When someone decides that they are interested in buying your home, their real estate agent will probably arrange to meet with your agent to discuss the offer. You may want to meet with the agents as well, even though the buyer is unlikely to attend this meeting. The buyer’s agent probably will use a standard form provided by the realtor association in your state to present the offer. It can cover the price, contingencies that need to be met before closing, the allocation of fees between the buyer and the seller, and other issues. The level of detail in the initial offer depends on the state. It can range from a comprehensive purchase contract to a simple letter of intent that does not convey much information beyond the price.
The buyer’s agent will emphasize the positive features of the offer and describe the buyer in a favorable way that encourages you to trust them. However, you will want to carefully review the specific components of the deal. You will want to be confident that the buyer has the financial ability to follow through and that the contingencies can be satisfied. You may want to evaluate whether the buyer’s agent has a reputation for honesty and fairness. The highest price may not be the best offer, depending on the other terms. Also, a preemptive offer before the house is listed can be tempting because it allows you to finish the process more efficiently. But it may not be the best option, since it does not give you a chance to consider other offers.
Understanding the Components of the Offer
The first part of the offer to review is the price. If it is the asking price, you should feel encouraged, but you may want to hold out for higher offers if you are early in the process. If it is lower than the asking price, you may want to consider negotiating unless the price is so low that it seems unreasonable, or you are receiving higher offers from other buyers. You might be able to reach a price close to market value following counteroffers.
Earnest money is usually paid when the purchase agreement is signed, and then held in an escrow account until the closing unless it is refunded or forfeited under certain conditions.
Another component of the offer is the earnest money deposit, which you will keep if the buyer backs out for a reason not permitted by the contract. A very high deposit indicates a high level of interest. The offer also will include a down payment and a financing contingency. A down payment is the amount that the buyer pays in cash toward the purchase price, which preferably should be at least 20 percent and definitely should not be lower than five percent. A financing contingency involves the loan that the buyer will need to obtain. You should make sure that the buyer has received preapproval from a reputable lender and that their envisioned loan terms are realistic. You may also want to evaluate their financial situation in more detail. In some cases, a financing contingency includes an appraisal contingency, which means that the deal will go through only if a professional appraiser values the home at least as high as the offer price.
The offer will provide which party is responsible for which fees. This may depend on standard practices in your state. If your home has certain drawbacks, such as a need for repairs, you may be able to overcome a buyer’s reluctance by offering to cover these fees.
Many offers will include a long list of contingencies, which are ways for a buyer to back out of the deal without paying a penalty. Comparing contingencies in different offers can be a useful way to choose between them. For example, some buyers may want to make the purchase contingent on their ability to sell their current home. This is usually a red flag and may be a reason by itself to reject an offer if you have other options. More commonly, a buyer may want to make the purchase contingent on the home passing an inspection and a final walkthrough. This type of contingency probably should not discourage you from accepting the offer.
Other types of contingencies include a title contingency and a homeowners’ insurance contingency. These are also basic and not likely to be disputed. The title contingency allows a title officer to make sure that you own your home free and clear, while the insurance contingency means that the sale depends on the buyer getting homeowners’ insurance. The buyer also may want to make the sale contingent on a review by their attorney, although this issue does not arise in states in which attorneys routinely review real estate sale agreements. If your state does not require seller disclosures, which is rare, the sale may be contingent on the buyer reviewing your disclosure report.
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A real estate lawyer may be helpful in evaluating less common contingencies. Justia offers a lawyer directory to simplify researching, comparing, and contacting attorneys who fit your legal needs.
Certain types of property may be subject to specific contingencies. For example, property in a flood zone might be sold contingent on the buyer getting flood insurance. If you live in a common interest development, the buyer may make their purchase contingent on their review of the homeowners’ association documents. In a few states, a buyer may want to include a contingency based on their review of the neighborhood, but this is rare and often can be negotiated out of the deal.
Negotiations and Counteroffers
If you are satisfied with the terms of the offer, and your agent does not raise any concerns, you can feel free to accept it and move forward toward closing. At the other extreme, if you have multiple serious concerns about the offer, and you cannot imagine resolving them, you can reject the offer and wait for others. Many offers fall between these scenarios, though, and the seller may negotiate with a buyer over certain parts of the deal in the hope of reaching an acceptable compromise. You can even make counteroffers to multiple prospective buyers at the same time. If you do this, you will want to include a provision that prevents multiple buyers from accepting the counteroffer and creating valid contracts. Your agent can provide a form that prevents a contract from being finalized until you have signed the buyer’s acceptance of the counteroffer.
Both offers and counteroffers will usually include expiration dates to keep negotiations moving.
A counteroffer might involve asking to remove a term in the offer (such as a contingency), asking to adjust a term in the offer (such as the price), or asking to add a term to the offer to offset a term with which you are uncomfortable. The counteroffer may be verbal, it may consist of a written document stating that you agree but with certain changes, or it may be an entirely new form that includes the changes. Negotiations can continue until the seller and the buyer reach an agreement, or until one or the other decides to walk away.