Making an Offer

Now you have your team together, you have evaluated deal after deal. You’ve gotten discouraged and said that there just aren’t any deals in your area. But you kept going.

Meanwhile, your cash reserves for that down payment have been increasing. Then the day comes and that magic amazing deal comes across and you wonder why no one else bought it first. Maybe the listing agent missed that there was an extra room in the house (it happens!), or the square footage was wrong, or you saw that one of the garage spaces could be converted into another bedroom, or you realized that what everybody else hated could be fixed with an inexpensive cosmetic repair. The list is endless, the place just needed someone with a vision. And you are that person.

When this scenario happens, jump on it right away. Good thing you’ve analyzed a hundred other offers and rejected them all for some reason. This enabled you to just know that this one has a shot at working. You’ll get a great rush of endorphins and feel awesome. Don’t forget that there are others like us out there. If they see this deal, they will also go after it. Time is of the essence (to use a goofy legalism).

Your Offer – Contingencies

I’m going to assume that you got your income and expense numbers right. Based on those numbers, you already have a bottom-dollar number figured out. Don’t ever change this. Believe me, there will be temptation to bend the number and that temptation is a killer.

Next, think about all the other must-haves for you to make an offer. Your agent will help you write this up, but you need a feel for what are the deal-breakers for you. You must have an inspection contingency and you probably need a financing contingency unless you have the entire purchase price in cash. When can your bank close? In my area it is usually no sooner than 45 days. Those are the typical contingencies in a residential sale. In a commercial sale, there will be many more, but there is way too much to talk about to get into that today.

These contingencies are the things that can get you out of a deal that isn’t working out. Don’t take that to mean if you get cold feet or another deal comes around you can just quit. Contingencies are for unforeseen problems with the deal that you couldn’t have known before making the offer, but cause the deal to fail. Such as not being able to get a loan from a bank. Or there is some fundamental problem with the house that you couldn’t have known about until the inspection.

If you have learned anything about real estate, you will never just quit the deal when something like this happens. These are opportunities for renegotiation. Some people will put these in knowing that they will use them to get a lower price. This is called ‘re-trading’ and is frowned-upon. But it is a gray area. You might walk though a house and see a crack in the foundation. Don’t panic, cracks are usual. It’s just that you don’t know whether it is a problem or not. Your offer price is based on it not being a problem. Your inspection may or may not reveal a problem. If it does, then it is right that the seller must mitigate the problem or drop the price.

What if you already knew there was a problem?
OK, what if the seller disclosed that the windows are bad? You knew that needed to be fixed. Their asking price and your offer price should be decreased by the cost to fix. Your inspector will find that problem and you shouldn’t then ask the seller to decrease the price for something you already knew about and accounted for. That would be re-trading and will give you a bad reputation. Maybe that is not important for a homeowner, but it is if you ever want this to be your business.

Your Offer – Timing

This is the boring part of the contract but it is the one that is most stressful to me (as an agent writing offers). You will need to agree to a date after which you cannot do more inspections, a date to complete negotiation on inspections, a date to give the seller proof of financial eligibility (like a bank pre-approval), proof of funds (once the bank agrees to give you a loan), a date that the offer expires, and closing date.

There are a lot of details around these dates and it would be too much to write here. Your agent will be very helpful in navigating these deals. For instance, you might give an expiration date 24 hours from your offer. This is fine for a residential seller, but if it is an REO (bank-owned), they won’t be able to give you a response for much longer. The listing agent will know how long it will take.

Step Into the Shoes of the Seller

The seller’s mindset will be very different depending on who the seller is. Sometimes, you can get clues to this mindset. Maybe it is a residential seller and the house is vacant. That might mean that the seller needed to move to a different location and now has a second house and may be eager to sell quickly. If you can give them a quick sale, they might be willing to accept a lower price.

Similarly, in a REO, the bank wants that place sold yesterday, but there are multiple layers of approval necessary. Look at the name of the bank. If it is local, you might be able to deal with them more. If it is a large national bank, you will be dealing with a bean counter in New Jersey who has 10 minutes to look at your offer and make a decision. These offers need to be as simple as possible and usually will boil down to the offer price. If this price is less than a certain percent of the bank’s appraisal it will probably be rejected out of hand. That percentage will change based on how long the bank has held the property.

Now, Make Your Offer

Be sure to consider if there is any personal property in the home you want given to you as part of the sale. A washing machine is personal property. In my state, this property is listed on an addendum to the offer. I like asking for a lot of stuff here because they are all great things to negotiate. People tend to attach an unrealistic value to something like a washer – they can pay a moving company to move it to their new house and then they save $350! They couldn’t possibly part with it. All of these are great negotiating points for later when you can remove them for some concession from the seller.

Sign the dotted line on the bottom and send it away. Experience the excitement and nervousness of waiting for the seller’s response to your offer.

But don’t relax, it ain’t over yet.