Home Buying: The Purchase Offer and Negotiations
The manner in which an offer to purchase residential real estate is submitted to a seller and the quality of that offer can make a huge difference in whether or not the offer is accepted. Of equal importance in getting the property at the best price is the strategy utilized as part of the negotiation process. This section will provide a brief summary of these topics: (1) The Purchase Offer, and (2) Negotiating the Terms.
1) The Purchase Offer
a) What should be included with the offer?
Although this may vary somewhat according to jurisdiction, in Maryland a comprehensive purchase offer for residential real estate will usually include the following items and addendum: a contract of sale signed by the buyer(s), earnest money deposit, pre-approval or pre-qualification letter from a lender, various signed contract addendum relevant to the property or the specific jurisdiction of the property, copy of a recent ad for the property or MLS print-out, and copy of the public record (if available).
A good real estate professional working as a buyers's representative will accompany the offer with a cover letter highlighting the main deal points and, where appropriate, provide a little background about the buyer(s) if the information would strengthen their negotiating position or cast the buyer(s) in a sympathetic light.
b) What makes an offer attractive to a seller?
The attractiveness of the offer will almost always depend on market conditions and the seller’s motivations. Obviously, one of the most important pieces of the puzzle is the sales price, but other contract terms carry significant weight. For example, a below asking price offer might look attractive in a buyer’s market if the rest of the contract terms (e.g., escrow period, contingencies, inspections, etc.) are acceptable and a pre-approval letter demonstrates that the buyer is financially bona fide. In a competitive seller’s market, however, items such as sales price and lack of contingencies are usually of most importance to a seller. All of these concerns play an important role in determining what the negotiating strategy of the buyer should be. Regardless of the market or seller motivations, however, any sloppily presented offer or one with significant omissions or inconsistencies will not likely be taken seriously by a seller.
2) Negotiation of Terms
The process of contract negotiation in residential real estate is a bit odd compared to most industries. Strangely, there is usually little face-to-face or verbal negotiation between the parties or their representatives prior to a documents being presented as an offer. The typical process is simply for prospective buyer(s) to submit a written offer and then wait for the seller(s) to do one of the following: (1) accept the offer as presented, (2) reject the offer, or (3) present a counter-offer. Most negotiation usually occurs after a counter-offer is delivered by the seller(s).
a) What are the most often negotiated contract terms?
The deal points in a residential contract of sale that are most likely to be negotiated are the following:
- Sales Price
- Escrow Period (time between contract acceptance and settlement)
- Contingencies (conditions place on the performance of one or both parties)
- Requirement of Repairs to the Property Following the Home Inspection
b) How should a negotiation strategy be formed?
Negotiation strategies employed by the parties of a residential real estate transaction are not usually different than any other negotiated agreement. The motivations, concerns and financial positions of the parties dictate most of the power. External factors affecting how much negotiation is possible by either side include general market conditions, interest rates, etc.
However, one element in a residential real estate transaction that is unique (or at least significantly heightened) is the emotional element. Homes are not just financial assets. Homeowners usually have significant sentimental ties to the property. Perhaps the owners have lived in a house for most of their lives, raised children, and experienced the type of important life events that make a house a home. And, more often than not, the prospective buyers are looking to start new memories in that home. These emotional, sentimental factors are not easily quantified in dollars and cents and can drastically affect the perceived value of a property.
Much ink has been spilled on the art of negotiation in the real estate context. But perhaps the most important principle for prospective homebuyer to consider is represented by the acronym BATNA, which stands for Best Alternative To A Negotiated Settlement. Simply stated, any negotiation strategy should take into account the alternatives available to the parties in the absence of a deal on a particular property. Generally speaking the more viable alternatives that are available to a party significantly increases the negotiating position of that party.
If you would like to learn more about the details of purchase offers and the process of residential real estate negotiations, please contact me.
