How to Write a Compelling Offer
Purchasing a home is one of the most significant financial decisions most of us will make in our lifetimes. With the real estate market always changing, what it takes to write a compelling offer is also a moving target. Whether you're buying in a fast-paced market or towing the line on how aggressive you can be when negotiating, every single box on the Purchase Agreement matters and conveys a message to the seller.
As a buyer, you should NOT be navigating this process on your own. Knowing and understanding the ins and outs of each market is the experience and intel you hire representation for! Your agent’s offer recommendations should be backed with local data and comparable sales; it should be a collaborative discussion. One of the most important messages you can articulate to your agent is how much you want the house. I almost always know how to advise you to win in multiple offers - but sometimes the house isn’t worth that much to you. Give your agent full-disclosure regarding how emotionally invested you are in the home.
Here are the specifics of the Purchase Agreement that you will need to determine when drafting your offer along with options you have for strengthening terms!
Not Paying in Cash? You Must be Preapproved!
**Already approved or paying in cash? Skip ahead.
Let’s back up a bit. Before writing an offer is even on the table, you must be pre-approved for a mortgage. Getting preapproved means establishing a relationship with a loan officer and undergoing a qualification process based on information you provide (like income, debt, taxes, W-2 and bank statements, etc). The process will culminate in a roadmap of sorts that outlines what you qualify for, the terms of the qualification and a letter that will accompany any offers you make. A pre-approval letter from a reputable lender demonstrates your ability to finance the purchase, giving sellers confidence in your offer.
Pro Tip: Who you work with matters! Listing agents recognize local loan officers with a proven history of closing loans seamlessly and on time. In multiple offers, who’s doing the financing will certainly come under the lens. Ask for local referrals from your agent!
Paying in cash?
As is the case with financing, listing agents and sellers are not likely to ‘take our word’ for anything. When submitting a Purchase Agreement that denotes the property will be purchased with 100% cash, a proof of funds will be required. A proof of funds can be a letter from your bank, a copy of a bank statement or balance on investment accounts in excess of the amount offered in the Purchase Agreement. Be sure to black out any sensitive personal information like account or social security numbers. It’s best to have this in order before beginning your search so you aren’t scrambling - especially on a weekend or holiday when banks are closed!
Pro Tip: If you are negotiating on a purchase be careful of showing too high of a balance on a proof of funds. This is why the letter from your bank just stating ‘sufficient funds’ can be the best strategy as to not forfeit your leverage on negotiating.
Personal Letter…???
A personal letter from the buyer to the seller had become commonplace in year’s past. These letters were in an effort to tug at the heartstrings of emotional sellers. Personal letters gained scrutiny in recent years as they became a breeding ground for discrimination. Even subconsciously, a seller's decision-making could be swayed by a person’s ability to write, their familial status, color of their skin in a photo or otherwise.
If you feel compelled to include a personal letter to the seller with your offer, make sure you focus your writing on the home itself and why you love it! Note that some sellers may exclude personal letters out of the gate and can do so at their discretion.
Pro Tip: Keep the letter positive and focus on what makes their home special to you, but avoid revealing too much personal information that might put you at a disadvantage in negotiations.
Increase Your Earnest Money Deposit
An earnest money deposit is a show of good faith that you're committed to purchasing the home. While 1% of the offer price is standard, offering a higher deposit can make your offer stand out (2%? 3%? More?). Strengthening your earnest money allows buyers to flex their financial muscles without actually paying more for the house. It shows the seller you're committed to purchasing the home and willing to put more skin in the game.
One of the most frequently asked questions I get is whether or not earnest money is refundable. The short answer is that it depends on how the Purchase Agreement is drafted. It’s critical you understand the terms of the commitment you are making - if you don’t, ASK! Your understanding of what protections are in place for your earnest money should be crystal clear.
Price (Obviously)
Your offer price is often the first thing a seller is scanning your offer for. How much to offer depends on the conditions of the property you are offering on. Is it in multiple offers? How many days has it been on the market? How is the property priced compared to similar properties that have sold in the area? Has the seller taken any price reductions lately? And so many other factors.
I like to tell my clients that there are often three ways to approach an offer price:
The easy yes: give the seller an offer price they can’t refuse
The easy no: offer too low and you risk not opening the door to a negotiation. Depending how invested in the home you are, you may want to avoid offending the seller and deterring them from working with you.
Get the ball rolling: What is the price that gets a conversation started - maybe there are terms to be met…maybe not. Evaluate where you are registering on the walkaway power radar.
Amount of your Down Payment
One order of business you will need to disclose on the Purchase Agreement is the percent of the purchase that will be paid in cash versus the amount that will be financed. In theory, the amount of proceeds the seller receives on closing day is the same regardless of the down payment - however sellers will consider what lower or higher down payments could mean for them.
For example, if a buyer is putting very little down in cash, the seller may jump to the conclusion that the buyer does not have a lot of discretionary funds. If larger repairs are uncovered as part of an inspection, the seller may fear that the buyer will not have the funds to cover said repairs and the seller will, by default, be responsible for them. Whether or not that is true is beside the point - the seller is going to make assumptions based on every box and blank that is filled out on the Purchase Agreement.
Pro Tip: I picture the Purchase Agreement to be a series of levers that can be dialed up or down. If you have a term dialed back - like a lower down payment - consider where else you could dial a term up to offset less favorable terms.
Be Flexible with Closing Dates
Sellers may have specific timing needs, such as a longer closing period to find a new home or a faster close if they're relocating. Being flexible with your closing date or offering the option of a rent-back agreement (giving the seller the option to stay in the home and rent it from you after closing) can make your offer more appealing. It’s important for your agent to ASK and understand the motives of the seller so you can do your best to accommodate them. A good negotiation is a win/win for all parties.
Financing Terms
When mortgage financing is involved, the buyer has the option of adding a Mortgage Financing Contingency that protects the buyer from different circumstances that can arise through the underwriting process. These could be issues like a missed payment that suddenly affects a borrower's credit score, loss of employment or an appraisal that does not meet the agreed upon purchase price. If a buyer is unable to qualify for their financing for one reason or another - the question will become what happens to the earnest money. Is the earnest money forfeited to the seller or retained by the buyer? That depends how the Purchase Agreement is written. Discuss with your agent how aggressive you want your offer to be and how you can tighten or loosen the terms of the mortgage financing contingency.
Appraisal Clause
Particularly in multiple offers, savvy buyers will strengthen their offer by adding language around the conditions of the appraisal. In the event that the appraised value comes in at less than the agreed upon purchase price, there are four potential outcomes that can happen:
The buyer can agree to cover the difference between the appraised value and the agreed upon purchase price in additional cash at closing (or by restructuring their financing - make sure you are working strategically with your lender!)
The seller can agree to reduce the sales price to the appraised value
Buyer and seller can negotiate and meet somewhere in the middle with seller reducing and buyer bringing some additional to closing.
No agreement can be made between buyers and sellers and the transaction cancels under the mortgage financing contingency with earnest money being refunded to the buyers.
In a competitive market where prices are often being driven up by having multiple offers in play, the concern of an appraisal coming in at less than the agreed upon purchase price grows. Sellers will compare offers to see what assurances the buyers are offering in the case of a low appraisal. Some buyers will write in a particular dollar amount they would be willing to cover if the appraisal indeed came in low. Other buyers may be wiling to gamble and cover *any* potential difference. While others won’t be willing to offer the seller any assurance. Before making any decisions, talk with your agent about what’s most likely to happen relative to your offer price. A good agent will perform their own comparable analysis so you know best what to expect.
Pro Tip: Appraisers are third-parties to the transaction and not affiliated with your loan officer. However Loan Officers will speak to the pool of appraisers they work with. Don’t be afraid to ask when interviewing LO’s if their appraisers are local and familiar with the area you’ll be buying or if they’re traveling from greater Minnesota. A local appraiser will understand the nuances of the market better than one who isn’t.
Seller Paid Closing Costs
In theory, a buyer can ask a seller to pay a percentage of the purchase price toward the buyer’s closing costs. These dollars are used by the buyer’s lender to help offset some or all of the borrowing fees up front. This is particularly helpful for those buyers without a surplus of cash and who are already working hard to fund a downpayment.
While advantageous to the buyer, a seller is going to calculate the net offer by reducing the seller paid closing costs from the total purchase price. Make sure your offer nets out where you want it to be - especially if you are in multiple offers. In a competitive market, keeping your offer as clean and simple as possible with fewer ‘asks’ of the seller will warrant the best results. If seller paid closing costs are a must, consider shopping for a home when the market is quieter - locally, over holidays, late summer or into the 3rd and 4th quarters of the year.
Pro Tip: The percentage a buyer can ask for varies depending on the type of financing they are utilizing. Talk with your lender about down payment assistance, which could keep your cash on hand to fund your own closing costs.
Inspection Contingencies
My advice to you will always be to have a comprehensive inspection performed on the property you are purchasing. You can read more about what home inspections cover in this post here. With that said, in a competitive market, you may be up against offers with little to no inspection contingencies. Here are a few ways to retain your contingency while edging out the competition:
Keep the inspection timeline tight (1-3 days?)
Perform a ‘pass/fail’ inspection where you agree not to negotiate but rather accept or decline the property in its current condition
Offer the seller an allowance around repairs saying the buyer will cover defects up to a particular dollar amount.
Bring an inspector with you to your showing to get a high level (yet less comprehensive) opinion of its condition.
Pro Tip: If you choose to waive an inspection contingency altogether, make sure you're fully comfortable with the potential risks. Buying without an inspection could mean buying a home with undiscovered issues - set aside funds to prepare for such an occasion.
Use an Experienced Realtor
Believe it or not, who you work with matters…a lot. In fact, the communication that is provided by them, their method of delivery, their follow up, efficiency, ability to articulate, knowledge of the local market, experience in multiple offers, reputation and rapport in the industry and track record of proven sales will all come into consideration. Not only that, but their ability to populate a well-written Purchase Agreement is one of the first indications of what to expect on their side of the transaction. Experience matters - and it often costs less than that of inexperience.
Pro Tip: Choose an agent with a strong track record in the local market. They will be better positioned to offer strategic advice and anticipate what will resonate most with sellers.
Be Responsive and Communicate Clearly
Chances are this is all going to happen faster than you want it to. It’s unfortunate that some of our biggest financial decisions have to be made under stringent deadlines, however, it’s also become the norm. The best way to thwart off pressure is to go into the experience prepared. If you are this far along in this post, you are already more prepared than most buyers and have the knowledge to navigate these terms from a position of strength.
Time is of the essence. Delays in communication can cause frustration for the seller and give other buyers an opportunity to interfere. Clear communication can create a sense of professionalism and efficiency, which sellers appreciate.
Pro Tip: We need to stay in close contact - most commonly via text. We keep you updated of every interaction so you know exactly what to expect and when you need to be available. Help us help you!
Remain Open to Counteroffers
Even if your initial offer isn't accepted, the seller may counter with different terms. Stay open-minded and be willing to negotiate on price, contingencies, or other details. Flexibility and compromise often lead to a win-win resolution. Take a temperature on your stamina for back and forth negotiations. Some clients THRIVE on the experience while others feel completely uncomfortable (and everything in between!) Let your agent know your tolerance as that may affect the terms they advise you to counter with.
Once your offer is drafted, I like to give it a rating on a scale of 1-10 in terms of how strong I feel the offer is. I can tell you if I feel the offer will win or not based on my experience - I’ll be transparent so that you go into the offer with clear expectations. I recommend asking yourself, “If we found out tomorrow we didn’t get the house over $5,000 - would we be OK with that?’ What’s the offer you want to make that will allow you to sleep at night if you aren’t the winning offer. We will ensure you go into every offer as confidently as you can and with an offer that accurately reflects your goals and priorities.
Utilize my offer worksheet when drafting your own Purchase Agreement! It will walk you through the various terms along with tips and tricks of the trade! For your reference, here is a copy of the Purchase Agreement to start getting familiar with. Soon enough - we’ll be drafting yours!
Happy house hunting!