How to Make an Offer on a House and What to Avoid
Making an offer on a house is one of the most nerve-racking and exciting things you can do, especially if you’re a first-time buyer. You’re going from a tenant to a homeowner; from bad debt to good debt, but in doing so, you’re committing to one of the biggest purchases you will ever make.
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Understanding how this process works before you take your first steps will allow you to avoid costly mistakes and deal with any of the mishaps, complications, and difficulties that can occur.
How Much Should You Offer?
Once you find a house that you like and decide to place a bid, the fun and the excitement begins.
The first big question you have to answer is, how much should you offer?
This is not a straightforward question, as there are several factors at play. The important thing to remember, however, is that the rule of supply and demand is as important here as it is anywhere else.
If the house has only been on the market for a few weeks and has been viewed several times, with numerous interested parties waiting in the wings, you’ll have very little leeway. Negotiation is at its most effective when you’re the only one interested, when your voice is the only one they can hear.
Trying to negotiate a rock-bottom price when demand is high is like threatening Coca Cola that if you don’t give you a free drink, you’ll never buy from them again. At that point, you don’t have the power you think you have, and can’t have things your own way.
If, however, the house has been on the market for more than a few weeks and has received little interest, you can offer much less than the asking price.
A good rule of thumb is homeowners are least likely to negotiate when the house is newly listed, has recently received offers or has recently been reduced, and more likely when the house has been on the market for at least a few weeks without any interest. The homeowner’s personal circumstances and the local housing market will also impact the price.
On average, houses sell for around 5% less than the asking price, and we recommend offering as much as 20% less when the house has been listed without interest for a long time, and 10% when it’s only a few weeks old. It’s highly unlikely that they will accept straightaway, but it gives you a good starting point and means you’re more likely to settle around that 5% mark.
Your buyer’s agent can provide you with details about the house and its position in the market and can also recommend the ideal starting bid.
The Process of Making an Offer
Now that you know how much to bid, it’s time to look at how the actual bidding process works:
- View the house and if you like what you see, you can arrange additional viewings and discuss your options.
- Make an offer, preferably one that is below the asking price to account for a counteroffer.
- The seller will either refuse, accept or counter the offer.
- Refuse: If they refuse, you can make another offer or move onto another house.
- Accept: The process can begin in earnest.
- Counter: You will be presented with another offer that you can counter, accept or walk away from.
- You can send as many offers back and forward as you wish. There are no technically no limits other than the seller’s patience. You also run the risk of another buyer offering a higher amount and buying the house from under you.
- Once the offer has been accepted, a purchase agreement needs to be signed. From that moment on, the buyer and the seller are under contract and must abide by the terms of that contract.
Tips for Making an Offer
Real estate agents understand the buying process more than anyone and will be happy to help you, providing tips, advice, and guidance where needed. Use your own buyer’s agent and don’t rely on the seller’s agent, as they already have a dog in the race and may be more than a little biased.
The following tips can also help you when making an offer on a house.
Keep Your Options Open
Reduce your chances of rejection and disappointment by keeping your options open and not getting too invested in a single house. This is hard, especially if you’ve viewed many houses, struggled to find anything that ticks all boxes, and suddenly come across the perfect home. But by devoting yourself too much to a single house you risk paying more than it’s worth and you’ll also feel dejected if the house slips through your fingers.
Keep your options open, remember that other houses exist, and don’t go overboard when bidding.
Take Your Time
This is a long, slow, and drawn-out process. And that’s a good thing, because you’re making a massive decision that will impact on the rest of your life. The more you try to rush things, the more likely you are to make a mistake that you will regret further down the line.
Take your time when viewing, negotiating, and preparing the contracts. Buyers often panic during this time, believing that the house will be sold to someone else if they don’t act quickly. There is a chance this could happen, but in acting quickly you may spend more than you have budgeted for and draw yourself into a situation you don’t want to be in.
Making an offer is just the start of the process. Once this is over and done with, you’ll need to think about appraisals, home inspections, legal costs, moving costs, closing costs, and more. You’ll need more time, and a great deal more money, so don’t rest just yet and make sure you’ll have plenty money left in your budget to cover what follows.
Common Mistakes Buyers Make Before Making an Offer
More than 4 out of 10 American homeowners have regrets about their purchase, believing that they made a mistake and suggesting that they would do things differently if given the chance. To keep regrets to a minimum, avoid making these common mistakes when making an offer on a home.
Bidding the Full Amount
It doesn’t matter how much you like the house and how convinced you are of its value; you should never bid the full amount. No one else will, and the seller won’t anticipate it, so why bother? Bidding the full amount may secure a sale relatively quickly, but it could cost you thousands of dollars.
Americans are at their most frivolous and wasteful when buying a home. The average consumer will go out of their way to save a few cents on gas or a few bucks on clothes, but they won’t think twice about spending an extra $10,000 on a home. And that’s because they don’t feel the immediate, short-term impact; they don’t have to spend an extra $10,000 right now.
But every little helps, and a few grand less here and there could save you huge sums of money over the long-term. For example, let’s imagine that you’re making an offer on a $250,000 home that will be paid with a $200,000 mortgage and a $50,000 down payment. The full $250,000 is within your budget and you may be tempted to bid that amount just to expedite this process and get the keys a few weeks sooner.
However, if you shave just $10,000 off the purchase price and get a mortgage of $190,000 instead of $200,000, you’ll pay $17,000 less over a 30-year term (assuming an interest rate of 4%), and your mortgage payment will be $47 less every month. Even if you shave just $2,000 off the purchase price, you’ll save over $3,500 during the term and pay $10 less per month.
Not Getting a Pre-Approval
Borrowers are often in a weaker position than they think. They overestimate their affordability and start shopping for homes that are out of their price range, only to be hit with that unfortunate truth when they’ve already found a house and are preparing a bid. To avoid this issue, get a mortgage pre-approval before you do anything else.
Not only will this allow you to avoid disappointment, but it will get you more respect from sellers and real estate agents.
Focusing on Minor Details
Buyers get excited, blindsided; they let their hearts rule their heads and they end up bidding top dollar for a house that isn’t suitable or economical. They focus on artwork, decorations, furniture—missing the forest because of the trees.
The owner will take their decorations away; that furniture will be packed-up and shipped-off. You’re buying a house, not renting a hotel room. Focus on the things that matter, from the practicality of the layout, to the condition of the house and the projected cost of essential renovations.
18% of homeowners state that their biggest regret is getting too caught up in the minor details and not thinking about maintenance and repair costs. A further 12% state that the house is too small for their needs, while 5% claim that it is too big.
Think About the Area
As the old saying goes, the three most important things to consider when buying a home are location, location, and location. The area will dictate everything from the future and projected value to the ease of schooling and healthcare. Look for an area with low crime, easy access to schools/workplaces, and nearby amenities or highway access.
You may also want to consider:
- Wi-Fi access and phone signals
- Proximity to airports and hospitals
- Nearby entertainment options
- Current neighbors and potential development plots
Letting Emotions Dictate the Offer
Buying a home is an emotional experience. You’re committing to a debt that will stay with you for decades and buying a property that you may spend the rest of your life in. It’s only natural that you’ll want it to be perfect, and if you find a house that ticks all boxes, you may be reluctant to let it go.
At this point, the sellers and the real estate agent has you right where they want you. Buyers in this state of mind often make their feelings known, at which point they place the ball firmly in the seller’s court, giving them all the sway in the negotiations. And even if you keep your feelings to yourself, this still makes you more likely to increase your offer beyond what you can afford.
You need to stay strong, remain defiant, and don’t get caught in a bidding war, it could save you thousands of dollars on the purchase price. And even if you do lose out, so what? There are other properties out there; you’ll find something else that makes you feel the same way.
Bidding Too Low
Making an offer is a delicate process; you want to bid at little as possible, but in a way that doesn’t insult the seller. Otherwise, they will reject your offer outright, refuse to entertain any counteroffers, and take you less seriously in the future.
20% less than the asking price is the lowest we recommend, and we would only go this low if the house has been on the market for a while without generating much interest. For houses that are newly listed or have attracted some attention, 10% is acceptable and is unlikely to insult a reasonable seller.