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How to Make a Highly Compelling Offer |
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| A Mindset That Matters | ||||||||||||||||||||||||||||||||||||
| Buyer’s Financial Power | ||||||||||||||||||||||||||||||||||||
| Price – what to consider when deciding on price. | ||||||||||||||||||||||||||||||||||||
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| Terms of Purchase | ||||||||||||||||||||||||||||||||||||
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| Time of Closing | ||||||||||||||||||||||||||||||||||||
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| Earnest Money | ||||||||||||||||||||||||||||||||||||
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| A Mindset That Matters Everyone understandably wants to make the best deal possible. Many buyers assume price is the most compelling aspect of any offer they might present a seller. While it’s true that sellers definitely are interested in getting a good price for their home, money is not always the definitive factor. Sellers can, and often do, take the lower price of two offers because of other pivotal factors. Knowing all the critical issues enables you to develop an offer that appeals to the seller, whether or not the price is exactly what they were seeking. Imagine that a seller has two offers come in on the same day. One offer is $7,000 more than the other. Initially, you might assume the seller would take the higher offer. But, that often doesn’t happen. Here’s one example in which it didn’t. Which offer would you have chosen? Buyer Number One:
Buyer Number Two:
For $7,000, you might think the seller could easily pay for a property survey plus toss in the 2 year old appliances and hot tub. However, the seller didn’t go for it. Why? The sellers had already picked out a new home. It was in a new school district, and they wanted to move and get settled before the school year began. They were scheduled to close on their new house in six weeks, so the eight-week closing requested by Buyer #2 didn’t suit them. They were concerned about paying two mortgages (on the current house and the new house) should this deal fall through after closing on their next house. They could have tried to negotiate on the closing date, but they didn’t, because they also had other concerns. They wanted to be sure that the deal on their house would go through without any hitches, and they weren’t confident that Buyer #2 could or would make that happen. To them, a $1,000 earnest money deposit didn’t seem like a strong commitment. And, given the buyer wasn’t pre-approved, there was no guarantee that he was really prepared to swing the loan. There was nothing unusual about their property lines, so they had no idea why the buyer wanted a survey. The explanation given by buyer’s agent for this request was brief and not too convincing. Why wasn’t the legal description adequate? If he didn’t like what the survey said, would he walk out on the deal? All in all, they felt like Buyer #1 was a “bird in the hand” – a solid, serious buyer who would be able to close the deal within the time frame they wanted. They saw Buyer #2 as a “bird in the bush”. It could be a good deal, if it went through, but it would cause lots of complications if it didn’t. They would have to put their house on the market again and wait for another qualified buyer. Their peace of mind was worth more to them than the “potential” of extra money that might never materialize! Bottom line: a good solid (pre-approved) buyer who could get the deal closed in a shorter time frame seemed like the “better deal” for them, given their needs. I encourage buyers to try to think like the seller when preparing an offer to buy. Putting a deal together is a little like working on a jigsaw puzzle. Certain pieces need to fit together. You need to know the shape of one part to find the next part. What follows are five pivotal factors you need to consider in order to write a compelling offer. They are presented somewhat in order of usual importance to a seller. But keep in mind that different sellers have different needs. A good Realtor will do her/his best to determine the seller’s needs so the offer can be written in terms that are most appealing, while still representing the buyer’s best interests.
Five Pivotal Factors In a Compelling Offer
1)
Buyer’s Financial Power There’s a big difference between being pre-qualified and being pre-approved. A person can get pre-approved for a loan over the phone in two minutes. It isn’t worth much, if anything. It means that, given what the applicant stated, the lender calculates what he/she be able to borrow. However, it’s just hot air on both sides until further evidence is presented by both parties. Often, the applicant fails to remember or state a financial obligation, or knows too little about their current credit rating and how that will impact the lender’s attitudes. The lender, eager to get the potential customer into the office, often is generous (on the phone at least) about how much their institution might be willing to loan. To really know what a buyer is qualified to borrow, the lender will request documentation to back up the claims made in the initial conversation. Credit checks must be run. Questions will be asked. Only then can a reputable lending institution state that you truly are pre-approved for a loan, and for what amount. Once all this has happened, the lender will provide a written statement that their institution will (probably) follow through on their offer to lend. It’s called pre-approval because the actual approval will be dependant upon the house passing the lender’s inspection (appraisal). Bottom line, you need to be pre-approved by a reputable lending institution to position yourself well when presenting an offer. A pre-qualification simply carries no weight in today’s real estate world. Along with being pre-approved, the sellers will often consider the amount of Earnest Money being offered and the amount of money being put down on the loan to be signals of the buyer’s financial power and ability to carry through with the proposed offer. An oft overlooked or under considered factor is the how the agent represents the buyer, and how this impacts the sellers’ impressions. The buyer’s agent must be very savvy in presenting the buyer as quite capable of fulfilling the financial demands of the contract. At the same time, the agent does not want to indicate that the buyer is prepared to pay any more than what is being offered. You want someone with tact and ability representing you in this transaction.
2) Price
Of course your personal finances must also be pivotal in determining the price.
The following things have little or nothing to do with how much you should offer a seller:
A seasoned realtor will consider all the factors and advise you about a good price to offer. Remember, price is just one important variable. You don’t always have to offer top dollar to present a compelling offer.
3)
Terms of Purchase – inspections,
repairs, personal property inclusions, etc. The buyer is free to ask for just about anything. If you learn that the seller is firm about their price but you think it’s a little high, perhaps you can work out terms that make it more appealing to you. I’ve had buyers ask for (and get) - among other things - the master bedroom furniture, seller financing of 10% for three years, a new fence erected, a garage foundation poured, an old tool shed demolished and removed. Not all on the same deal, of course! But you get the idea. Similarly, if you are coming in with a low price, the seller is likely to react unfavorably to a a clause for unlimited repairs at the seller’s expense or a request to delay closing for 3 months. The trick to negotiating the best terms possible is to have the Realtor find out as much as possible about the seller’s needs and desires and to measure these along with your needs and desires. Sometimes, it isn’t even what you ask for; it’s how it’s presented or how it’s worded! You want someone who can handle this part of your contract/offer with creativity, wisdom and tact.
4) Time of Closing The term “closing” actually encompasses several stages of the buying process. When not fully understood or loosely used, the related stages/terms can lead to significant misunderstandings. These stages - signing, funding, recording and possession - are covered in more detail elsewhere on this website, under Essential Steps (to the Home Buying Process). In this article, we are primarily concerned with the funding aspect (referred to here as “closing”) and possession. Typically, either the buyer or the seller has specific needs about either the closing date or possession. When both buyer and seller have specific needs, these dates can become serious negotiating points. And, when it happens that the needs of each party clash, this often leads to complex negotiations that must be handled with sensitivity and serious consideration. The example at the beginning of this article demonstrated a case in which the closing date was a significant factor in the seller’s decision. There are an infinite number of reasons that these dates may be sensitive to one or the other parties. For example, a renter may need a specific amount of time to “give notice” to the landlord, or must be out by a particular date. A seller may be transferring to another state, and want the deal to be completed prior to departure. The seller may want the closing to coincide exactly with the date they need funds to close on their next home. “Possession” (the date the new buyer can actually move into their new home) can also be an important matter. Often sellers want to remain in the house for a few days after the funding/closing. This is because they don’t want to move until they know for sure that the deal will close. Sometimes, if a house is vacant, the buyer wants to move in prior to closing because it coincides with their need to vacate their former residence. I once handled a transaction in which the owners wanted to use the cash from the sale of their home to complete the building of their dream home. However, they wanted to remain in the home for three months after closing while the new home got it’s finishing touches. Few buyers were prepared to wait three months to move into a house they’d just bought. The buyer’s flexibility on date of possession enabled them to swing a more lucrative deal. Often, terms or finances are rearranged to make it more appealing for one party to comply with the other party’s needs for a specific closing date or date of possession. Both buyers and sellers get a sense of how cooperative the other party may be during the transaction through the negotiations about these dates. One party or the other can (and often does) develop an attitude that gets in the way at other points along the way. A good Realtor will work sensitively and sensibly to learn what the seller’s needs are, and to assist you in presenting an offer that represents your needs while still being appealing to the seller.
5) Earnest Money Deposit In writing a compelling offer, you want to offer an amount that will enable the seller to feel comfortable that you are “earnest” about your desire and intent to buy. It needs to be an amount that a typical person would not reasonably walk away from simply because she/he got cold feet or found another house. Likewise, if a person did have a change of mind or found a more preferable house, the earnest money needs to be enough that a seller would feel reasonably compensated for the frustration of having taken their home off the market and then starting all over again. What amount is that? Some realtor’s suggest 3-5% of the purchase price. I think it depends on all the other factors with the offer. If the price offered is close to the asking price, the buyer is pre-approved, can meet the seller’s needs for closing and has no unusual terms, a smaller earnest money deposit can be considered. If there is anything that would make the seller perceive the buyer or the offer as somewhat “weak”, I suggest a stronger earnest money deposit. Obviously, making a compelling offer depends on a multitude of possibilities and considerations. Want
to talk about it? I regret that in an effort to foil spammers, who have previously high-jacked my e-mail address, I have removed the automatic link to my e-mail. Please type the address, using the @ symbol to replace the word at, and use the period key to replace the word dot in the e-mail address above. Do not leave spaces. They are used here only to help you read the address.
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{ Site Overview }{ Essential Steps }{ Compelling Offers }{ Scary Parts }{ Resources }{ About Deborah }{ Seller Info }{ Home } © 2008 |
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