Making an Offer

Making an offer. It’s so exciting! You’ve been searching for a home—and you just found THE ONE! That brownstone within walking distance of the great shopping and dining in downtown Birmingham. Or a condo that overlooks Kellogg Park in downtown Plymouth. Or a great home in a new sub in Canton.

The moment of truth has arrived, and it’s everything you dreamed it would be. What happens now?

This page explains the entire offer process, including:

  1. Understanding purchase offer documents
  2. Preparing your offer
  3. Common seller objections to offers
  4. Negotiating strategies & suggestions
  5. The process of making an offer

1. Understanding Purchase Offer Documents

It is CRUCIAL that you:

  1. Understand that NOT ALL PURCHASE OFFER DOCUMENTS ARE CREATED THE SAME.
  2. Select the purchase offer document that is appropriate in your circumstances (as choosing the wrong one can doom you before you even begin!).

Without writing a massive and overly technical dissertation on this important point, here are the things you need to know before you prepare your offer:

  1. Terminology – There are many terms used to describe “an offer,” including “purchase agreement” (or “PA” for short), “purchase offer,” “offer,” “purchase contract,” “contract” and more. Understand that almost every company has its own pet term for this, and there is no generally accepted, universally used name for this document.
  2. No Uniform Offer Document – Almost every real estate company in Michigan has its own favored contract, or multiple favored contracts (at Professional One Real Estate, we have two, and the one we use depends on the circumstances of the particular situation). It’s potentially important to note that many states actually DO have a uniform contract that all agents are required to use. Michigan is a little bit unique in that this is not the case here.
  3. Types of Offer Document – Irrespective of its title, every Purchase Offer document falls into one of two basic category types:
    1. Those that inherently favor you, the purchaser.
    2. Those that are inherently neutral and or favor the seller.
  4. Situations Where Buyers’ Version of Offer Document Is Sometimes Not Used – You may be thinking, “If you are representing me, the buyer, as a Buyer’s Agent, I assume you will use the Purchase Offer that favors me, right?” Generally speaking, that is a correct assumption. However, there are situations where that may not be true. The primary reasons are when we represent buyers making offers in situations:
    1. Where we know we are competing against other offers, and we want to make our offer more attractive.
    2. Where are dealing in a super-hot sellers’ market, and we know we don’t have as much leverage as we do in “normal” or buyers’ markets.
  5. Why This Matters – Does this really matter? Yes, it absolutely can. Here is an example where it can have a real impact on you in an offer situation: your offer is accepted, you have an inspection and the inspection discovers things that make you want to terminate the offer. While this doesn’t happen a lot, it absolutely does happen from time-to-time. And when it does, the type of offer document you decided to use can make a massive difference. Why? Because of the language in your inspection provision. Yes, all offer documents have inspection provisions, but some give you, the purchaser, extreme latitude in terms of what you can do in terms of reacting to the results of your inspection. And some do not. We’ve seen purchasers get stuck in situations they could have walked away from easily if they just used the right offer document in the first place. We could give a number of additional examples, but we wanted to point out that using the wrong contract really can impact you in very practical ways.
  6. Always Ask – ALWAYS ASK YOUR AGENT this key question: “What kind of contract do you use when representing buyers?” While it is true that real estate agents are specifically precluded from “practicing law,” every experienced, competent agent should be able to provide an overview comparable to what is written on this page. If not, you might want to find more qualified representation!
  7. Get Legal Advice – As we mention later on this page, we believe it’s always a good idea to have your attorney review your offer document before you do anything. As a sidebar, we also suggest you use a real estate attorney specifically, as we’ve seen people get odd and sometimes bad advice from attorneys who simply lacked sufficient experience in this very specific area of the law.

2. Preparing Your Offer

Now that you have an understanding of the different types of purchase offer documents that exist, you need to create an offer that details all of the particulars involved in your purchase. Here is a list that covers most of the particulars involved in that process:

  1. Obtain an Updated Pre-approval letter – As soon as you make the decision to make an offer on a property, you should call your lender to obtain a pre approval letter that is specific to the offer you are about to make (your lender and your Professional One agent will explain this to you in further detail).
  2. Review of Disclosures – Review Understanding Disclosures. You and your Professional One agent will critically review the Seller’s Disclosure Statement and the Lead Based Paint Disclosure Statement to identify any unusual factors that you may need to consider before making your offer. Michigan State law requires that you review this information BEFORE you make an offer on any property. Remember, the general rule of thumb is that sellers will never allow concessions for anything they’ve disclosed on their Seller’s Disclosure Statement. So, if the seller has already disclosed that the roof is 20 years old, you need to factor this into the price you want to offer up front. If you attempt to come back later and request a lower price to reflect the aged roof, 95% of the time you will receive a negative reaction from the seller. Base your offer price on what you see on the disclosures.
  3. Determination of Price to be Offered/Review of Comparables – Your Professional One agent will run searches to give you the information you will need to make an intelligent, informed decision with regard to the price you intend to offer. Every situation is unique, and there is no “magic formula” for preparing such comps. In a “normal” offer scenario (e.g., a residence in an established neighborhood with a number of comparable sales in the last year), the typical parameters to use are as follows:
    • Legal description (in lay terms, this is the name of the subdivision).
    • Status date (we typically only look at sales that have occurred within the last 12 months, unless we need to look at older sales if there are not enough “newer” sales).
    • Square footage (we typically establish a “range” of sizes to include in our comp searches; as an example, if the subject property is 2,400 square feet, start by selecting a minimum square footage of 2,200 and a maximum square footage of 2,600; adjust the range to obtain a representative number of properties).
    • When reviewing the search summaries that your Professional One agent will provide, focus on the following information (which appears at the bottom of the last page of each search):
      • Average sales price for the sub/area.
      • High sales price for the sub/area.
      • Average sales-price-per-square-foot for the sub/area.
      • High sales-price-per-square-foot for the sub/area.
    • Again, there is no magic formula to be used here. Our job is to provide you with the intellectual ammunition to make a good decision.
    • Having said that, here are a few “big picture” thoughts to keep in mind when deciding what price you want to offer for your home:
      • On a “mega-scale,” the gap between average list price and average sales price is 3% (that is, the typical seller sells their home for 97% of the list price.)
      • The first rule of successful negotiating is this: do not insult the seller. Purchasers sometimes attempt to “steal” houses by offering insultingly low prices. Usually, this strategy fails miserably. We’ve seen many instances where sellers will simply refuse to negotiate with buyers that try to “low ball” an offer. Do not use this approach unless you truly do not care if you obtain the home (and, if you truly don’t care if you obtain the home, we would suggest that you simply continue looking until you do find a home that you desire).
      • There are no hard-and-fast rules on what constitutes a “low ball” offer, but assuming a home is reasonably priced, offering 10% less than list price is generally received quite negatively by the typical home seller.
  4. Selection of Contract to be Used – You have two basic choices, as follows:
    • Buyer’s contract: This is the default contract we use when we work with buyers (assuming we are representing you “buyer’s agents,” which we do the vast majority of the time). This contract includes special provisions which are designed to protect you, the purchaser. As logic would have it, some agents and sellers find some of these provisions objectionable (see below). Typically, such objections are not “deal killers” and can be worked around. Your Professional One agent will review the contract with you in detail. Review the standard Buyer’s Contract.
    • Seller’s contract: It is extremely rare for a Professional One agent to use this type of contract when working with buyers. The only circumstances in which we sometimes use this contract are as follows:
      • When we are working as “dual agents” (which happens whenever you are attempting to buy a Professional One listing).
      • When we know or believe that we are competing with other offers on the same listing (the logic here is that we are increasing your chances of “winning” by reducing a seller’s potential objections to our offer).
        Review the standard Seller’s Contract.
  5. Preparation of Offer/Completion of Contract – Once you’ve completed your review of the comparables, reviewed the disclosures and selected your contract, you’re ready to move on to the final stage of this process, the preparation of the actual contract detailing what you want to offer to the seller of the property. While there are a myriad of details which your Professional One agent will explain and review with you, the key things to be noted/decided are as follows:
    • Items to be included and excluded (end of Provision 1) – Make sure you list all items of personal property to be included and excluded from the sale (refrigerator, stove, window treatments, etc.).
    • Type of Financing (Provision 2) – This section includes all of the common financing techniques you can use to purchase a home. The most common choice is “New Mortgage.” The second most common choice is “Cash Sale.” During your pre approval process, make sure to have a detailed conversation with your lender about how you intend to finance the purchase of your home. Assuming you are going to obtain a new mortgage, as most people do, note the following:
      • Any offer with a down payment of 20% or more is generally considered a “good” or “strong” offer.
      • Any offer with less than 20% down is considered an “average” or (as the down payment decreases), a “weak offer.”
      • To explain the logic of these points is a rather lengthy proposition; in a nutshell, it has to do with the likelihood of there being an appraisal problem later in the transaction.
      • You will need to formally apply for your mortgage within five days of offer acceptance, and you will need to actually obtain mortgage approval within 30 days (these are more or less industry-accepted standards).
    • Occupancy and possession (Provision 3) – Generally speaking, this – occupancy and possession – is one of the most critical and most misunderstood aspects of real estate contract and real estate in general. People consistently have misunderstandings over this, so SLOW DOWN and make sure that you fully understand every aspect of this issue. As you will note, you have two options within this area: immediate occupancy (which means that you can take possession immediately after closing), or deferred occupancy (which means that you will take possession at some point after the closing). Key things to note under each scenario:
      • Immediate possession – Self explanatory; you get possession of the property as soon as you close.
      • Deferred closing – When the seller desires to stay in the home subsequent to the closing, the following issues need to be addressed:
        • The number of days that you have agreed to allow the seller to live in the residence subsequent to the closing. Typically, the seller indicates their preference with regard to this issue on the listing itself (in the data field entitled “POS”, which means “possession”). Typical seller preferences are “10 DAC” (10 days after closing), “IMM” (immediate), NEGO (“negotiable”), etc.
        • WORD OF CAUTION: The seller has the legal right to vacate the property at ANY TIME within the agreed upon period; that is, even if the contract says that the seller can stay 30 days, and even if the seller specifically says that they intend to stay for 30 days, the reality is that the seller can move out at any time during the 30 day period: the day of closing, six days after closing, 22 days after closing, or any other number of days between zero and 30.
        • The “per diem rate” that the seller agrees to pay to you for the right to stay in the house after the closing (this is the daily rent that the seller will be paying). The typical “short hand” that we insert here is the often-confusing acronym “1/30NMP+I+T.” This stands for “1/30 of the New Mortgage Payment plus Insurance plus Taxes.” In other words, the seller is being asked to pay you your exact cost of owning the particular property.
    • The amount of your deposit (Provision 4) – The most typical rule of thumb is that you should provide a deposit of 3% of your offer price. The check should be made payable to “Professional One Real Estate.” Also, understand that this check is actually going to be deposited (in case you need to transfer funds, etc.); state law requires that we deposit your check within 48 hours of offer acceptance.
    • Closing timeframe (Provision 10) – This is another area where you need to slow down and focus on the issue being addressed: the closing timeframe. In this provision, the main thing to determine is when you would like to close. This seems simple, but there are often factors that complicate the matter (e.g., when you are closing on the sale of your current home, if applicable, out-of-country travel plans, etc.). Also, people often confuse the “closing date” with the “occupancy/possession” date. The possession timeframe (if there is one) BEGINS at the date of closing. When it comes to possession, people tend to think in terms of “days from right now” instead of “days from the date of closing.” Beware of this common mistake. It can cause MAJOR problems later in your transaction.
    • Inspection (Provision 14) – This is one of the more significant aspects of this contract. In a nutshell, this provision says that you can get out of the deal for ANY REASON WHATSOEVER with regard to the inspection results. For the most part, any experienced listing agent will not object to this provision. Also, please note the following with respect to inspections in general:
      • We recommend to that you have a primary inspection AND a radon test.
      • WORD OF CAUTION: The primary purpose of an inspection is to investigate whether the property in question is free of material defects and or conditions that potentially affect habitability. It is NOT intended to be used as leverage to renegotiate the price you intend to pay for the home. EVERY home has a laundry list of issues and problems, even new construction!
  6. Signatures and Initials – At this point, all that’s left to do is the following:
    • Sign and initial the contract.
    • Sign the Seller’s Disclosure Statement.
    • Sign the Lead Based Paint Disclosure Statement.
    • Write your deposit check made payable to “Professional One Real Estate.”

3. Common Seller Objections

Following is a list of provisions within the Buyer’s Contract that are sometimes found objectionable by listing agents and sellers (note that this list is specific to the Professional One Real Estate Buyer’s Contract, and may or may not apply to other contracts, as most real estate companies in the State of Michigan have their own preferred contract):

  1. Provision 3 re Additional Security Deposit – This represents the place where the purchaser can request that the seller provide a security deposit (just like a landlord would request from a renter) in situations where the seller will be staying in the home for some period of time after the closing. Although this is conceptually a simple concept, the practical reality is that it is very rare for a purchaser to actually request such a deposit; for whatever reason, it is not customary in our market to do this. Understand that, if a purchaser does request such a deposit, the seller will likely have a less favorable reaction to the offer. Our experience is that the seller will view any security deposit they are required to provide as “lost money” and adjust the ultimate sales price accordingly to recover this “loss.”
  2. Provision 6 re Stake Survey Required for Title Insurance – The objection results from the reluctance on the part of the listing agent to ask his or her client to pay for the cost of a staked survey (which can be very expensive). In a typical offer scenario, where a purchaser is buying a residence in a traditional subdivision, this objection is not a problem (because the title company typically doesn’t need a staked survey to provide a title policy without standard exceptions, which is the reason for the request for the staked survey in the first place). Accordingly, unless the property is located in a rural setting (which is indicated by the existence of a “metes and bounds” legal description), it is not a major issue if the listing agent objects to this language.
  3. Provision 7 re Approval of Easements and Restrictions – This language is unique to this contract, although listing agents and sellers rarely object to this provision (because, to do so, they will look like they’re trying to hide something). All that is being requested is information about any easements and restrictions that might apply to this particular property. Having said that, it is unfortunately common for the listing agent to shirk his or her responsibilities and not attend to this request in a timely fashion. Purchasers and their agents should be prepared to do their own investigative work if the listing agent fails to reply in a timely fashion.
  4. Provision 11 re Closing Costs – Some agents think that the contract is requesting that the seller pay for certain closing costs that are not typically the responsibility of the seller. In reality, this is much ado about nothing, as a typical title company will always allocate the costs between buyer and seller in the same manner, irrespective of what the contract says. This is not a major issue.
  5. Provision 16 re Risk of Loss – This is the provision most likely to be objected to by any good listing agent. This provision gives a prospective purchaser too much latitude in terms of potentially voiding the transaction at the last minute if there is “damage” (because “damage” is so subjective, and an unscrupulous purchaser could manufacture a reason to void the deal with little or no actual “damage”). There are ways to modify the language of this provision to maintain the protections afforded the purchaser while at the same time alleviating the seller’s legitimate fears that leaving the language intact may create.
  6. Provision 17 re Environmental Issues – This is another provision likely to be objected to by any good listing agent. This language gives the purchaser too much latitude in terms of suing the seller if there are any environmental issues, even if such issues are discovered years after the sale. Given the aggressive nature of this provision, a purchaser should expect most sellers to refuse the inclusion of this language.

Why is it important to understand the things that sellers may object to in your offer? It’s important so that you can anticipate how a seller may react upon receiving your offer, and also so that you can think about these factors as your offer is created (in case you might want to adjust an item or two to make your offer more attractive to the seller).

4. Negotiating Strategies & Suggestions

Hundreds, if not thousands, of books have been written about negotiating. We certainly cannot summarize everything that is involved in this dynamic, often-complex strategy in a few pages. However, there are some things that are worth mentioning, as follows:

General Suggestions

  1. The Golden Rule – We all know this one, right? “Do unto others as you would have them do unto you.” Sadly, in today’s contentious, litigious society, we see many people enter into negotiations with the often misguided belief that negotiations have to be a negative, confrontational experience. Our experience shows that people seem to get more of what they want when they use the exact opposite approach. When you show yourselves to be reasonable and objective, people are often so pleasantly surprised that they bend over backwards to “meet you halfway” and often end up meeting you MORE than halfway! Also, you never know when you’re going to need information or assistance of some sort from the other side of the transaction – particular if you are a buyer – so it’s always a good idea to try to make a friend when buying or selling a home.
  2. The Other Guy Does Not Have to be Your Enemy – This is similar to the prior item, but a little different. We know that it may sound cliche or trite, but our objective in every transaction that we do is for it be a “win-win” situation for all parties involved. How can you take pleasure in an activity when you know the other side is miserable? Toward that goal, there is absolutely no reason that everyone cannot be on positive terms during the course of a real estate transaction. We are occasionally disappointed when we encounter people – buyers, sellers, other realtors, sometimes even our own clients – that have a mentality that “the other guy is trying to screw me.” Often times, this mentality is a self-fulfilling prophecy. Show the other guy you are reasonable, and the odds are very good that he will show you the same.
  3. Ethics are Everything – No explanation needed here. If people don’t trust you, you’re done. Once trust leaves any relationship, whether it’s in real estate deal or anywhere else, for that matter, you are left with nothing.
  4. Never Reopen a Closed Issue/Raise an Issue at an Inappropriate Time – Very often, there are multiple issues to be negotiated in a real estate transaction (e.g., price, closing date, possession and occupancy, items to be included, various deadlines, etc.). In most typical transactions, the parties methodically work through the issues and eventually end up with an overall agreement. One thing that almost always upsets people is reopening an issue that was previously agreed to, or raising an issue that was thought to have not been an issue. The classic example: all contracts have deadlines for raising objections that result from inspections. The proper time for a purchaser to inform a seller of issues stemming from an inspection is very quickly after the completion of the inspection(s). A purchaser has an inspection, and a number of typical issues are noted. The purchaser says nothing to the seller for several days after the inspection is completed. And then, at the very last minute before the inspection deadline lapses, the purchaser presents the seller with a laundry list of requests relating to the inspection. 90% of the time, this approach will upset a seller. In real estate, as in most things in life, timing is everything!
  5. Initiating a “Lowball Offer” – Do lowball offers work? Sometimes. Can you shoot a basketball blindfolded from half-court and make the shot? Sometimes. But, as the old saying goes, the “the exception does not disprove the rule.” Just because this sometimes work does not mean it’s a good idea to use this approach. The reality is that, a very high percentage of the time, lowball offers fail miserably. Why? Because you are effectively saying, “Hey, Mr. Seller, I know your home is worth more than this, but I’m hoping that you are in dire straits and desperate and that you’ll accept my offer because you feel you have no other options.” Now, if you are correct in this thinking, maybe, just maybe, the seller might accept your offer. But the reality most of the time is this: Even if you are right in your thinking, you will so offend the seller in the process that they won’t even bother to respond to your offer. We have seen his many, many times. As much as we try to make our clients view real estate as a “business” (as opposed to something more personal), the reality is that people have a hard time doing this. Homes tend to take on a very personal significance to their owners. If you try to “steal” their personal possession, bad things typically result…
  6. Get it in Writing – Never rely on a verbal agreement in a real estate transaction. The “Parol Evidence Rule” of law states that real estate agreements must be in writing. If an issue is important enough to matter to you, then make sure you document it in an addendum to your contract and get everyone’s signature.
  7. Don’t Critique the Home with the Seller Nearby – You may not like the way a seller has decorated or furnished their home. But be sensitive to the fact that the homeowner likes it that way, or else it wouldn’t be the way that it is. I can’t count how many times I’ve shown a home to one of my intelligent, seemingly sensitive clients and they will say something like, “This room would look great with a new coat of paint” or “this room would look a lot brighter without that paneling.” Believe it or not, even if you are entirely correct, many people are very sensitive to this sort of remark. And that matters because you don’t want to do anything that makes the seller less favorably disposed toward you.
  8. Hire an Attorney – Yes, we read Shakespeare, who famously said, “Let’s kill all the attorneys,” but we still think it’s a good idea to have legal representation.

Specific Strategies

Traditional Method: Start Low and Come Up to Your Real Price – This is the tried-and-true method that most people use. The house is priced at $300,000, the purchaser is willing to pay $290,000, and they offer $280,000, hoping that the seller will come down and meet them “half way.” This approach is effective when a home is reasonably priced and the initial “low” offer can be made without insulting the seller. Of course, it is impossible to know what a given seller will view as “insulting.”

The positives of this approach are as follows:

  1. It’s what most people expect you to do
  2. You likely won’t run the risk of paying too much on your initial offer price

The negatives of this approach are as follows:

  1. The process sometimes bogs down if both parties don’t agree to react at the same relative “pacing.” When one part responds in one hour and the other responds in two days, it can create “bad will” between the parties
  2. If you end up with two strong-willed parties in a negotiation and both INSIST upon having the last word, negotiations can become contentious or break down altogether
  3. Unless responses from the other side are very quick, the party “waiting” always thinks the other side is taking too long to reply

“Take It or Leave It/Best Shot” Method: Start With Your Highest Offer and Hope It Works – This is a method that people often use in the following circumstances:

  1. The purchaser cannot afford to pay more than a certain amount, and to start the negotiations at a price below that amount risks offending the seller
  2. The purchaser does not like to play the “back and forth” game
  3. The purchaser desires a quick answer
  4. The positives of this approach are as follows:
  5. It does accelerate the entire process
  6. Many people like the simplicity of it

The negatives of this approach are as follows:

  1. A purchaser might end up overpaying, since they are coming in with his “best shot” from the start
  2. A purchaser cannot deviate from this method once they start it; if the purchaser does, then they will lose all credibility with the seller

At the end of the day, the strategy you decide to employ is entirely up to you. And there are other approaches you can use, of course.

That said, we’ve seen every approach work – and we’ve seen every approach fail. It really is a “feel” issue, and every person has a different view of the best approach.

Discuss this with your agent, and, ultimately, go with what feels right to you.

5. The Offer Process Itself

You’ve selected your purchase offer document, you’ve completed it, you’ve decided on a negotiation approach and you’re ready to proceed. What happens from this point forward? Here is a quick overview:

  1. Your Agent Prepares Offer – Your agent will prepare your offer in one of two ways: either physically on paper, or electronically, using an Electronic Signature technology solution like DocuSign, AuthentiSign or a number of other comparable products. For purpose of this section, we’ll assume your offer is being created and administered via an Electronic Signature solution, as most of our deals are done in this manner.
  2. You Review & Approve Offer – You and or your attorney review the offer to ensure you are in agreement with everything included therein.
  3. You Sign the Offer and Disclosures – This is super fast and easy, and can be done in a matter of a few seconds.
  4. The Offer and Disclosures are Sent to the Listing Agent – Your agent is notified instantly after you sign everything, so they can forward it on to the listing agent very quickly (as time is often of the essence in real estate).
  5. Your Agent Follows Up with Listing Agency to Ensure Receipt and Request Updates – Your agent will typically call/email/text the listing agent to ensure receipt of the documents and to request information regarding when a response can be expected from the seller. It’s important to note that, while we always include a specific date and time by which the seller must respond, unfortunately, many agents and sellers are lax when it comes to respecting this particular request.
  6. Listing Agent Responds with Seller’s Response to Offer – The listing agent will communicate their client’s response to your offer, which can be one of three things:
    1. Acceptance of offer with no modifications
    2. Counteroffer that includes modifications to the terms of your original offer
    3. Rejection of your offer
  7. You Respond to Seller’s Response to Offer – Continuing the prior point, here is how that typically works:
    1. Assuming they accepted your offer without modification, their signature on your offer normally indicates a legally binding sale, and you move on to the next phase of the process: contract-to-close/buying
    2. Assuming they provided a counteroffer, then the ball is back in your court, and you have the same options they had in terms of the original offer. You will do one of the following:
      1. Accept their counteroffer by initialing their changes and “bottom lining” the offer (signing the document in the place where your acceptance of their counteroffer is indicated);
      2. Provide a counteroffer to their counteroffer, or
      3. Reject their counteroffer, and the offer will be terminated
  8. The Process Concludes – This continues until you reach terms with the seller and agree to buy the property, or you or the seller terminates the offer. If you reach terms, you then move on toward completing the transaction, which you can read more about here.

Send this to friend