How to Make a Good Real Estate Offer
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How to Make a Good Real Estate Offer

Purchasing a home is still the single largest investment many of us will make in our lifetime. How we approach the acquisition can be life altering. The choices could set us on an upward or downward financial spiral. So, a little judiciousness at the beginning of the process can determine decades of success or failure. This article is a step by step method to help weigh in the balance specific criteria for purchasing a home. The goal is to make bias decisions to enhance a lucrative experience.

First step: Get prequalified by talking to your financial people in order to determine what you can afford. This can be done by going to most lenders in the real estate mortgage business. They will determine things like income to debt ratio and debt to equity ratio. These ratios are a preliminary look at your ability to pay.

Second step: Determine what you need for a property. This mean you will need to identify characteristics like size of your present and near future family. Neighborhood history, crime, schools, is it a middle class community. Typical bedroom communities with 3 to 4 bedroom houses with two or three car garages are middle class indicators. What is the zoning for lot size? Is it strictly residential or is it a mixture with commercial? Is it a planned community? What is your commuting distance from home to place of business and what are the traffic patterns? The age of the community, well established or not; but above all what is the overall condition of the properties excellent, good, fair or poor.

Third step: Get a Commitment letter. A commitment letter is the most important if not one of the most import weapons in your negotiation arsenal. If you intend to acquire your new home by getting bank funding it tells all concerned that the price you are offering is backed up with the full faith an authority of a financial institution.

Many get being prequalified by a lender confused with having a commitment letter. There is a big difference. Having a commitment letter means you have filled out a formal application with your lending institution and that they have verified the information for accuracy. They have run a credit report and have verified income and deposits to be used for all earnest money and your down payment. It is important that the letter come from the underwriting department. Unlike the case of prequalification the same information may have been given verbally to a representative of the lending institution but it has not been substantiated or reviewed by underwriting. There is one caveat. Many banks will not make such a commitment until a purchase contract has been accepted but if you have assets and/or a good relationship with your lender then this step is recommended before step four.

Fourth Step: Choose your property wisely. Make sure it suits at least 90% or all your needs. The nearer it is to fulfilling your desires the closer you get to your satisfaction quotient. This should be based on your rational and financial attachment not your emotional attachment.

Then to meet the other 10% of your needs you may have to do some minor renovation or give up some other convenience like commuter distance or close proximity to a major city which often time has a direct relationship to value.

Fifth Step: Determine the level of seller motivation. Their purpose for selling plays strong into your strategy depending on how the needs match up with a sense of urgency. Keep in mind the importance may not always be financial. For example, an elderly couple may want to be closer to their grandchildren or the neighborhood may have undergone a transformation and the sellers feel they no longer fit in. Then there are other financial incentives to sell. They need the money to purchase another home. They can no longer afford the property. They are planning to downsize. The level of seller motivation should not be underestimated. It is a very important part of the process.

Also along with this information determine the seller’s financial obligation or their level of indebtedness. Find out how much equity the seller has in the property or any outstanding loans. This is a matter of public record. If you do not know how to look up the information ask your realtor. If there is anything odd about the asking price, too high or too low it will give the buyer some insight into the seller’s financial position. It will also give you and idea whether the price you offer or the transaction in general may evolve into a short sale.

Sixth Step: Do a Comparative Market Analysis. This is an informal assessment of the intended home’s value. Find a minimum of 3 residences that have sold within a 12 month period. The closer the data is to the current date the more relevant the information. If the target is a single family home the samples should be from the same street. If the target is a condo the 3 units should be from the same building.

Routinely it is nice to preview at least 3 places actively for sale on the market on the same street or building depending on property type. In the event like kind properties can not be found on the same street or in the same building, expand your search to include the surrounding neighborhood. If the units are not one to one in comparison with respect to configuration then square footage can be used to determine relative value. In all cases keep in mind the sold samplings will determine the value of the property you are considering not the active listings. These sold examples will also determine what the bank will lend for your transaction.

Seventh Step: Determine market trends and specifically neighborhood trends. For example are properties in the neighborhood decreasing or increasing in value? Establish the percent rise or drop and the projected time for stabilization. These numbers can be tricky and it behooves you to obtain the services of a good realtor.

Eighth Step: Determine what kind of strategy you want to use, a onetime cash offer, best and final offer or meet you half way approach. It is my opinion most people like a negotiated decision. It seems innately fair. So meet you half way is a very popular strategy.

For example, the listing price of a 2 bedroom, 2 baths, 2 parking stall, and 1230 square foot condo is being offered at $550,000. The owner has an outstanding loan for $300,000. They are the first owners and bought five years ago for $375,000. The wife is pregnant and they want to sell in order to buy a 3 bedroom home in what they feel is a slightly nicer neighborhood.

After doing all your research you find out the neighborhood property values are projected to trend 30% downward over the next two years. You have some objective information that indicates values will stabilize thereafter and perhaps swing up after the end of the 3rd year. You intend to hold onto the property for at least 5 years. The comparative analysis for the 3 like kind units that sold in the building within the past six months went for $525,000, $495,000 and $475,000 respectively. You want to make a onetime best offer. What is the ideal maximum price you should make?

 

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