Making an offer on a home is one of the most crucial steps in the home-buying process. It’s the moment when your preparation, research, and emotions converge into a single decision that could secure your dream property or leave you empty-handed. In a competitive real estate market, understanding how to make a strong, strategic offer is essential. This guide will walk you through common pitfalls to avoid and provide expert tips to make an offer stand out, giving you the best chance of success.
It’s an exhilarating experience. You and your buyer’s agent have been touring homes for several weeks, and you’ve finally found the one! After planning and saving for quite some time, and after getting pre-approval from your lender, you’re ready to make an offer. But now, two competing thoughts pull on you:
1. You want to ensure that when you make an offer, it is taken seriously.
2. You don’t want to overpay. The goal is to find a balance between these two.
It can feel like a chess match—one where you don’t want to lose your queen. So, how do you avoid making a misstep? Here’s how NOT to make an offer on a home:
How to Antagonize a Seller in One Easy Step
Step 1: Submit a Lowball Offer
Unfortunately, we see this far too often. Submitting a lowball offer can backfire, especially in any of these situations:
- Your buyer’s agent has advised you, “All the comparable homes indicate that this is a great price.”
- The seller has recently reduced the price by $20,000 (5%).
- It’s a seller’s market, where demand outpaces supply. How do you know if it is a buyer’s market or a seller’s market?
- There is significant interest in the house.
- Prices in the area are appreciating.
When you submit a lowball offer, several things are likely to happen:
- The seller will probably feel insulted.
- The seller may become antagonized.
- Most of the time, the seller will likely ignore or decline your offer without a counter.
This approach is akin to using a “scorched earth” method in negotiations. It’s not advisable and often means you need to move on to other options.
Why Lowball Offers Often Fail
Let’s address some common reasons why buyers submit lowball offers, and why these reasons typically don’t hold up:
- “I can’t afford to pay the list price and also do all the upgrades the house ‘needs’.” In our experience, many buyers site “upgrades” that are often cosmetic choices to make the home more accustomed to particular tastes than they are necessary changes to upgrade a home.
- “I’m at the top of my budget.” In a competitive market when sellers are getting 101% of the list price on average, buyers should be prepared to make an offer above the list price to compete. They should be searching in a price range below their budget maximum to be able to bid appropriately, given the market.
- I just don’t think the house is worth that much.” The market determines the worth of a home. Not the seller, not the agent, and not anyone’s personal opinion.
- “I read somewhere (someone’s blog?) that I should be able to get a home for X amount. I’m sticking to that amount.”
- My favorite: “My father (who hasn’t purchased a home in 20 years) thinks that the price is too high.”
These are true stories from my 30+ years in real estate, but the truth is, none of these reasons matter when it comes to making a successful offer. These reasons don’t align with market realities.
Understanding Market Value: How to Determine a Fair Offer Price
When evaluating a home, understanding its market value is crucial. Data is necessary to analyze the current market. The market value is determined by what buyers are willing to pay, based on comparable homes in the same market. A qualified buyer’s agent will run a Comparative Market Analysis (CMA) on the home to help you determine the best offer price.
Agents use the following items to create a Comparative Market Analysis (CMA):
- Recent Sales of Comparable Homes: Data on homes that have recently sold in the same area, with similar size, features, and condition.
- Active Listings: Current homes on the market that are comparable to the subject property, providing insight into the competition.
- Pending Sales: Homes that are under contract but have not yet closed, offering a glimpse of current market activity and buyer interest.
- Expired Listings: Homes that were listed but did not sell, which can indicate overpricing or lack of demand.
- Market Trends: Analysis of broader market conditions, such as whether it’s a buyer’s or seller’s market, and trends in home prices over time.
- Neighborhood Characteristics: Consideration of the neighborhood’s overall appeal, including schools, amenities, and proximity to services.
- Home Condition: The physical condition of the home, including updates, repairs, and overall maintenance, compared to other properties.
- Location: The specific location of the property within the neighborhood or community, which can influence value.
- Lot Size and Usability: The size and utility of the lot, including landscaping, outdoor spaces, and potential for future improvements.
- Square Footage: The total living area of the home, often compared on a price-per-square-foot basis.
- Number of bedrooms and bathrooms: The count and configuration of bedrooms and bathrooms are key factors in buyer demand.
- Age of the Home: The age of the property, especially concerning similar homes in the area, as newer homes might command higher prices.
- Unique Features: Any unique features or amenities that add value, such as a pool, finished basement, or high-end appliances.
- Time on Market: The average time homes in the area spend on the market, which can indicate demand and pricing strategy.
- Seller Concessions: Information on any concessions sellers have made, such as paying for closing costs or including appliances, which can affect the final sale price.
- Local Economic Factors: Consideration of local economic conditions, such as employment rates and major employers in the area, which can impact housing demand.
If you want to do updates to personalize the home—like updating flooring, countertops, or appliances—remember that these are subjective and usually don’t affect the market value of the home. You’ll need to determine if you have the funds to cover these upgrades yourself.
Considering the Seller’s Mindset
If the seller has reduced the list price, this is already an indication of their mindset and motivation. Sellers often adjust their list price based on feedback from buyers and agents, with guidance from their listing agent. If they’ve already adjusted the price and the home is competitively priced, a lowball offer is likely to be seen as insulting.
The Emotional Side of Home Buying and Selling
Buying and selling a home is an emotionally draining process. It starts with excitement, but by the time you’re unpacking boxes, you’re often exhausted. Both buyers and sellers need to consider their emotional stamina.
Buyers should focus on homes within their price range. Looking at higher-priced homes increases the risk of being outbid or of making lowball offers, which can lead to wasted time, energy, and emotional fatigue—not to mention the possibility of antagonizing sellers.
Don’t underestimate the emotional state of a seller, and be mindful of your own emotional stamina. The first rule in negotiating is not to let emotions get out of hand. This is where an experienced buyer’s agent becomes invaluable, taking much of the emotional stress off your shoulders. Agents negotiate daily and are well-equipped to handle the emotional aspects of the process.
How to Make an Offer That Succeeds in One Step
Step 1: Listen to Your Buyer’s Agent
Home buyers must do their due diligence when purchasing a home. As Bill Gassett, a Metrowest Massachusetts Realtor, points out in his article, “One of the roles of an exceptional buyer’s agent is to help buyers get the home of their choice at the best possible price and terms. Your buyer’s agent is there to assist with all aspects of the home purchase, none more important than making a successful offer.”
A Real-Life Example of a Successful Offer in Frederick, Maryland
After much searching, our buyer found the perfect home in downtown Frederick. It was priced at $425,000, following a 5% price reduction. This was a fair market value based on comparable sales and market conditions. The market was tight, with low inventory (a seller’s market) and rising values, so we knew this home wouldn’t sit for long.
Our buyer’s maximum budget is $450,000. Instead of starting at $420,000, giving herself “negotiating room”, we advised her to offer a competitive price with an escalation clause to increase by $500 over other higher offers. There is a possibility that she will be outbid. With the escalation clause, she would theoretically get the home for an extra $500 over any other offer, barring other considerations.
If our buyer had come with a lowball offer, we believe she wouldn’t even be considered in the current market. Current market conditions are critical to a buyer’s offer strategy.
Given that sellers are getting an average of 101% of the list price in the Frederick community, this offer is strong.
**UPDATE: Yes, our buyer got the house with the final price of $435,500.
Competing in a Bidding War with an Escalation Clause
An escalation clause can be a powerful tool in a competitive market. It allows you to automatically increase your offer up to a certain limit if another buyer submits a higher bid, ensuring your offer remains competitive without overshooting your budget. Of all the expert tips for negotiating with a seller, the escalation clause is a strategic tool in the right circumstances.
Price Isn’t the Only Consideration in Your Offer
Out of all the advice home buyers receive, having advice home buyers usually receive, a great offer strategy stands out as one of the most important aspects. Your offer includes more than just the price; it also concerns timelines, whether to ask for closing cost assistance, loan details, pre-approval, seller motivations, and more.
Contingencies—such as those related to inspections, appraisals, or the sale of your current home—also play a vital role in protecting your interests, while balancing them against the seller’s expectations. By carefully considering all these factors, and not just the price, you can make an offer that is not only competitive but also aligns with your personal needs and market conditions. This strategic approach can make the difference between winning your dream home or losing out to a more prepared buyer.
Be Flexible on the Closing Date
In some situations, being flexible with the seller’s preferred closing date can make an offer more attractive. For instance, if the seller needs extra time to move out, offering to accommodate that timeline can be a significant advantage.
On the other hand, if the seller desires a quicker timeline, the buyer with a pre-approval has the advantage over the buyer who needs that additional time to go through the approval process.
Waiving Contingencies
While contingencies are important, in a competitive market, being strategic about which contingencies to include or waive can strengthen your offer. For example, waiving a home inspection contingency might make an offer stand out, but only if you’re comfortable with the risks.
Showcasing Seriousness with the Deposit
Increasing your earnest money deposit can demonstrate your seriousness as a buyer. It gives the seller confidence that you’re committed to seeing the transaction through, which can make your offer more appealing.
Negotiating on a home is a little bit like a chess match… another reason for an experienced buyer’s agent.
Additional Tips and Resources
Use a Mortgage Calculator: Before making an offer, use a mortgage calculator to determine how much home you can afford.
You may already have a pre-qualification letter from a reputable local lender. In a highly competitive market, many buyer’s agents advise getting a pre-approval letter to further your chances of winning in a bidding situation.
As Kevin Vitali, a Massachusetts real estate agent points out: “A mortgage pre-approval will hone in on a monthly mortgage payment down to a few dollars. You will know exactly how much a house will cost you…With real numbers, it is possible to put a budget together that you are comfortable with. Committing to a monthly payment for 30 years is a big deal and you want to know what you are getting into.”
Check Local Market Trends: Stay informed about the current market trends in your desired neighborhood. This is one of many reasons that an experienced buyer’s agent is invaluable.
Prepare Your Budget: Make sure you have a clear budget that includes not just the purchase price but also potential closing costs and any hidden costs of buying a home. Luke Skar of Madison Mortgage Guys explains in detail the costs associated with homeownership that often get overlooked. Be sure to work out an accurate budget that reflects all of your lifestyle choices.
Practice Living the Budget: Some financial advisers encourage home buyers to take budgeting one step further. Practice living on that budget for a few months to get acquainted with the lifestyle. This way you will be sure that you are comfortable and reaching your goals.
To Sum It Up…
Use your agent as a trusted advisor. As buyer’s agents, we’re here to negotiate with your best interests in mind. We’re immersed in local market conditions every day, study statistics, and understand trends. We are your advocate—experienced, skilled, and motivated to get you the best possible outcome.
Frequently Asked Questions (FAQs)
Q: What if my offer is rejected?
A: If your offer is rejected, your agent can help you understand why and advise you on whether to make a counteroffer or move on to another property.
Q: How do I know if I’m overpaying for a home?
A: A comparative market analysis (CMA) performed by your agent will help ensure you’re making a fair offer based on recent sales of similar homes in the area.
Q: Should I include contingencies in my offer?
A: Contingencies can protect you, but in a competitive market, too many contingencies might make an offer less attractive. Your agent can guide you on which contingencies are essential.
Ready to make an offer on a home but unsure where to start? I’m here to help. Reach out to me today for personalized advice tailored to your unique situation. With my experience and insights, we can craft a winning offer that aligns with your goals and maximizes your chances of securing your dream home. Contact Chris Highland and ask about Buyer Representation: 301-401-5119 chris@chrishighland.com
If you’re just starting your home search, now is the perfect time to get professional guidance. I can help you navigate the complexities of the real estate market, from finding the right property to making a strategic offer. Contact me today to begin your journey toward homeownership with confidence.
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