First Time Homebuyer Series - Part 6: Making and Negotiating an Offer

In our First Time Home Buyer Series, we made our budget, got prequalified, looked for a house, checked out some foreclosures and short sales, and now I'm hoping you found the right house! All you have to do now is buy it!

It would be nice if there was a magic formula for how to negotiate the best price on a house. Unfortunately, every situation is different, which makes every negotiation different. Sometimes we have to come in quickly at full price to snatch up a deal. Other times, we will start really low and do our best to work the seller down from their asking price. One of my most important jobs is to guide you through this process based on the situation.

Instead of covering negotiating techniques in this post, I'll go over the important aspects of the offer so that you'll know what to expect. When we make an offer, we not only offer a price, but also an array of other terms. Your real estate agent will explain these terms and make sure you understand your options and rights per the contract.

Offer Terms:

Price - of course, price is first! There's a saying in real estate that it's not about the price unless it is about the price. This is often the most difficult term upon which to reach an agreement!

Seller Paid Closing Costs - In Georgia, all the closing costs are he responsibility of the buyer. That means that in addition to your down payment, you have to pay these additional closing costs on the day of closing. The costs include items such as attorney's fees, loan fees, home owners insurance, intangible and transfer taxes, setting up your escrow account, and more. Buyers often ask the seller to pay some or all of these costs so that they do not need as much cash on the day of closing. This essentially allows the buyer to finance the closing costs in their loan. Sellers usually don't mind to do this because it does not effect their net proceeds. For example, for the seller, a $325,000 purchase price with the seller paying $5,000 in closing is the same as a $320,000 purchase price with the seller paying no closing costs. For the buyer, this means they need $5,000 less dollars because their loan will be for $5,000 more.

Earnest Money - This is a deposit that shows good faith that you will purchase the home. When you buy the house, it becomes part of your down payment. If you terminate the contract for some reason, it can either go back to you, or it could go to the seller as damages for termination without a contractual cause. Of course, if you terminate the contract based on a valid contingency, then you will get the earnest money back. Another important job for your agent is to make sure you know your rights in the contract pertaining to the earnest money.

Closing Date - This is the day on which you will be a home owner! There are advantages and disadvantages to doing the closing at different times of the month, and you have to consider your personal situation. Typically, the closing will take place 30 to 45 days from the when we make the offer.

Closing Attorney - In Georgia, all closings take place at an attorney's office. The buyer has the right to select their attorney. Usually your real estate agent will have a relationship with a good attorney. However, if you buy a short sale or foreclosure, the bank often requires you to close at an attorney they select. Don't worry too much about that. The attorney represents your lender in the transaction, and you can always have a different attorney examine the title and documents for you.

Due Diligence Period - This is the length of time you have to do your inspections and make sure you want to move forward with the house. The main point of this period is for us to do inspections. We will also have a second negotiation with the seller to try to get them to repair problem items. However, it's honestly a free look, and you can terminate the contract for any reason. You also get your earnest money back if you cancel during this time. We will examine this period in detail in our next post.

Contingencies - These are other provisions in the contract that protect the buyer. They require something to happen in order for the buyer to be required to move forward with the purchase. The most common contingencies are for the buyer's financing to be approved and for the property to appraise for the purchase price. However, you could also have a contingency for the sale of an existing home, a certain inspection, the bank accepting a short sale, etc. Contingencies usually have time limits associated with them. For example, the buyer may have 21 days for their lender to perform an appraisal and confirm that the value of the home is equal to or greater than the purchase price.

Special Stipulations - In this section of the contract we can ask for anything. Maybe you can luck into that new car you've been eying! Seriously, you do see a variety of items in this section, but not usually a new car! Some common stipulations for first time home buyers are a home warranty, any appliances not originally included having the house cleaned prior to move in, leaving some furniture, for the seller to provide a survey, etc. This is free form, so it's up to you!

Process

It's hard to generalize the offer process because negotiations can go so differently. In general, the buyer makes an offer and the seller can accept, reject, or counter. Typically, they counter. The buyer then has the same options - accept, reject, or counter. Often, they will counter again. Once the buyer and seller agree and all the signatures are on the contract, the contract is said to be "binding". When you hear people say that a house is "under contract", this is what they mean. The buyer and seller have agreed to sell the property, and they are in the period between that agreement and closing. We will talk more about that period in our next post.

Justin Landis
Keller Williams Realty Peachtree Road
404-803-0471
justin.landis@kw.com

First Time Homebuyer Series - Part 5B: Short Sales

In Part 5A of our First Time Home Buyer Series, we talked about bank owned properties, which are commonly called Foreclosures. In this installment, we will look at another type of "distressed property" - Short Sales.

A short sale is when the seller is trying to sell the property for less than his mortgage balance. Therefore, he is "short" on his mortgage and is asking the bank to take a loss in order to sell the property. As home values declined over the past few years, this has become a much bigger part of the market. When home prices were going up, sellers were usually in a position to sell their homes for more than their mortgage even though they could no longer make their mortgage payments. That's the beauty of rising prices! However, with declining prices, a short sale is often a seller's last resort before foreclosure. It benefits the seller because he does not get a foreclosure on his credit report, and even though the bank takes a loss, it benefits them versus actually foreclosing and taking ownership of the property. If you know someone how is "upside down" on their house, this may be an option for them. Jarrod Thomas, on our team, is a Certified Distressed Property Expert, and can help them navigate their options.

How does the short sale process work?

The process is a little backwards in my opinion, but here are the absolute basics.

1. The property is listed by an agent at a price at which the agent thinks will generate an offer. At this point, the bank has not set a price at which they will sell the property. Therefore, the buyer and seller do not know if this asking price will be accepted.

2. The offer is received and accepted by the seller pending acceptance by the bank who has a mortgage on the property.

3. The listing agent submits the offer and other short sale paperwork (the seller has to apply for a short sale, but we won't go into that here) to the bank.

4. The bank has the property appraised to determine the current market value. Often the bank's other alternative is to foreclose. In that case, they have to hire an attorney, take the property back, clean it out, list it with an agent, etc. Therefore, they want to evaluate if it makes more sense to sell it now with the current offer.

5. The bank accepts, rejects, or counters the current offer.

6. If accepted, the buyer can move forward with their inspections and loan in order to purchase the property.

7. If the bank counters with a higher price that is not acceptable to the buyer or if the buyer walks away, the agent will re list the property at the price accepted by the bank. They can now market it as an "Approved Short Sale". In this case, a new buyer can come in a purchase the property at this price.

The reason I said it was a backwards process is because you do not know the price the bank will accept until you make an offer. So you can offer full price and still not get the property! That doesn't seem right!

For the buyer, short sales can be one of this market's best opportunities and one of its biggest frustrations! How could it be both? I'll outline the advantages and disadvantages below.

Advantages of a Short Sale for a buyer

1. Buy the property at a discount.

You can often get a great deal on a short sale. The seller is not going to receive or pay any money at closing, so they are only concerned with getting the property sold. On the other hand, the bank is concerned about the sales price since they are taking a loss on the mortgage. However, they are going to take a loss whether they approve the short sale or whether they foreclosure. There are quite a few other costs associated with foreclosing, so the bank is actually incented to sell the property for a little less as a short sale.

2. You are not locked into the property.

At least you are not locked in at first. The contract will be written so that you can terminate the contract prior to bank approval. Therefore, we can keep looking for other properties while we wait for the bank to decide. Your due diligence period and other contingencies begin once the bank approves the sale.

3. Better condition than a foreclosure.

This is obviously a generalization. I've seen foreclosures that are immaculate and short sales that are dumps. However, in general short sales are usually better maintained than foreclosures because the owners often still live in the home or they just moved out. Foreclosures have often been vacant for a while, and homes age quickly when they are vacant. You can also find out information about the property from the owner (such as maintenance history, repairs, etc.). This info is never available from the bank on a foreclosure.

Disadvantages of a Short Sale for a buyer

1. Uncertain pricing

Until the bank approves the short sale, you don't know if you can buy the property for the asking price! This can obviously be frustrating. I've seen buyers wait months only to find out the bank will not accept their offer. This is heartbreaking!

2. Uncertain timing

Short sales are not for you if you have a very tight and precise timeline. A few years ago, banks would take forever to respond to short sale offers. In the last year, many of the banks have significantly improved their process. However, it is still a longer process than buying from a regular seller. We also don't know exactly how long this process will take. Therefore, if you have to move into a place one month from now, I can't promise you that the short sale will be approved in that amount of time. I can't even promise it will be approved in two months.

3. Uncertain sellers

The seller also has to be committed to getting the property sold. They have to fill out a lot of paperwork and submit a lot of documents to the bank. If they do not get approved, the sale could fall apart. Also, if they feel like it is too much effort or they would rather just let it foreclose, the deal won't get done. Unfortunately, I've seen both happen.

To wrap it up, short sales provide a great opportunity to get a stellar deal in this market. However, you do have to navigate the uncertainty of the process. They are best for buyers who have the flexibility to wait and see what will happen.

We've worked with many clients on both sides of short sale transactions, so if you need some help, give us a call!

Justin Landis
Keller Williams
404-803-0471
justin.landis@kw.com