Making an offer is one of the most important steps in the home buying process. If you offer too much, the property might not meet the appraisal. This means you could have trouble getting a mortgage loan. On the other hand, if you offer too little for the home, the seller may reject it.
Here’s the bottom line. If you make a real estate offer based on solid data and advice, you’ll be less likely to encounter any snags — and more likely to get the home! So let’s talk about what it takes to make such an offer when buying residential real estate for the first time. In particular, let’s go over the steps that should take place during this process.
How to Make a Smart Offer – Step by Step
Let me start with the usual disclaimer. The process of buying real estate will vary slightly from one person to the next, based on a variety of factors. But if you follow the steps outlined below as closely as possible, you’ll be well positioned to make a smart offer on your real estate purchase.
1. Determine your home buying budget first.
Yes, we are going back to the beginning. That’s where a lot of first-time home buyers make mistakes. In fact, many people neglect this step altogether and don’t even establish a budget. They just jump ahead to step #3, getting pre-approved for a mortgage. That’s a mistake. You should always set your spending limits first, before dealing with lenders.
When you make a real estate offer to purchase a home, you have to do it within two “boundaries.” The first boundary is the amount you’ve been approved for, by the bank. We will talk about that in a moment. The second boundary is your monthly budget. This might be the same as the pre-approval amount, but in many cases it’s lower. When you make an offer to buy a home, you must ensure that the mortgage payments won’t exceed your monthly spending limits. Otherwise, you could find yourself in a foreclosure situation down the road.
Learn more here: How Much House Can I Afford to Buy?
2. Hire a real estate agent to help you.
This article is written for first-time home buyers in particular, so I’ve included this as a necessary step to making an offer. Granted, there are a few first-time buyers our there who understand the real estate process pretty well. But these folks are the exception to the rule. Most first-timers have no idea what to expect along the way, and this is only natural. How could they know? This is why I recommend hiring an experienced agent to guide you through the transaction.
A good real estate agent will help you in many ways, and the offer is chief among them. I will help you validate the seller’s asking price by reviewing recent, comparable sales in the area — commonly referred to as “comps.”
Remember, it’s called the asking price for a reason. That’s what the seller hopes to receive, but it may or may not be a reasonable price. Many sellers overprice their homes, for both financial and emotional reasons. So when you make a real estate offer to buy a home, you need to base the offer on hard data from recent sales.
3. Get pre-approved for a mortgage loan.
Earlier, we talked about the two boundaries you must stay within when making a purchase offer. The first boundary is your actual budget, the maximum amount you can afford to spend each month on a mortgage payment. We talked about that under step #1 above. The second set of boundaries will come from your mortgage lender. They will only lend you a certain amount of money, based on your credit score, income and other factors. So when you make a real estate offer, you must stay within both of these parameters.
This brings up the process of pre-approval. This is when a mortgage lender reviews your financial situation and tells you how much they’re willing to lend you. This number is not written in stone, and there’s no guarantee you’ll actually get that amount later on. But it does give you a good idea how much you can borrow from that particular lender.
Just remember that it’s possible to be approved for a mortgage loan that exceeds your monthly budget (step #1 above). When this happens, you should use the smaller number as your guide.
Get pre-approved here
4. Start the house hunting process.
If you follow the recommended steps up to this point, you’ll be ready to start the house hunting process. This can be the most exciting part of the process. There’s not much to say about it within the context of this article. But it’s another distinct step in the process, so I had to include it for the sake of continuity.
Learn more here: House Hunting Checklist
5. Make an offer based on recent sales data.
Earlier, I said that it’s called an “asking price” for a very good reason. It’s what the seller has asked to receive for the property. But it’s not necessarily what they will receive. They might receive more or less than what they are asking, based on current market conditions and how realistic their price is. So when you make a real estate offer to purchase a property, you must do it based on recent sales data.
The market determines what a house is worth — the seller does not. A smart seller will price it right from the start, in order to make a quick sale. But many homeowners overprice their homes when listing them. Your real estate agent will help you evaluate the asking price by reviewing sales data for similar homes in the area.
Learn more here: How to Evaluate the Seller’s Asking Price
6. Negotiate based on facts and logic, not emotions.
After you make your initial offer, the sellers will do one of three things. They will accept it, reject it, or sign it back to you as a counter-offer. The first scenario is obviously what you want, but you should have a plan in place for the other two scenarios as well. For example, if you offer less than the asking price and have your offer turned down, you need to know how high you are willing to go. Your agent will help you navigate this process.
I hope you’ve enjoyed this guide to making real estate offers the right way, and I wish you all the best with your home buying process. If you have additional questions about this topic, you will probably find the answers here on this website. If you don’t, you can always ask me a question.