Making a Successful Purchase - Part Two - The Purchase
3-Part Series on Making a Successful Purchase
Part Two: The Purchase
A house will sell for whatever the market says it’s worth, so what we’re really trying to accomplish is a meeting of the minds.
Congratulations! You’ve found a house you want to buy! It’s truly an exciting time when all that Preparation leads you to a home that “checks all the boxes” and compels you to make an offer.
Let’s discuss some of the different points of negotiation and the logistics of the purchasing process.
Setting the stage
We always take this opportunity to provide a little bit of perspective to the situation. Keller Williams has a value system that we at The Porter Group aspire to maintain. One of the values is Win-Win, which essentially means that in every transaction, we will remember that if it isn’t a win for every party involved, there is no deal.
That doesn’t mean that we don’t try to maximize our seller’s bottom line, or negotiate the best price for our buyers, but it does mean that we are seeking a “meeting of the minds” at the end of the day. You’ve probably heard that a house will sell for whatever the market says it should sell for, so what we have to do is work with the opposing agent (nine times out of ten, there will be an agent representing the other party) to figure out how we can achieve the goals of both parties.
Now, using that perspective, let’s talk about this “meeting of the minds” we’re seeking.
Financial Negotiations
The first point of negotiation that everyone will consider is the sales price. Not only is it the most visible part of the sale, but it’s also the largest number in the transaction and a lot of other financial figures are a percentage of the sales price.
As a buyer, the closing costs for sale are going to be a big consideration, especially if you’re getting a mortgage to finance a portion of the sale. Closing costs are due at the closing table, so it’s important to understand that these fees are coming out of your pocket at closing, in addition to your downpayment. Depending upon the sales price and loan amount, you can see closing costs range anywhere from 2-5 percent of the sales price.
Add the fact that you’re already making a downpayment of 3-25 percent (or more!) of the sales price, and you can see why this 2-5 percent in closing costs is such a huge consideration in the transaction.
As a result, you’ll often hear of sellers paying some of the buyer’s closing costs in order to finalize the deal. If you’re short on cash, it may be worth considering an offer over the asking price of the home, having the seller contribute towards your closing costs, and effectively financing your closing costs. We see it every day, and as long as the house will appraise at the inflated purchase price, it can make a huge difference in what you’re able to afford.
The sales price and closing costs are largely determined by the market, and a good real estate agent can tell you what to expect, based on recent comparable sales.
It’s also true that the type of financing a buyer uses can be a point of negotiation. VA and FHA loans can sometimes carry stricter appraisals and/or repairs requirements that a conventional mortgage would not. A seller may like everything about your offer except the type of financing you intend to pursue. If that’s the case and you are able to qualify for a conventional loan, it might be worth it to get the house you love.
Let’s refer to all of these considerations the financial negotiations of a purchase.
Performance Deadlines
Another group of considerations are the performance deadlines. Within most states’ standardized sales contracts, you’ll find obligations for both parties - things like loan applications, home inspections, title searches, HOA documents deliveries, and the closing date for the sale.
More often than not, a seller wants to close the sale as soon as possible in order to cash in on their sale and finance their new home. If you’re able to close on a sale within 10 days of a contract being signed (because you have a great lending partner or you’re paying cash), that’s going to be really attractive to a lot of sellers.
However, some sellers may be more inclined to work with an extended closing period. Maybe they still haven’t found their next home, or they’re waiting on a job transfer to finalize or a new home to be completed. If you’re able to be flexible on the closing and/or date of possession, that might be more valuable to a seller than any sales price anyone else can offer them.
Buyers can make their purchase offers more attractive by offering more abbreviated performance deadlines.
Sellers take a big risk when their home goes under contract. The house is essentially off the market while in escrow. If they buyer ends up not closing on the sale, not only have they lost the marketing time from contract to termination, but they also now have to answer to future prospective buyers why the home didn’t sell. That can be a difficult scenario to overcome.
Therefore, it can be incredibly beneficial to offer more restrictive timelines on your performance on the contract. If you can get a home inspector in the house within 5 days, versus asking for three weeks to inspect the house, doesn’t that seem more attractive to a seller? You bet!
Contingency Clauses
Lastly, let’s take a look at contingencies.
The typical standardized purchase contract will be riddled with contingencies. You can think of them as “subject to” clauses. Three big ones are inspections, appraisal, and financing. If the house fails inspections, the home doesn’t appraise for the purchase price, or the buyer is denied financing, a contract contingent upon these things can be terminated, and the buyer is returned their earnest money.
Starting to understand the risk sellers take by accepting a contract?
It is well within a seller’s rights to negotiate a contract that is not contingent upon these terms. If a contract is not contingent upon the appraised value equaling (or exceeding) the sales price on the contract, a buyer must come up with the additional funds to meet the difference between the loan amount and sales price (resulting in a lower loan percentage), or forfeit their earnest money and terminate the contract.
Said another way, a buyer can make their offer more attractive by eliminating as many contingencies as possible, given their situation.
For example, a very common, but not standard, contingency is one to sell the buyer’s current home. Most people don’t want to pay two mortgages, but if you’re able to afford the new home without selling your current one, that’s one less contingency the seller has to wait to be satisfied, and your offer just became that much more attractive.
There are, of course, some contingencies I would not recommend forfeiting as a buyer. Inspections are a good example. While you don’t always have to request repairs, there are very limited circumstances in which I would purchase a property without an inspection contingency. Clear title is another one. However, just because I wouldn’t recommend it, that doesn’t mean you can’t make an offer not subject to clear title. Ever heard of an auction sale?
Now that you have an idea of some of the different negotiable items in a purchase contract, it’s time we paint a picture of the offer process itself.
The Back and Forth
As we’ve already discussed, most states’ realtor associations will have a standardized purchase contract that details the handling of all the different aspects - how title will be transferred, what items are assumed to stay with the property upon sale, repercussions for termination, etc. - with fill-in-the-blank spaces for items that are often negotiated - sales price, closing costs, performance deadlines, and the other things we’ve briefly covered.
After discussing how to craft your offer with your real estate agent, you will sign the offer (probably electronically, in most cases), and your agent will present the offer to the listing agent, usually with a letter from a financial institution (or a bank statement in a cash offer) showing you have the financial means to close on the sale.
I don’t ever recommend submitting a purchase offer without an expiration date and time on the offer. You’ve put a lot of effort into this, and the seller should respect that by giving you a response within a reasonable amount of time. If due to travel, or some other extenuating circumstance, the seller is unable to respond to your offer before it expires, you are not obligated to perform on the contract. If you feel the seller is acting in good faith and wish to continue to pursue the purchase, you can always submit another offer.
99 times out of 100, the seller’s agent will be required to present all purchase offers, regardless of his or her opinion of viability, to the seller. In rare instances, the seller will instruct his or her agent in writing to only present offers with certain criteria. Once the seller receives the offer, they usually have three options.
They can choose to accept the offer as it’s written, reject the offer, or submit a counter offer to you.
In every state we do business, the counter offers are not compounding. Regardless of the number of counters within a negotiation, only the final counter offer and original purchase offer state the terms and conditions of the contract.
For example, if you submit an offer to a seller to buy their home for $300,000 and ask for $5,000 in closing cost assistance, then they submit a counter offer for $3,000 and a different closing date that doesn’t work for you, your counter offer (second counter in the sequence) will only counter your original offer. So if you accept the reduced closing cost assistance, but cannot accept the seller’s proposed closing date, your counter offer two will need only to state the reduced closing costs, and whatever closing date was in your original offer will apply.
During this negotiation process, be sure your counter offers have expiration dates and times as well. You don’t want a seller using your purchase offer as leverage with other prospective buyers.
Multiple Offers
Speaking of which, multiple offer scenarios are stressful on everyone.
When a home in great condition and priced well hits the market, people notice. As long as these low inventory trends continue, well-priced homes are sure to elicit multiple offers. You did a lot of work in Part One of this series becoming a hyper-local expert, and you need to rely on that knowledge now.
Most of the time, you won’t know what the competing offers are, and few agents will tell other parties what the best offer is, so make the offer you’re excited to make, and let the chips fall where they may. It’s hard to keep your emotions in check, but you can’t allow the excitement or competitive nature of a multiple offer situation allow you to make an ill-advised purchase.
This is a huge investment, and the stakes are too high.
The Meeting of the Minds
You’ll probably learn a lot about what is important to the sellers if/when they make their first counter offer. Sometimes the gap is just too big to overcome, but if two reasonable parties can negotiate in good faith, a Win-Win scenario can usually be found.
Once an offering party receives notification of acceptance by the other party (in writing), the clock starts on all of your performance deadlines.
Cheers (kinda)!
Congratulations - you got the house!
As most realtors will tell you, now the real work begins. A lot can still happen, so don’t go counting your eggs just yet. As I put it to our clients, it’s okay to celebrate. While I wouldn’t pop the champagne, we can probably go ahead and purchase it.
We’ll detail the steps towards owning your new home in Part Three of this series: the Closing Process.