REGION – Buying a home in today’s market will likely require you to make an offer on more than one home.
In fact, 42% of buyers who make an offer on a home do so multiple times before succeeding in buying one, according to the Zillow Group Consumer Housing Trends Report 2021. Multiple offers were most common among Gen Z and Millennial buyers, ages 18 to 40.
Competing against other buyers can be an emotional experience, especially if you’re doing it for the first time. That’s especially true in a sellers’ market, where there are more buyers than homes listed for sale.
The good news is you don’t have to go it alone. A good local agent can help you craft strategies that help you stand out, regardless of the conditions in your market.
If this is your first time buying – or if it’s been a while since you bought a house – here’s an overview of how the process will typically unfold.
Steps to putting an offer on a house
First, find the right home. Attend showings and open houses, search on Zillow and review listings picked for you by your real estate agent. If you’re serious about shopping, you can level up your search by using technology to alert you to new listings that fit the home characteristics you’re looking for in the neighborhood(s) of your choice.
Next, determine if the home fits your budget. Do you have enough for the down payment? Can you afford the estimated monthly payment on the home? Most mortgage lenders will include property taxes and homeowners insurance in your monthly payment, so be sure to take them into account. If you’re in a planned community or condominium, add in any homeowner association dues.
Then compare the home price to other recent sales of similar homes nearby. Have your real estate agent run “comps,” or comparisons, which will show you what similar homes in the area are selling for and/or have sold for in the recent past. The comps will give you a feel for whether the seller is asking a reasonable price for the home. If you’re searching on Zillow, each home listing includes a section showing comparable homes for sale. The information could help you shape your offer if the price of the home you’re making an offer on is considerably higher than the comps.
Determine your offer price, contingencies, and timeline. In a competitive market where multiple offers are submitted, contingencies and timeline can be the deciding factors in whether your offer is accepted. If you’re buying in a seller’s market, be sure to ask your agent for insights on what could make your offer more attractive to the sellers whose home you want to buy.
Every seller has their own needs, possibly including time to find another home to buy after theirs sells, so take a holistic view of the situation, and see how your offer can meet their needs and yours.
If you need room to negotiate, make your offer lower than the maximum price you’re willing or able to pay. In a seller’s market, where homes are selling quickly and over list price, that may mean shopping for listings below what you can afford. You’ll also need to determine when you want to officially take ownership of the home, and what contingencies, including inspections and appraisals, you want to include in the offer.
The next step is to draft and submit your offer. Your offer should be in the form of a purchase and sale agreement. Your agent will draft this for you, and you’ll sign or esign before it’s submitted.
If your offer differs substantially from the asking price, you should consider including a letter summarizing the market conditions or comparative market analyses that led to your offer. The seller’s agent is legally bound to provide anything you present in writing to the seller. A respectful letter can help them understand your offer and your interpretation of the market conditions.
The purchase and sale agreement becomes legally binding if the seller accepts your offer. At that point, you’re buying a house, and the purchase and sale contract will become a key part of the paperwork that guides the sale.
Upon reviewing your offer, the seller might accept your offer as-is, decline the offer altogether, or counter the offer to start the negotiating process. If the seller accepts your offer, they will sign the purchase and sale contract. If they decline your offer, negotiations end. If they counter by offering terms, you can either accept some or all of their counteroffer, or counter back.
It’s common for the negotiations to go a few rounds, with the buyer and seller providing counteroffers back and forth, usually with the advice and assistance of their agents. Price isn’t the only thing that can be negotiated. You might also find yourself negotiating repairs, contingencies, furnishings, or fixtures, and closing timeline.
Once both parties agree to the deal – including price, inspection, negotiated repairs, closing date, etc. – the contract is updated accordingly, the home is officially “under contract,” and the listing will typically show the sale as “pending.” Assuming all goes well with contingencies and financing, and depending on your closing date, you’ll be a homeowner in about 30-45 days.
While some elements of your offer will vary based on your location and market conditions, a few basic items can be found in all property purchase offers: property address, buyer’s name, seller’s name, offer price, earnest money amount, contingencies (like financing, home sale, inspection, or appraisal) or waived contingencies, identification of title company or closing attorney (where applicable), credits if you are requesting them as part of the offer, offer expiration date and time, and proposed closing date.
Anyone can put in an offer on a house, and they should be aware that residential purchase and sale contracts are legally binding. Once you are under contract, it will be difficult to back out of the deal other than through a contingency clause in the contract. Such contingencies include things like inspections, clear ownership records, and the ability to secure financing, all of which have to align with a timeline for getting them done.
If, for example, you included a contingency for a home inspection that will take place within two weeks, and your inspector discovers that the roof has a leak, you can back out of the contract, or ask the seller to repair the roof or reduce the price so you can have it fixed.
Backing out of a contract that has no contingencies, or when the deadline for a contingency has passed, may mean that you lose the earnest money you put down when you made the offer.
The best way to entice a seller into accepting your offer – or at least countering it – is by offering their full asking price. In a competitive market or a situation where the seller has received multiple offers, you may even need to offer more than the asking price.
Not all homes sell for their initial asking price, and not every home is priced correctly, so before you bust your budget, consider some non-price-related ways to strengthen your offer in a competitive market – your agent should be able to talk to the listing agent about what could make your offer more appealing to the specific seller.
According to Zillow research, the typical U.S. home with a price cut sold for 96.6% of its listing price in March 2021. This number varies from market to market – in some very competitive markets, the typical home will fetch more than the asking price, and in some slower-moving areas, the typical home will fetch less. Your agent should be able to help you gauge market conditions.
Consider an escalation clause. In a multiple-offer scenario, the last thing you want to do is assume another buyer is paying far above the asking price and try to top that imaginary number. You might get the property, but you could eventually realize you could have gotten it for less. Rather than overshoot, ask your agent about including an escalation clause, which states that you’re willing to pay a specific dollar amount over the seller’s next highest offer.
A home is listed for $250,000 and it has three other offers. You submit an offer of $250,000 with an escalation clause that says you’ll pay $1,000 more than the highest offer, up to a maximum offer price of $260,000. Then, if another buyer comes in at $255,000, you’ll automatically offer $256,000 to secure the deal, without going over the maximum amount you’re comfortable spending.
Accommodate the seller’s timeline. If the seller needs or wants to close the sale quickly, and you’re sure you want to buy their home, try to accommodate their schedule as much as possible. For some sellers, like those buying at the same time or relocating for work, timeline is even more important than price.
Consider whether to waive or include contingencies. The majority of buyers (80%) include contingencies in their offer, according to Zillow’s trends report. Contingencies allow you to cancel the sale while protecting your earnest money deposit if you’re unwilling or unable to proceed with the closing process. However, in a competitive market, some buyers risk waiving contingencies to help their offer stand out.
For instance, cash buyers might remove the appraisal contingency that is typically required of buyers who purchase their home with a mortgage. Waiving contingencies is considered risky because you could be on the hook for expensive repairs that might have been uncovered in an inspection, or you lose your right to back out of the sale if your financing falls through, among other things.
Some buyers also include a home sale contingency, where their offer is contingent on selling the home they currently own. Those buyers typically need to use the equity from a home they’re selling to purchase a new home, but this can make their offer less appealing to a seller who is looking to lockdown a sale that fits their own timeline and priorities..
Put down more earnest money, also called “good faith money,” because it’s money you pay upfront to show the seller that you’re serious about buying their home. The earnest money is applied toward your total down payment and closing costs when the sale is completed. Earnest money can telegraph your commitment to the purchase, and assure the sellers that you won’t back out without a reason. Real estate experts say you can expect to put down 1% to 3% of the purchase price, but the amount can vary according to local market conditions.
So-called “love letters,” intended to tug on a seller’s heartstrings, can put buyers and agents at risk of fair housing violations. These letters can include personal demographic information about the buyer, unlawfully swaying a seller’s decision, which can violate the federal Fair Housing Act and other state and local laws against housing discrimination.
Writing to a seller also is not a successful strategy for buyers – according to the agents surveyed, love letters are the least important factor for sellers in the current market.
The survey found that in their last few transactions as a buyer’s agent, only about 1 in 10 agents reported always using a love letter (13%).
Bottom line: avoid writing a letter, and focus on making your offer the best it can be.
Information provided by Zillow Group.