You converted the original home buyer inquiry to an appointment. You qualified the buyer as to needs, wants and price range, helped them obtain mortgage pre-approval and developed rapport to start the home search process.
Now six weeks later, 29 home showings and second showings to both sets of parents, your buyer client says “We want this one, let’s make a contract offer”! You’re excited. You’ve finally found them a home. You’ve done it!
Almost, but not yet. In fact, you’re not even in field goal range yet.
There’s more to preparing a contract than simply filling in the blanks! The goal is to prepare the contract offer to get it signed by the seller, and not questioned and rejected! And yet, knowing that a home cannot be sold without obtaining a signed contract by the seller, it is amazing how contracts are being prepared and submitted by many Realtors and Buyer Agents. Contracts are being prepared and submitted that are impossible to read, are incomplete, dollars not adding up, are missing documents or disclosures and have dates that are impossible to meet.
This is not the time to rush into filling out and completing the contract offer paper work. This is not the time to assume your buyer’s offer is too low and won’t be accepted, and does not warrant your time and energy to prepare and present. This is not the time to simply call the listing agent and present a verbal offer or just fax or email the contract offer to the listing agent for them to present.
Contract presentations are what we are in the real estate business for. They are the result of providing professional service to buyers looking to purchase a home. Why, then, are Realtors and buyer agents spending so little time in preparing buyers in advance of a contract offer and little or no time in structuring the contract to make the offer as strong as possible regardless of the price offered?
Regardless of the number of pages in a sales contract, the agreement to purchase can be broken down into three separate parts: price, terms and conditions. Each has to be satisfactory to obtain seller acceptance and a signed contract offer.
In some situations, full price offers are not acceptable due to the buyer’s terms and conditions in the contract offer. In other instances, contracts get accepted and signed even though the offer was much lower in price than other competing offers, but was more favorable for the seller in terms and conditions. Then there are the contracts where the price is acceptable, but the contract offer is sent back to the buyer for initials on all the corrections which had to be made.
Avoiding time delays when negotiating a contract can be the difference in obtaining seller acceptance, or losing out to another offer, especially if the delay is due to reasons which could have been avoided with proper preparation of the contract offer to begin with.
Preliminary Information in Preparing Contract Offers
Contact the Listing Agent
In most listing agreements, the listing agent is the gateway to a contract presentation with the seller. Don’t just start writing the contract offer! Don’t assume the seller will accept a normal closing date! Inquire as to the sellers preferred closing date time frame. It would be important to know that the seller wants a six month closing and the buyer needs a two month closing due to the sale of their present home or the seller needs an immediate closing and the buyer has a home to sell and it is not even on the market yet.
Don’t be afraid to ask if there are there any offers being negotiated at the moment? If there had been any offers presented, refused and when? Is so, try to obtain information as to what is the status of the listing, what price has been refused and try to obtain any other information that may be helpful? Some agents do like to talk.
And be diligent in inquiring whether the property is a short sale or pre foreclosure. This is information that buyers should know and agents need to have prior to preparing contract offers.
Obtain a copy of the Sellers Property Disclosure in advance of preparing a contract offer and review it with the buyer. Information provided in the disclosure may have an affect on the price the buyer will offer, and may have affect on the market value of the home.
Why wait until the contract presentation to obtain the sellers property disclosure? Obtaining the disclosure after the fact requires extra time in getting it signed by the buyer, but more importantly it may provide information which may change the buyer’s desire for the home or the price they are willing to pay for the home.
For homes built prior to 1978, obtain the Lead Based Disclosure. By law, this form must be completed by the seller, signed and dated prior to the buyer’s acknowledgement signature. Again, why wait to obtain it at the contract presentation and then go about obtaining the buyer’s signature?
Prepare the Buyer
The first step is explaining the process of negotiating a contract offer with the buyer. Buyers need to know and understand how the process of presenting their contract offer works.
They need to know that there is no cardinal rule that there must be some fixed amount that a seller will negotiate from their asking price. They need to know that a seller has options when a contract offer is presented: they can accept it, make a counter offer or refuse it without even making a counter offer.
They need to know that the home is on the market and is being shown to other buyers during the process of contract negotiating and perhaps afterwards in many cases. They need to know that new offers may be presented while theirs is being negotiated.
When buyers are not informed with information like this, and if the contract negotiations do not work out, there is a great chance that the buyer places all the blame on the agent.
Be sure the buyer has provided a copy of their Mortgage Pre-Approval.
Be sure a copy is included with the contract offer. Why? The first question to be asked by the seller and listing agent at a contract presentation will be “Does the buyer have Mortgage Pre-Approval? And this is where the benefit of a Mortgage Pre-Approval letter provides advantages over a standard Pre-Qualification letter. There is a difference!
A good practice would also be making a phone call to the mortgage representative to obtain the time frame they feel is necessary to process the mortgage application and what additional information the buyer needs to provide. With information like this, there is a better comfort level in knowing what time frame is needed in the mortgage contingency clause in the contract offer.
Three Parts of a Contract Offer
When negotiating a real estate purchase offer, the seller wants to sell at the highest price and the buyer wants to buy at the lowest price! The reality is that a home will sell for what is worth, whether a seller is looking to get more or a buyer wants to pay less. That is why it is called negotiating the contract offer. Contract negotiation is all about getting agreement.
Prepare a Market Analysis for the buyer. The report should contain information comparing similar properties which are active on the market for sale, homes which expired and did not sell in the past six months, under contract sales and closed sales in the past six months, including asking price history and days on market before sold. With a report like this, a buyer can then have a better understanding of the real estate market and be better prepared when submitting a contract offer.
And bring the Market Analysis to the contract presentation. It could become very valuable in contract negotiations with the seller. Do not assume the listing agent has provided the seller with an updated market analysis after the original listing presentation.
So how does a buyer start negotiating to purchase a home? That depends on a number of things, such as the risk to losing the home to another buyer, how close to market value the seller’s asking price is and what is the maximum price the buyer is willing to pay for the home.
When a buyer’s contract offer is low, or in situations where there are multiple offers being submitted, it becomes even more important that the content of the contract is structured to be more pleasing to the seller, and listing agent.
Terms of the Contract
Binder and Earnest Money Deposit
Writing a binder check for $100.00 shows good faith, but what kind of statement is that making to the owner when the contract offer is presented to them?
Would a more substantial initial deposit, say $1,000.00, make a stronger statement? How about $5,000 as an initial deposit, or even more? Wouldn’t a larger initial deposit check make a stronger impression with a seller in making a decision to accept a contract offer?
What about the second deposit, the earnest money deposit? Where buyers have a substantial down payment, more then 10%, it is becoming very rare that contract offers are prepared with an earnest money deposit of 10% of the purchase price. Use the buyer’s assets to their advantage in the contract presentation.
When buyers have minimum down payments, such as an FHA offer with 3.5% as a down payment, why is the contract offer structured with some part of the down payment as the earnest money deposit and the balance being paid at closing? Utilize the entire 3.5 % as the earnest money deposit; it can become an advantage in the contract presentation.
Many buyers, and buyer agents, under estimate the importance of these two aspects of contract preparation, and the benefits they can provide in contract negotiation. The Initial Deposit and Earnest Money Deposit can be the difference in whether a contract offer gets accepted and signed by the seller or refused, especially in multi-contract presentations.
The mortgage contingency date is another area of concern for sellers in contracts presentations. A common statement from sellers is, “I don’t like the idea of keeping my home off the market that long”. This is where the buyer’s Mortgage Pre Approval becomes very valuable, especially in low down payment contract offers.
Contract offers need to have a reasonable time frame for obtaining mortgage approval. Agents need to know the expected time frame in processing the mortgage application, whether it is conventional, VA or FHA, and whether it could take two weeks, one month or six weeks. This depends on the buyer, the mortgage company and what verifications were obtained in the Pre Approval process.
The mortgage contingency date is a condition in the contract; it is a subject to event. When a short mortgage contingency date is provided in the contract and mortgage approval is not received, most all real estate contracts provide language such as: If the Mortgage Loan has not been arranged by DATE, then either buyer or seller can void this agreement by providing written notice to the other party.
Why are contracts prepared with a two week mortgage contingency clause when contract approval and the home inspection could take that long and the buyer does not plan on submitting a formal mortgage application until they are satisfied with the results of the home inspection? If there is a short mortgage contingency date due to a fast closing, or otherwise, advise the buyer that the home inspection, mortgage application and bank appraisal must be ordered immediately in order to meet the time frames and include it in writing in the contract offer.
What about transactions which involve a delayed closing, say six month, due to the seller purchasing a home being built? Many buyers, and some agents, believe that a mortgage application would not need to be submitted for three months or so because a mortgage rate lock-in would not be available for such an extended closing date. That is the wrong thinking. Prepare the buyer in advance for the need to obtain mortgage approval in advance of an extended closing date.
Why would a seller want to sign, or a listing agent advise a seller to sign, a contract offer which allowed the buyer three months to obtain mortgage approval? Mortgage approval is the most important aspect in a real estate transaction. Why would a seller agree to such a long period of time where the home is off the market and the contract can be voided by the buyer if mortgage approval is not obtained?
When submitting a contract offer, so much is dependent on the seller and what time frame they have in selling. Some sellers are extremely flexible in when they would like to close, others are buying another home and need a specific date, and others may need a fast closing due to relocation or otherwise.
If a fast closing is required by the buyer or the seller, prepare the buyer with the importance of time lines. Depending on the time needed for processing the mortgage application, it may be necessary for the buyer to have their Attorney or title agent order searches and prepare the title work prior to mortgage approval. If that is the case, include it in writing in the contract offer.
Conditions in the Contract Offer
As previously mentioned, conditions are found in most all real estate contracts. What is important and needs to be reviewed is that as a condition, these subject to clauses can be a concern to a seller. The concern is not that a mortgage needs to be obtained or that a home inspection needs to be performed, but it is a question of in what time frames will they be completed by the buyer. Again, in most cases, their home is off the market during this time period.
Depending on the state or specific geographic location, the home inspection, termite inspection and perhaps radon inspection are generally the most common inspections found in real estate contract offers.
If the time frames for these inspections are too long, there may be a negative response from the seller in contract negotiations. If the dates are too short, complications could arise, such as a waiver of the right to inspections or perhaps even voiding of the contract of sale. The sooner the buyer can complete the inspections in the contract, the more comfortable the seller will be in knowing that their home will be under contract with the inspection contingencies satisfied.
Prepare the buyer for the types of inspections which need to performed, ask them investigate inspection companies in advance, advise the buyer that it is recommended they attend the home inspection and provide information relating to the time frames involved in obtaining inspection dates and receiving the written reports.
Buyer Home Sale Contingency
There are other subject to contingencies that can be more of a concern to a home seller, such as subject to the sale of the buyer’s present home, especially if it is not yet on the market for sale or not under contract. While it is understandable that most home buyers need the equity from their home sale in order to purchase another home, many sellers may not be willing to take their home off the market and wait for the buyer to sell their current home.
The seller’s situation and home sale needs will be the factor in whether a buyer’s home sale contingency is something that may be acceptable or something which is completely unacceptable. A buyer with a home sale contingency is a much weaker buyer than a buyer without a home sale contingency. However, a buyer who has a signed contract on the sale of their home would be in a much better negotiating position than one without a sales contract.
Provide as much information as possible related to the buyer’s home sale, whether it is the listing agreement and showing activity if the home is not sold or a copy of the sales contract and copy of the mortgage commitment if it is under contract. And again, explain the difficulties to the buyer of presenting this type of contingency to the seller.
There are times when buyers are willing to make an offer to purchase another home without a contingency to sell their present home, something which was quite common in 2002 to early 2006 and perhaps now in multiple contract situations. Even though the buyer may be financially prepared to close without the sale proceeds of their current home, they need to know, obtain and provide documentation that their mortgage approval will not be subject to the sale of the current home as well. It is one thing for a buyer to agree to purchase without closing and paying off their existing mortgage on their home sale, but it is another that they have it in writing on the mortgage approval.
While price is an important aspect in contract presentations and negotiation, the structure and the conditions in the contract, such as mortgage terms, inspection time frames and other contingencies, are the most overlooked details by Realtors in preparing a contract offer. In fact, I’ve seen more contracts than I can count in my 38 years of listing and selling real estate that would have been signed and accepted at the initial presentation, if they were properly structured and prepared to begin with!
Licensed since 1971, David Fialk, CRB, CRS, ABR, GRI, e-Pro Certified Internet Professional, is the broker/owner of Choice Realty Co., Iselin, NJ and provides Real Estate Sales Seminars and Training. He can be reached at 732-283-3400 or David@ChoiceRealty.com.