Entering The Offer and Negotiation Phase

You can logically assume that if you’ve selected a couple of areas in which to focus your home search activities, you’ve seen a spectrum of houses at various price points.  Based on your observations during home tours, you’ve probably formed an opinion about which houses are over priced and which offer a good value.

Your Realtor should also be able to provide you with some background information on each property such as: how many days the house has actively been on the market, the initial asking price, the current tax appraisal value and any other information gathered from speaking with the listing agent.  Another factor that often plays a key role in overall seller motivation is whether or not the property is occupied by the owner.  If the house is vacant or is/was occupied by a tenant, you may have a broader opportunity when negotiating on price and terms.

STEP 1: Comparable Market Analysis (CMA)

Once you have selected one house or perhaps two or three houses that you want to choose from, ask your Realtor to provide you with an analysis of current market value (CMA) for each house.  This can be somewhat difficult for your Realtor to do at the onset of your home search because oftentimes he or she has not seen each property in person.  However, at this stage in the game, having seen each property one or more times, he or she should be able to help you narrow in on a particular value for the properties in consideration.  This CMA will take into consideration the following factors: (a) what have similar homes sold for in the past 3-6 months (b) what are the current inventory levels in the subdivision (c) how long has the property been on the market (d) the overall condition of the property (e) is the house vacant or occupied and (f) how does the list price compare to others currently for sale?

On occasion, your Realtor may have gained additional information about seller motivation from conversations with the listing agent.  That information can also factor into the equation.

STEP 2: Making an Offer – Where do you Start?

I’ve written articles in the past about the topic of how much to offer on a house.  There are many factors that determine where the initial offer price should be.  Having already detailed the aspects that determine perceived “market value” above, I’ll delve into the most important aspects of the actual contract (in my opinion).

You might also want to read my article about What a Buyer Should Know Before Making an Offer.

First instinct is to assume that price is the main aspect that drives all contract negotiations.  I’d be lying to you if I said that price was not important to home sellers – it definitely is.  However, there are other parts of the contract that are equally important in my opinion.

• Price
• Financing Ratios
• Closing Costs Paid by Seller
• Proposed Closing Date
• Home Warranty Amount
• Option Period
• Financing Approval Timeline
• Inclusions – Real Property (furniture or decor items)

Offer and Negotiation Strategy – Taking into consideration the overall scope of the property and contract factors you and your Realtor can determine the best strategy for your purposes.  There are a wide variety of approaches the buyers and their Realtors take.

What is the Option Period?

In the state of Texas, per the Texas Association of Realtors promulgated residential purchase contract, the buyer is given the right to a termination option period.  The amount of time of the option period and the fee paid for that right are a negotiable item in the contract as discussed above.  Typically, option periods range from 7-14 days and depend largely on the number of things that will need to be inspected at the property.

The buyer pledges an “option fee” to the seller for the right to have an additional # of days to inspect the property and complete any other kind of due diligence the buyer sees fit.  Inside of this option period, the buyer must make a decision as to whether or not he or she plans to move forward.  The buyer may also request additional repairs completed by the seller prior to closing, concessions or a combination of the two after completing the necessary property inspections.   In essence, the option period can serves as a secondary negotiation phase if necessary.  During the option period, the only deposit that is at stake is the actual option fee.  The earnest money is deposited in escrow with the title company responsible for facilitating the transaction but the earnest money is not “on the line” until a decision has been made by the buyer to proceed through the option period.

What is the Third Party Financing Period?

Unless you are paying all cash for the property that you are purchasing, there will be third party financing involved as well.  In other words, there will be a loan involved.  The proposed loan amount is spelled out on page one of the contract and the financing terms are spelled out in greater detail in the attached Third Party Financing Addendum to the Contract.  This addendum provides a specific time period in which your lender must provide you with notice that you have received financing and credit approval based on the terms of your proposed financing.  Since you have already provided a pre-approval letter to the sellers with your offer the final notice is more of a formality.  However, in the event that there was a drastic alteration in your credit worthiness or perhaps your lost employment between the time the contract was agreed to, this addendum does provide for a secondary buyer’s contingency to the contract.

STEP 3: Lock Your Rate

Ask your lender to discuss the rate options available.  Remember the lowest rate is not always the best rate as you need to balance the rate versus payment.  Your lender should provide 3 rates for review.  The first is a rate with no points and a credit toward closing.  The second with no points and no credit toward closing.  The third rate would include a point to buy down the interest rate.  A point is a discount point that is paid upfront at closing to reduce the interest rate by a certain percentage over the life of a loan.

Stay in Communication with Your Lender

If you’ve followed the steps previous outlined for providing the property documentation to your lender for approval you are ahead of the game.  However, over the course of the escrow period the lender’s underwriter will be working on processing your loan for closing.  As a result, you may have to update existing information or provide new documentation as that process continues.  Respond promptly to an questions and requests from the underwriter for further documentation.  A successful closing involves the whole team – you, your lender, your Realtor and the title company.  You can ensure a smoother closing by staying in communication.

Got it.  What’s Next?  Once the contingency periods are past and the finish line is in clear view, its all about tying up loose ends and preparing for the actual move.  Find out what you need to do to prepare for the big day.