For Sale by Owner Guide
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Negotiate the Offer
Interpreting the Buyer's Response
It's almost always best to try to work with your first offer. Many times it is the best offer you will receive.
Understand the concept of net proceeds. The actual sales price of the house is not the only issue. The amount you NET (the sales price less all your payoffs and costs) is the critical number. So, figure out the NET on every offer. Some higher offers may actually result in lower NET depending on what the buyer wants you to concede or contribute.
Upon receiving the buyer's offer, you will want to estimate your net proceeds to get a sense of what you will potentially take away from the sale. A real estate agent, your escrow officer or title attorney should be able to assist you in this process.
Also, check the offer's contingencies and timeframes for acceptability. Does the settlement date fit your schedule? Do the contingency timeframes seem reasonable?
Pre-qualify the buyer. Hopefully, the buyer has given you a pre-approval letter with the purchase agreement. If not, then be sure to include in any counter-offer that the buyer must deliver a pre-approval letter to you (within 5-7 days) that includes a credit check and source of funds review.
Common Issues and Possible Solutions
Buyer is offering low price
REMEMBER: PRICE ISN’T EVERYTHING! It is better to accept a lower offer from a buyer who will actually go to closing than a high price from a buyer who will not be able to close
If the offer is in the high area of your acceptable net proceeds range, offer to "split the difference" or "meet in the middle". This tactic seems inherently fair to both parties and can sometimes shorten the negotiation process.
If the offer is at the low end of your range or not within the range at all, move in small increments; give a counter-offer at just below your asking price. Be prepared to go through several counter-offers with this buyer.
Sometimes asking the buyer how they arrived at their offer price leads to a fruitful dialogue. For instance, the buyer may have done more research on the comparables than you have and have good evidence that your price is high. If so, you eventually have to drop your price - no matter who buys the property. Or the buyer might say this is all they can afford to offer. This could indicate that they are not really qualified to buy your home and you should not spend time negotiating, or that they are short of cash and you should step in and pick up some costs to make the deal work at a higher price.
Buyer doesn’t want to provide a pre-approval letter from a lender or wants a long financing contingency
You must get to the bottom of this type of situation before you take your house off the market for an extended period of time. Explain that you must know whether the buyer can perform and ask point-blank if there is an issue with financing. Wanting a long financing contingency or a delayed closing can also mean that the buyers have a house to sell and are not disclosing this. Ask the question "do you have a house to sell?" outright.
Buyer has offered a low Good Faith (also called earnest money) deposit or none at all
It is natural for a buyer not to want to give an individual a deposit, even though they wouldn’t hesitate if there were a real estate agent or attorney involved. Remember that the buyer is probably just learning this process too. In this instance, you might recommend that the buyer obtain a contract attorney to negotiate the contract for them, since they are nervous about it. In any event, do not take your house off the market without a deposit.
Insist on a deposit in your counter-offer and put a contingency in the counter that the deposit will not be deposited into the closing agent’s escrow account until the home inspection and other inspections have cleared. Another tactic is to accept a smaller deposit with the contract and require an additional deposit when the inspection contingencies have cleared.
The mortgage terms the buyer has outlined in the contract do not seem reasonable to you
If the purchase agreement indicates that the buyer is making a down payment of less than 5% of the purchase price, this could be a red flag. Inquire as to the loan program they are looking at and be sure you get a pre-approval letter (complete with credit and source of funds review) for that specific loan program from a lender within 5 days of signing the contract.
Buyer wants you to pay some or all of their closing costs or points on their loan
First, realize that any costs you agree to pay come out of your net proceeds, so don't forget to put the figures into the seller net calculation. It is not unusual for the seller to pay buyer's closing costs in real estate transactions. Generally it means that the buyers want to save their money for other expenses or that they are short of cash to close. This is fine as long as your net proceeds are acceptable and the buyer qualifies for the loan with your closing cost contribution.
When a buyer asks you to pay closing costs, and it reduces your net proceeds to an unacceptable level, counter back to them at a higher price but leaving in the seller contribution to closing costs. Again, make sure you get a pre-approval letter from a lender ASAP.
Buyer has a house to sell before they can buy yours
This is a sticky situation. You have to decide whether to accept this contingency or not. You have no control over whether the buyer’s house actually sells, so you are really taking your house off the market and gambling that your buyer's home will sell.
If you are in a good market and you’ve had many people look at your home, you would be less likely to take the house off the market contingent on the sale of another house. Suggest to the buyers that they get a bridge loan or swing loan and that they will need to qualify to carry both houses at the same time. If they can qualify to carry both houses, you can stretch the closing date on your house into the future to try to give them the time to sell their house. That way, they have the time they need and you have a guarantee that they will close on your house even if they don’t sell their current home.
If the buyer doesn’t qualify to carry both and you want to try to make the deal work, find out more about the market their house is in. What timeframe do they think it will sell in and how are they are pricing it? You may even want to visit the house to see if it is in good condition, and in a desirable neighborhood.
If it seems reasonable to you that their house will sell and these buyers seem like otherwise good prospects, you could consider taking the offer, but adding a "kick-out clause". This means that you leave your house on the market, and if you get another offer, the first buyers will have 24-48 hours to prove that they can perform on their contract without selling their current home, or they get "kicked out" and get their deposit back. You are then free to negotiate with the new purchasers.
When you accept a contract contingent on the sale of the buyers current house, always put a timeframe around it, even if you have a kick-out clause in the contract. For instance, you might give the buyers 30-60 days to get a firm contract on their house and 30 more days to close the transaction. Don’t leave the timeframe open ended.
If you exercise the kick-out clause, remember that when negotiating with the newest purchasers, you must make any agreement with them contingent on the first buyers being released from your contract.
We highly recommend that you hire a contract attorney when you are dealing with complicated situations such as this.
Buyer wants an extended closing date
This is only a problem if you can’t or don’t want to wait to close. Find out why the buyer wants an extended timeframe. Is it because they need to save money for closing? Or because they want their kids to finish school in their current location?
If the extended date has something to do with qualifying to purchase your house, then it is a potential concern. Get the details and see if there is another way to work it out. Often, presenting the issue to a qualified loan officer will uncover some viable options for the buyer.
If it is a logistical issue, such as kids finishing school, just decide whether you can wait or not. If you can, accept the offer, but be sure you keep the financing and inspection contingencies short, so you know the contract is solid.
Buyer wants a quicker closing date
Frequently, buyers believe that a quick settlement will cause a seller to accept a lower price or take their offer over others. And sometimes, it does benefit the seller to close quickly, so the strategy works. However, if you can’t close and move that quickly, counter back with your desired timeframe. If the buyer can postpone closing, they probably will. If not, they will reject that portion of the counter-offer and go back to their original timeframe.
Best advice - try to work it out - only very serious buyers want to move quickly. If you already have a contract on another house you are purchasing, see if you can speed up your closing to meet the buyer’s timeframe. If you are purchasing another house, but haven’t found it yet or you aren’t ready to move, determine whether you are willing to move twice to accommodate this buyer’s timeframe.
Buyer wants you to hold financing for them (Seller held financing)
This means that the buyer wants you to hold seller-held financing for all or part of the purchase price. There are both risks and rewards in holding a mortgage for the buyer. If you decide to pursue this, we strongly suggest you hire a real estate contract attorney to prepare the forms and manage the closing.
Buyer wants to do a lease/purchase also called a "lease-option"
This means the buyer wants to lease (or rent) the property for a period of time and then purchase it during or at the end of the lease period. You don't get your money immediately, so this option only works if you don’t need the equity in your home to make your next move. A lease option is a popular means to sell less desirable properties or to sell properties in a slow market. If you choose to pursue this option, we strongly suggest you hire a real estate contract attorney to prepare the forms and manage the closing.
- Accept the agreement as is, and it then becomes a binding contract.
- Decline the offer (usually not a productive response).
- Prepare a counter-offer back to the buyer. When you counter-offer, you are opening negotiation again and the buyer has the right to simply walk away.
Usually this is done on the same purchase agreement form - the changes are made and initialed by all parties. If you are adding significant language to the purchase agreement, make an addendum to the purchase agreement. Indicate the date of the original purchase agreement, the date of the counter offer, the names of the parties and the address of the property. Then list the changes are that you want to make to the original purchase agreement. Make sure that you put a timeframe around the buyer's response time. 24-48 hours is usually enough to consider a counter offer.