what's in an offer
An offer is an 11+ page proposed sale agreement that the buyer’s broker, on behalf of the buyer, submits to the listing broker, to present to the seller. It is important to remember this is a legal document. Accurate and honest information is crucial. Elements of an offer include:
- Final Agency Acknowledgement: Identifies who is representing the buyer and who is representing the seller
- Sales Agreement: Identifies the buyer, seller and subject property; States the sale price (or offer price), including all down payments; Identifies any personal property to be excluded or included in the sale.
- Financing: States the buyer’s financing arrangements for purchasing the property (cash, loan, type of loan, seller-carried financing, etc.); States the provisions around securing proper financing, necessary insurance, and flood insurance, as needed. Financing contingencies are also outlined in this section (e.g. Buyer has a home to sell before they qualify for the loan on their purchase) and must be disclosed.
- Contingencies: Items that may allow a buyer or seller to terminate a transaction if the contingency is not met by a certain date or is not acceptable to either party. Contingencies allow protection for the buyer to terminate the transaction and receive all or part of their earnest money back. Title Insurance, property inspections, lead-based paint, private well, septic/onsite sewage system, and seller’s property disclosures are all contingencies that may be present in a transaction, depending on the property.
- Seller Representations: States the seller is honest and forthcoming in all knowledge of the property and is legally able to sell property in the United States
- Misc. Items: Identifies features of the property, such as residing within an HOA/Townhome/Planned Community, alarm systems, smoke an carbon monoxide detectors, smart home features and wood stoves. It also states whether there will be a warranty offered to the buyer and gives space to add more provisions.
- Closing/Escrow: Identifies where escrow will be held at, timelines around the buyer depositing money to escrow, instructions on refunds (if needed), and identifies the closing and possession dates.
- Definitions/Instructions: States legal definitions and instructions as it relates to this sale agreement.
- Dispute Resolution: States the process for satisfying a dispute between the parties and how to take something unresolved to small claims court or further, if needed.
- Signature Instructions: Identifies who will be listed on the deed upon closing of the transaction, states when the buyer would like a response to their offer from the seller, and is where the buyer signs the offer and the seller responds with either an acceptance, counter offer or rejection. Sales
In a competitive market there are often more than one competing offers to purchase the same property. Here are the different ways a seller might respond to a multiple-offer situation:
- Seller can accept one offer and reject the others.
- Seller can inform the interested buyers that other offers are “on the table.” This is often done in an attempt to generate more urgency and interest in the property and perhaps garnish a higher sales price. A buyer can respond by submitting their “highest and best” offer.
- Seller can counter one offer, and table the other offers while awaiting a response.
A listing broker can give advice and suggestions to the seller, but the decision on how to respond to and accept an offer is ultimately made by the seller. As the buyer, there are advantages and disadvantages to any negotiating strategy used in multiple offer situations. For example, a low offer may result in a successful purchase for less than the listed price – or – it may result in losing out to another buyer’s higher offer. On the other hand, a full price offer may result in paying more than the seller might have accepted.
In some cases, there can be several full price offers competing. You might want to incentivize your offer with agreeable terms, more earnest money or waived contingencies. This is one area in particular where a broker can be a big asset for you. Your broker can explain the pros and cons of these and other negotiating strategies, often affecting the outcome of your offer. Purchase offers generally aren’t confidential. In some cases, sellers may inform other buyers that your offer is in hand, or even disclose details about your offer to another buyer in an attempt to elicit a “better” one. While some brokers are reluctant to disclose offer terms even at the direction of their seller, the Code of Ethics does not prohibit such disclosure. State law may limit the ability of brokers to disclose the existence or terms of offers to third parties. You may want to discuss with your broker the possibility of making your offer confidential, or establishing a confidentiality agreement between yourself and the seller, prior to negotiations.
As the real estate market heats up, competitive buying situations and bidding wars are common. In many cities, the majority of new listings are receiving multiple offers. Real estate inventory continues to be extremely low, and growing buyer demand seems to be keeping pace with new properties coming on the market. Often, though, it all comes down to the final price. What a buyer is willing to pay for a property will be the deciding factor for the vast majority of sellers. When you’re determining a price to offer for a property, the situation may call for a single price or, in some cases, an escalation clause.
An escalation clause is a real estate contract, sometimes called an escalator, that lets a home buyer say “I will pay x price for this home, but if the seller receives an offer that’s higher than mine, I’m willing to increase my offer to y price.” In theory, an escalation clause is fairly simple. In practice, there are a lot of details involved. While escalation clauses vary significantly, the general escalation addendum has a few basic components:
If no other offers are submitted, the original offer will remain. Some sellers will not accept an offer with an escalation clause, they prefer that every buyer submits exactly what they’re willing to pay. Sellers sometimes prefer this method because it motivates buyers to outbid one another on the first try. It also streamlines the paperwork and the decision-making process.
Escalation clauses should only be used when the buyer is fairly confident that there will be multiple offers, or when the buyer expects to pay an escalated price. If a buyer submits an offer with an escalation clause, they’re laying all their cards on the table. The seller knows exactly how much the buyer will pay to get the home. If that offer ends up being the only offer submitted, it technically remains at its original price. However, the seller could submit a counter offer at the higher, escalated price, since it’s clear the buyer is willing to pay more.
A buyer gives up a lot of negotiating power when using an escalation clause that goes unmet by a competitor. Before writing an offer, a buyer’s broker should make sure the buyer is prepared for that situation. Writing an escalation clause on the initial offer in a multistage situation could put the buyer in a weak position during the second round. It’s perfectly legal for a seller’s broker, with the seller’s permission, to reveal to all potential buyers what the top initial offer is and to ask everyone to beat it. In this case, the escalation clause would expose that buyer’s maximum, and they would lose a competitive edge.
Back Up Offers
Perhaps your search leads you to your dream home, only to find out that the seller has just accepted another offer and the home is already under contract. In most cases, your agent will recommend that you move along and keep looking, but there may be times when it is worthwhile to submit a backup offer. So what exactly is the backup offer, and is it worth waiting in the wings for a home that’s already taken?
It helps to learn exactly how it works. If you and your broker have made the decision to try for a back-up position, you will submit an offer and negotiate terms with the seller just as if you were the original interested party. This puts you in a position to be next in line to get the house, should the first deal fall through for any reason.
Although it might seem like a long shot, putting an offer on a house that’s under contract actually has a reasonable chance of scoring you a home. Deals fall through for all kinds of reasons, so if you’re in the backup position, you’ll lock things in and keep a home from going back on the market. This can definitely work to your advantage in competitive markets with low inventory.
From a seller’s point of view, the back up offer offers both peace of mind and leverage. If at any point the seller feels the first buyer does not have the funds to purchase the property or other difficulties arise, they know the back up offer is there should the first transaction be terminated.