Evaluating the Price and Other Financial Parts of a Homebuyer’s Offer
Look beyond the dollar signs when deciding on a homebuyer’s purchase offer.
Price is a key part of a homebuyer’s offer, but there’s lots of other financial information within the typical offer, which will help you decide whether the buyer is really ready and able to close a sale.
In fact, if you’re lucky enough to receive multiple offers on your house, you won’t necessarily want to choose the highest-priced one. A buyer with solid financial backing—or who’s offering an unusually high down payment or all cash—may be your best bet, even at a lower price.
Your real estate agent will help you set a realistic price, based on comparable sales of other houses. If you’re offered your asking price, great. And if you’re in a hot market and your house is especially desirable, you may be offered more (sometimes substantially more) than the asking price. Especially great.
But, depending on the market and your house and neighborhood, you may be offered less than the asking price. If a buyer offers a price at the lower end of what you’d expected or hoped for, and no other offers seem to be on the horizon, it’s definitely worth considering. Waiting for a higher offer risks the house going stale on the market and will add to your costs—especially if you’ve already moved out and have to keep paying utilities and other fees, such as to your homeowners’ association, on your empty house. And of course, there’s no guarantee that a significantly better offer will come along.
If the offered price is ridiculously low, you’ve got some thinking to do. While you may be tempted to decline the offer outright or to counteroffer closer to your asking price, do some objective evaluation first, in consultation with your real estate agent. Consider the general interest level in your house so far, taking into account issues like:
- How many times have brokers shown your home to their clients? If buyers aren’t coming by at all, this could mean you’re lucky to have an offer at all.
- What level of interest have visitors shown? If you’ve heard nothing or vague promises to “think about it,” a low offer may start to look good.
- How long has your house been on the market? The longer it’s been available, the more likely you’ll have to compromise on price.
- Can you afford to wait? If you’re getting seriously strapped for cash that you need to buy another house, it may be time to take a lower office and cut your losses (if you can afford to do so).
- What’s it costing you? If you’ve already moved and are making two mortgage payments, it may not be worth waiting (especially when you add in the costs and time of keeping your house looking good for visitors).
- What are the latest sold comparables showing? Prices may have dropped even in the last few weeks, and you’ll probably need to get your price past an appraiser for the buyer’s lender in order to close the sale. So, a lower price may be your only choice for making the deal work.
Taking into account these market realities, try to judge just how realistic and fair a buyer’s offer is. Try to focus on meeting your goal—selling your home for its current market value—instead of fixating on everything you want.
The offer may be accompanied by a sum of money—called an earnest-money or good-faith deposit (or a "downpayment" in New York state).
Sometimes the deposit is paid in two parts: a flat fee (such as $500 or $1,000) when the offer is submitted, and the rest, usually a percentage of the purchase price, when the contract is signed. The idea is that a buyer who backs out of the deal for a reason not contemplated in the contract will forfeit this sum (otherwise, the money is typically applied toward closing costs). A higher deposit means less risk for you.
Down Payment Amount
The offer should state how much the buyer plans to pay in cash toward the purchase price. The higher the down payment (ideally, 20% or more), the greater the chances that the loan will close successfully. Also look at when the buyer plans to make the down payment (such as 10% down within first two weeks of signing the purchase agreement and the remaining 10% at closing).
Almost as important as the offer amount is how the buyer plans to pull together the rest of the money, and the chances for getting a bank loan for that amount.
Unless you receive an all-cash offer, the buyer will probably include a financing contingency in the offer. This states that the agreement will be finalized only if the buyer applies for financing within a certain time period and then successfully obtains a loan on certain specified terms, such as at no more than a certain maximum interest rate.
Here’s how to evaluate a financing contingency.
Look for Buyer Preapproval
A prepared buyer will have already gotten loan preapproval—that is, a lender’s statement of willingness to lend a certain amount of cash (ideally, equal to or greater than the sale price of your home). This means that a lender has given the green light, though no actual final commitment (that will happen on or near the closing date).
Set an Appropriate Schedule for Financing
Another issue to consider is how soon before the closing date the buyer will find out that financing has come through. You’ll want to make sure that the date for the buyer to remove any financing contingency isn’t so far out that the buyer can withdraw from the transaction right before closing. Negotiate for a date that lets you know sooner rather than later when the buyer’s financing will come through.
Get Additional Financial Information from the Buyer
Get as much information as possible from a potential buyer to make sure the buyer is in good position to get a mortgage loan, such as whether the buyer is selling another property before buying yours, and the buyer’s credit score.
For more on evaluating real estate purchase offers, see the book Selling Your House: Nolo's Essential Guide by Ilona Bray.