The Correct Way to Make an Offer on a Property
Whenever a person is confronted with a decision many different aspects should be taken into account. Getting married? Getting a divorce? Buying this car or staying put for a while? White or dark mocha? The examples
Whenever a person is confronted with a decision many different aspects should be taken into account. Getting married? Getting a divorce? Buying this car or staying put for a while? White or dark mocha? The examples are endless.
However, when it comes to deciding on whether or not to make an offer on a property, things take on a different meaning, even reaching the point of being daunting. Generally speaking, acquiring property tends to be one of life’s most important decisions, so it is clear that this is a decision that should not be taken lightly.
As you may already intuit, addressing this matter involves a myriad of aspects, starting with the fact that the process of arriving at an offer depends on the type of property you might be interested in. The intention of this article is to offer (no pun intended) a basic guideline for what to keep in mind whenever you are confronted with this kind of situation.
Enough said, let’s get into it.
The hectic environment in which society unfolds nowadays tends to put pressure on us. For example, in this case, arriving at a certain age without having a house of your own can be seen by some as some sort of “failure”.
Becoming a property owner can cause anxiety in some people. However, the fact that you have been waiting for a long time and have worked hard to have enough money to even contemplate the possibility of buying should be reason enough to dissuade anyone from just jumping into a negotiation without doing some sensible research first. Often people find themselves in a negotiation that doesn’t align with their goals and end up losing their investment.
So, as a first basic piece of advice: take your time to do some market research.
Researching the surroundings first
Let’s say you have decided on which kind of property suits you best (whether it’s located in a condominium or, an urban area or a rural area, or close to the beach, among other options). A good practice at this stage would be to start inquiring about the characteristics of the area in which that property is located, for example: taxes, the cost, quality and availability of utility services, the quality of certain services like security and health, the roads and any other aspect that may shape your experience once you have finished the process and have become the owner of that property.
Checking the market
Once you have formed a general yet reliable idea of the characteristics of the area, the next step would be to narrow down the options to just a handful of properties. Before deciding to make an offer on a property in particular (and taking into account the budget, of course), it is important to compare the price with the prices of similar properties in the area. A realtor could help in this process, but always keep in mind that, if this is the realtor of the seller, there might be a possibility that not all of the information is being shared. After all, their sole intention is to procure a sale no matter what.
Having said this, there is a point that has to be stated: no two properties are the same. There are many aspects that can influence the price: the age of the property, the current state of the structure, the price per square meter, the quality of the materials and such. These are aspects that could be verified during a due diligence period, if needed.
Adjusting the offer
Once you are well informed, the next step would be to attempt to adjust the offer. For example, a common piece of advice is to not offer the same amount as what is being asked for, since there is always the possibility to negotiate the price down 5% to 10%. In this situation, there are certain factors that can play a relevant role, such as how urgently the seller wants to make the sale, or how long the property has been on the market.
Moreover, if you happen to get the chance to pay a visit to the property beforehand and the seller is present, it is better not to voice a personal opinion about the property, or else this could affect the process of arriving at an offer.
Once an offer has been determined, the idea would be to make a reasonable offer not only for your purposes, but also for the seller’s (after all, if the offer is not attractive chances are the seller will not take you seriously).
Establishing the offer and signing the letter of intent
Once you get in contact with the seller (or the realtor), and the offer has been accepted, it is usual for them to arrange a brief letter of intent and ask you to sign it (by “brief” I mean a document that is used to establish some of the more relevant aspects surrounding the negotiation). Our experience has shown us that, as much as signing a letter of intent is considered a first step toward formalizing the transaction, this is just part of a preliminary stage. It would be better to negotiate the arrangement of a more formal, “robust” agreement that specifies the obligations, rights and expectations of the parties in a more detailed manner.
This agreement should include aspects such as the clear identification of the property (and its characteristics), the method of payment (whether there will be the need to resort to financing or not), the due diligence process and what it will entail and more importantly, that the purchase will be proceed only if the purchaser is fully satisfied with the results of the corresponding report.
Non-negotiable: due diligence and the escrow
As stated in the beginning, presenting an offer depends on the type of property and other conditions that should be taken into account; each case is different. Nevertheless, experience has told us that there are two aspects that a buyer should always strive to include in an offer and have solidified through an agreement no matter the type of property or conditions: the due diligence period and the use of an escrow.
Each of those two aspects would require a whole other article to properly address them, but the idea behind their inclusion is to make sure that you are placing an offer for a property that is worth buying. The objective of the due diligence is to dig further into the current conditions surrounding the house. The inclusion of an escrow is to secure your investment, since the escrow would serve as a neutral third party that would be tied to the disbursement instructions that the parties agreed upon beforehand. If the due diligence were to show negative results, then there would be the possibility of getting a refund of the earnest deposit you made in the beginning.
What if the offer is not accepted in the end?
An eventual possibility that should be taken into account: a rejected offer. In such a scenario, it is usual to see that the seller has a counteroffer under his/her sleeve. Renegotiating usually takes some expertise, but a basic concept to be aware of is who has the leverage in the situation. This is usually dictated by the market’s general behavior, the aforementioned urgency of the seller and such.
If the offer is not accepted, that event could understandably cause some frustration, however it will always be better to deal with frustration than with the loss of your investment, right?