what specifically are terms and contingencies? Terms are the factors, outside of the sales price of the home, that can either enhance or detract from your offer. For example, some considerations, or terms, that may be important to the seller may be:

The settlement date. The seller may want to settle before the end of the month so he doesn’t have to pay another mortgage payment. He may want to close on his home in 45 days so he can get his child in the new home before school starts. The settlement date may be a very motivating factor for the seller.
Closing Costs. Are you, the buyer, asking the seller to pay for any of your closing costs? Closing costs are generally paid for by the buyer, but can be negotiated for the seller to pay all or some of the costs.
Earnest Money Deposit. Are you prepared to make a strong offer and put down a higher deposit for the home? The lower the deposit, the higher the risk to the seller. The higher the deposit, the seller may feel you are more invested and are a lower risk of defaulting on the sale.
Home Warranty. Are you asking the seller’s to provide a home warranty? This type of warranty covers repairs or replacement of major systems in the home.
Conveyances. Are you asking for the shed to be included in the sale of the home? How about the pool supplies? The patio furniture?

Contingencies are factors that must be met prior to going to settlement. These could be inspections, financing, etc. For example, you may request to have a home inspection done and with that comes a clause that allows you to walk away from the contract if you find deficiencies in the home that you are unhappy with. A financing contingency means you must obtain a loan in order to purchase the home and if the mortgage company doesn’t give you a loan, you can walk away from the sale. Please understand that each of these contingencies and any other contingency has language that you must understand before signing an offer.

So when writing an offer it is important to remember to create a win-win for you and the seller. The most successful negotiations are those when each of the parties feel they got a fair deal, a good shake. It’s important to keep in mind that the motivation of the seller may determine what is more important - price, terms or contingencies. In other words, a seller who is in financial distress may just want to get out from under the mortgage and is willing to compromise on price as long as there are no contingencies. Whereas another seller in financial distress may find that price is the most important aspect of the sale and the terms and contingenices don’t play a critical role for the seller.

The difficult part here is the seller or the agent to the seller may not reveal the seller’s motivation. So remember, we are trying to create a win-win.

How to know what price to offer the seller? Your realtor will pull comparables for you. Comparables are homes that are similiar to the home you are purchasing in the same area as you are purchasing. If you are in a buyer’s market, you may be able to offer a little lower than the comparables suggest. In a seller’s market, you may want to offer a little more than the comparables suggest. Don’t worry about paying to much - you are protected by the appraisal required by the bank. The bank wants to make sure you are not paying more for the home than the home is worth.

When my team is preparing to write an offer, we will ask the listing agent (the agent who is working for the seller), when the seller would ideally like to settle. Why? Because if we are going to ask for a little more, (paying less than asking price, asking for closing help, asking for additional inclusions (the shed), etc. I want us to compensate by giving the seller a little more where we can. A strong offer to purchase, sales contract, includes a combination of these 3 major components and offers a win-win for you and the seller.

I hope this helps to open your mind up about the possibilites of writing an offer. There is more than just price.

If you know someone looking to buy in and around the Anne Arundel county area, please forward this blog to him and I would be honored to help them buy a home!

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Thanks for reading and live well!!!

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