How to Make and Grade your Offer on a House

If you have been searching for a house in this tight seller’s market, you feel a mixed bag of emotions when you find the “one”. The house marks off everyone of your items on your want list. You feel excited by the possibility of living in the home, but at the same time, you feel apprehensive about the upcoming offer you have to make to the seller.

Offers can be complex and have to be made in writing (at least in Texas). Realtors use promulugated forms from the Texas Real Estate Commission (TREC) to make offers for their buyers. These forms have blanks for your Realtor to fill out that make up the terms of your offer. Sales price is a big part of the allure for the seller, but there are other considerations when making an offer to a seller. What are these other items? Here is a short summary.

Offer price – The most important part of the offer you make to a seller. This is the price you will pay for the property. You also have to outline for the seller if you are paying cash for the property or financing the purchase via a lender. If financing, you will need to disclose how much of a down payment will you making to get the mortgage. Sellers will often use your down payment amount as one way to help them determine if you financially viable buyer. If you are making a large down payment, this might mean you are in a better position to get approval for the loan.

Earnest funds – Earnest funds are the payment you make as a good faith gesture that you are serious about going through with the purchase. Earnest funds are deposited with the title company within three days of executing the contract, and are usually 1% of the sales price of the home. If you should default on the contract, the seller stands a good chance of keeping the earnest funds. With this in mind, Sellers will look at the earnest funds as a way to get some compensation if the contract is not fulfilled and the house is not sold.

Title Policy – The title policy is insurance against false claims against the property from a third party. Buyers should always get title insurance as history has proven that less than honest individuals will try to get ownership of a property via false claims. Title policies are not cheap, but buyers historically ask the seller to pay for it.

Survey – The survey is a plat of the property showing the boundaries of the lot and other pertinent information about the property. For example, many utility companies will have easements through the property, which means the utility companies have the right to access your land for these easements. Surveys can also convey flood information. Surveys have to be approved by the lender and older surveys will often be out of date, which means a new one has to be purchased. Seller will usually pay for this service.

Homeowner Association – Many communities today have associations (HOA) to help keep the property values sustained for the home owner. These HOAs will have rules and regulations for residents with the intent of keeping the community as a whole looking good. HOAs will also offer amenties like pools and playgrounds. You have to purchase certain documents from the HOA in order to purchase a home in the community. Who pays for the documents is part of your offer for the house.

Residential Service Contract – These home insurance policies are often requested by buyers to protect against any future costly repairs that might develop during the first year of ownership. These policies can cost a few hundred dollars and sellers will often agree to purchase one for the buyer.

Closing Date – When will the deal be done? This is the closing date of the offer. After all the parties sign the required paperwork at closing and funding is received by all parties, the house becomes your property.

Closing Cost Assistance – You might need some help with the various closing costs charged by the lender and title company. You can request this assistance from the seller in the offer.

Option period – In Texas, all buyers can request a period of time to do due diligence on a property before going through with the purchase. This option period requires a financial consideration from you for it to be considered valid. For example, you might pay $100 for seven days in the option period.

Now that you have an idea on the offer terms you need to consider. Here is how you should grade your offer after you decide on the terms. Each grade offers a particular level for the terms outlined previously.

For example, if you get all the minimal terms realized for an aggressive offer, you could give the offer an A whereas if two of the terms for an aggressive offer is not meeting minimal value, then the grade could be an A minus.

Please note that every situation is slightly different, and even more terms, like a contingency on the sale of the buyer’s property, could be included in the offer. For the sake of this exercise, we will be focusing on the offer’s grade on the terms outlined previously in this post.

(A)ggressive – With an aggressive offer, you leave nothing off the table for the seller so there is very little chance for a counter or a rejection. Offer price should be at asking price, or higher. The offer should be in cash or without a finance contingency. Earnest funds should be double, or even higher, the usual 1% of sales price. Survey and title policy should be paid for by the buyer. All HOA fees also paid by the buyer. No residential service contract or closing cost assistance requested by the buyer. The closing date should be 14 to 21 days. Option should be .01% (or higher) of sales price and be three days or less. Some investors even do away with the option period all together to make the offer even more aggressive.

(B)old – With a bold offer, the buyer is offering terms that a majority of sellers will take as presented, but it leaves open for the possibility of a counter or rejection. Option period should be at least .01% of sales price and be three to five days. Closing cost assistance and residential service contract is not required. The closing date is three weeks or less. HOA fees are paid for by the buyer as is the survey. Title policy is still paid for by the seller. Offer price should be at asking or even a thousand or two above list price. Earnest funds should be 1% or slightly higher. It is a financed offer with a contingency of a approved loan. Down payment exceed the minimal required to get the mortgage.

(C)onservative – With a conservative offer, the buyer is more concerned about getting a better deal for the property. Buyer leaves the costs of the survey and title policy on the seller. Residential Service contract is requested at the optimal price and closing cost assistance is also included by the buyer (if needed). Option period is seven days for $100 or $150. HOA fees are shared between the buyer and the seller. Offer price is at list price, or even 95% of asking to see if the buyer can get it for less than requested in the listing. Offer’s down payment is the minimal required. Earnest funds are the standard 1% of the sales price. Closing date is three to four weeks away from the contract execution date.

(D)efective – This offer will be less than stellar in the mind of the seller and will most likely get a rejection or a counter from the seller. Offer price is below 95% of asking and the earnest funds are below the standard 1%. Offer is financed with the lowest down payment required. Survey and title policy costs are put upon the seller. All HOA fees are paid for by the seller. Buyer asks for a residential service contract above the standard plan and closing cost assistance is requesting at the upper limit of allowable by the mortgage provider. The closing date is four to six weeks away. Option period is seven days and less than a $100 dollars.

(F)ishing – This offer is fishing for a good deal and the tactic is that the seller is motivated to sell so all the terms are more favorable to the buyer. None of the terms mentioned before are in the seller’s favor. The offer price is lower than 80% of asking and is financed. Option fee (option period is more than 7 days) and earnest fees are below the standard acceptable amount. HOA fees are all paid for by the seller as is the survey and title policy. A high residential service contract amount is requested and closing cost assistance is above normal. Closing date is six weeks away or more. It interesting to note that many investors fish for good deals but will bring in terms, like no residential service contract, from higher grades to sweeten the pot a little for the seller.