Negotiating Purchase Contracts
What happens when you receive a Purchase Offer? You first want to evaluate the offer to determine if the terms are acceptable to you. Contract terms include the offer price, of course, but may also contain seller concessions, which have the effect of reducing the offer price.
For example, an offer may be submitted with an offer price of $300,000 but also includes terms that require the Seller pay up to 3% of the offer price towards the Buyer’s closing costs. 3% in this case would be $9,000, which essentially reduces the offer to $291,000.
Seller concessions do reduce the funds the Seller receives at closing, but sometimes they are necessary. Buyers that obtain VA and FHA loans often need the additional funds provided under Seller concessions in order to purchase the home.
Another important term is the Closing Date, which is when the ownership of your home transfers to the Buyer. Home purchases where there is a loan involved typically take 30 to 45 days to close.
If the Closing Date does not allow you sufficient time to move, you may need to request a later date. Conversely, if the closing date is too far out, say two months or more, I would question the need for the additional time as that is a long time to have your home off the market.
Your REALTOR will help you evaluate the terms of the offer and if they are unacceptable to you, they will guide you in preparing a Counter Offer.
A Counter Offer will usually include only changes to the above terms; Offer price, Seller concessions and the Closing Date. Let’s assume that the Seller does not want to accept the above offer of $300,000 with Seller concessions of $9,000 but will accept one that results in a net of $295,000. A Counter Offer could be written that increases the sales price by $4,000 to cover the lost funds; or it could be written to reduce Seller concessions to $5,000 at the same Offer price; or a combination of the two.
The Buyer may accept your Counter Offer or respond with another Counter Offer. Theoretically this could go on forever but there are usually no more than one or two Counter Offers. Once the offer is acceptable to both the Buyer and the Seller, then the Buyer’s Lender will order an Appraisal.
An Appraisal is an opinion of value prepared by a Licensed Appraiser. Lenders always require an Appraisal as the amount of money they will loan is dependent on the Appraised value. Why?
The Lender is essentially a co-owner of the home. If the Buyer defaults on the mortgage, the Lender will take it back (foreclose on the home) and resell it. They are counting on the home being worth what was paid for it which is why they require the Appraisal.
If the Appraiser places a value on the home that is below the Purchase Price, the Buyer may cancel the contract. The Lender will only approve a loan that is based on the Appraised value, which means the Buyer would have to increase their cash contribution in order to purchase the home at the accepted purchase price.
Most Buyers do not want to pay more than the Appraised value and may cancel the contract; however, the Seller may offer to lower the sales price to keep the sale intact. That may be a worthwhile consideration as the home would have to go back on the market and wait for another offer. The new offer will also be subject to an Appraisal and there is always a risk that the home may appraise for an even lower price.