Real Estate Counter Offers Explained

This article is part one in a two-part series on buyer-seller negotiations. You can view the continuation of this article here.

As a home buyer, there's a chance you will run into a situation where the seller makes a counter offer to your original offer. Tread carefully. How you handle this stage of negotiations could determine whether or not you get the home. So it's important to understand how the process works.

Let's start at the beginning and talk about how to submit an offer. After all, this is what can lead to a counter-offer scenario with the seller.

Let's say you've been house hunting for a while, and you finally found the right home. So you tell your real estate agent you're ready to make an offer on the property. What happens next? If your agent hasn't done so already, he or she will compile a list of recent sales in the area. These are referred to as comparable sales, or comps. You will use this data to determine how much to offer for the house. But that's the subject of another article entirely.

Let's just assume you've come up with a reasonable offer amount. Now it's time to write the purchase agreement. Once this document has been agreed upon and signed by both parties, it becomes the official contract.

Purchase agreements vary from state to state. But there should be a standard format used by real estate agents in your area. Your agent probably has this document saved on his or her computer. They would just plug in the specific information that pertains to your offer, and then print out the purchase agreement.

Parts of the Purchase Agreement

The most important parts of the purchase agreement are listed below. These items can also come up again later on, if you get a real estate counter offer from the homeowner.

• Purchase amount -- This is the amount you are offering to pay for the house. It should be based on research using comparable sales (discussed below).
• Earnest money -- This is the amount you are willing to put down as a deposit on the home. If you back out of the contract by using a legitimate contingency, you can get your earnest money back. But if you simply violate the contract with no good reason, you stand to lose your earnest money. So think carefully about the amount you want to list in the purchase agreement.
• Financing terms -- Most standard purchase agreements have a place where you will indicate your financing method. This may include the type of loan you are using and the amount of your down payment. But again, this information varies from state to state.
• Closing date -- This is the proposed date on which you want to close the deal. The time between the offer acceptance and the final closing is referred to as the escrow period. You can propose whatever closing date you want, but it will help your cause to be flexible.
• Contingencies -- You can think of these as legal exit-strategies from the contract. You should include a contingency that allows you to back out if the home inspector uncovers something you're not comfortable with. You should also include a contingency in case you're financing falls through. Some buyers choose to include a contingency regarding the sale of their current home, but sellers are sometimes reluctant to accept these.
• Personal property -- If there is something you would like to purchase in addition to the home itself, you would include this in the purchase agreement. Patio furniture is a good example. Furniture is not included in the asking price for a house, but you can request it by adding it to the purchase agreement.

Your purchase agreement will probably include additional information, beyond what I've listed above. These are just some of the most important items. Every one of these things might come up again when the seller makes a counter offer back to you. So we will talk more about them later.

Planning for a Counter Offer

The worst thing you can do is pull an offer amount out of thin air, without any planning or research. If you do this, you might not even get a real estate counter offer. The seller may choose to ignore you completely. You could also end up overpaying for the home. This is why it's so important to do your market research before writing up the purchase agreement.

First of all, make sure you have a firm budget in mind. This number will come from two places. If you've been pre-approved by a mortgage lender, they probably gave you a maximum loan amount. That's your first limitation.

You also need to stay within your own financial comfort-zone, which might actually be less than the pre-approval amount. That's your second limitation on spending.

And lastly, you must remember that the lender will send an appraiser to determine the market value of the home. If you agree to pay more for the house than the appraiser says it's worth, you could have trouble getting the loan.

Because of all these factors, you want to make sure you don't offer too much for the house.

But you don't want to offer too little either. If you lowball the seller with a ridiculously low offer, they probably won't even make a counter offer. I've seen it happen. Heck, I've even done it myself as a seller. Remember, the seller does not have any legal obligation to make a counter offer back to you. If they think your original offer is ridiculous, they can choose to ignore it. It's a courtesy to communicate with you at this stage, but it's not required by law.

Comparable Sales to the Rescue

So you don't want to aim too high or too low. And that is why you need to spend time reviewing comparable sales. These are similar homes that have sold in the same area within the last month or so. The more recent the data, the better the comps. The more similar the homes are to the target home, the better the comps.

What you're looking for here are common pricing trends. For example, if you're making an offer on a one-story craftsman-style house, you want to find sales data for one-story craftsman style homes in the same area. If you can pull up sales data for several of these properties, you'll have a good idea what the "going rate" should be.

You can base your offer on this data. You can also present it to the seller, in order to support your offer. Your real estate agent should help you with all of this, by the way.

It's also a good idea to view the property a couple of times before making an offer. If you only walk through one time, you're liable to miss something. Are the rooms big enough for your furniture? Was there sufficient storage space? Is the kitchen layout going to work for you? What about the level of maintenance outside the home, with landscaping and such? It's hard to capture all these details the first time through. It's common for potential buyers to make a second pass, and the seller will be happy to accommodate you. It's a good sign for them.

Lastly, you should consider the history of the property. Your agent should be able to tell you how long it has been on the market, and whether or not it has been listed before. You can also find out how much the current homeowners paid for the house.

While you're at it, try to find out if the price was ever reduced during the current listing period.

All of these things will give you insight into the seller's motivations. For example, if the home is been listed for over 100 days, and the sellers have reduced the price once already, they're probably more willing to negotiate. But if it just came on the market last week, the sellers might not be ready to reduce their asking price. All of this relates to the real estate counter offer you might receive. So you need to research it in advance.

Part 2: Negotiating with the seller