Making An Offer on A Home
Should I Try to Time The Market?
There are times when the economy is brisk and everyone feels confident about their prospects for the future. As a result, they spend money. People eat out more, buy new cars, and……they buy new homes
Then, for one reason or another, the economy slows. Companies lay off employees and consumers are more careful about where they spend money, perhaps saving more than usual. As a result, the economy decelerates even further. If it slows enough, we have a recession.
During such a time, fewer people are buying homes. Even so, some homeowners find themselves in a situation where they must sell. Families grow beyond the capacity of the home, employees get relocated, and some may even find themselves unable to make their mortgage payment , perhaps because of a layoff in the family.
But waiting for the “right moment” to buy a home is generally a losing proposition. One problem is that interest rates are generally higher during a depressed market, and income may not be keeping up. For that reason, fewer people can qualify for a home purchase than in more prosperous times. Interest rates and home prices tend to move in reverse tandem: When home prices are declining, interest rates are rising. While it may seem like a low-price environment is the right time to buy, the higher interest rates can translate into more painful monthly mortgage payments. In addition, the business cycle can change over time. Since 1983, we have had two fairly long expansions with only a slight recession in between. You would not want to wait nine years to buy a home, would you? You could miss out on a substantial amount of appreciation by waiting, and end up paying much higher prices.
Determining What Price to Offer
When you prepare an offer to purchase a home, you already know what price the seller is asking for. But how do you determine what to offer, and what you should realistically expect to pay?
Comparable Sales
First, your agent will look at recent sales of similar properties. These are called “comparable sales” and are referred to as “comps.” Your agent will compare prices of homes that are similar in square footage, number of bedrooms and bathrooms, garage space, lot size, and type of construction. The comps should be as geographically close to the listed home as possible. Then, she will make adjustments for factors such as condition of the property, upgrades and improvements, layout and desirability of lot, and orientation of the house, among other things. She should also understand the circumstances of the seller, as well as general market conditions and those specific to that neighborhood.
There are several sources of information on comparable sales, all of which are easily accessed by a real estate agent. It is somewhat more difficult for the general public to access this data, and in some cases impossible. Two of the most obvious information sources are the Public Records and the Multiple Listing Service.
There is often some back-and-forth between the buyer and the seller after an offer is made. While this depends on whether you are in a buyer’s or a seller’s market, if you make an offer that is substantially below asking, you will most likely receive a counteroffer from the seller. If the offer is far too low, note that the seller may not respond at all.
Condition of the Property
When evaluating a home’s condition, there are a number of things to consider. Structural condition is most important—categories such as walls, ceilings, floors, doors and windows. Then paint, carpets, and floor coverings. Pay special attention to bathrooms and bedrooms and whether the plumbing and electricity appear to work efficiently. Look at the fixtures, such as light switches, doorknobs, and drawer handles.
Home Improvements
Even when comparing exact model matches within a tract of homes, you should note whether the previous owners have made any substantial improvements. Cosmetic changes such as paint should be largely ignored when determining value, but major improvements should be taken into account. Most important would be room additions, especially bedrooms and bathrooms. Other items, like expensive hardwood flooring or a swimming pool should be taken into account, too, but should be discounted. A pool that costs $20,000 to install does not normally add $20,000 in value to the home. An exception might be a pool in a very hot climate where most of the comps, for some reason, do not have pools. A kitchen or bathroom remodel can add a great deal of value to a home. Rely on your agent to give you guidance in this area.
Packaging an Offer
Currently, a complete offer package in California consists of about 25 pages! An offer is far more than a letter stating, “I want to buy your house for $x.” To protect and properly service both the buyer and the seller, the purchase offer is a lengthy compilation presented on specific forms that are distributed to agents by the California Association of Realtors. The offer is also referred to as “the purchase agreement,” or “the contract.” It is very important that all key terms be stated precisely and correctly in the offer, because the offer becomes the legally binding contract if the offer is accepted and you open escrow. Remember: The offer is the contract! Buyers and sellers can agree to amend the terms of the contract during the escrow as well, but a buyer can not unilaterally decide to change any of the terms once escrow has been opened. Neither can a seller. So specify the terms exactly as you want them. The seller can always write a counteroffer, asking you to change some of the purchase terms in the offer.
The offer will stipulate all sorts of things, including what the seller and buyer should each pay for (e.g. seller pays to repair existing termite damage, buyer pays for a certain portion of the escrow & title costs), the amount of down payment, when the escrow is to close, and how many days each party has to fulfill various obligations. The package also contains multiple disclosures signed by you and your agent, and should include a preapproval letter from a lender, and a copy of an earnest-money check. The earnest-money check is usually 3%, but in a slow market sellers will sometimes settle for as little as 1%. This check is deposited with escrow upon acceptance of the offer.
Contrary to what many people believe, the seller does not receive the earnest money until after the sale has closed. Until then, the money remains “in escrow,” meaning with the escrow company that helps manage the entire transaction. This money is a safety-valve for the seller: If you withdraw from the contract past the date that you can legally do so, the seller can keep the earnest-money deposit as damages.
It is also a good idea for your agent to introduce you to the seller via a letter that makes you look like the ideal buyer! A great cover letter should make both an emotional and a business impression on the seller, making you seem like the fabulous and deserving person that you are, and like a solid and committed homebuyer!
The buyer and seller each have various obligations as well as rights, and professional advice is the only way to ensure that you are entirely aware of both. Consult your agent if you have questions, and make sure everything is crystal clear to you!