How to Handle, Read, and Negotiate an Offer to Purchase

Summary: An offer letter is a type of purchase contract drafted by the buyers’ agent to express the buyers’ interest in purchasing your home as well as showcasing their financial ability to uphold their end of the bargain. An offer letter will also include any terms and conditions which need to be met before the transaction can close. What an offer letter looks like will vary state to state, but upon accepting an offer, you and the buyers will move closer to a deal.

What Is an Offer to Purchase?

An offer to purchase (commonly called an “offer letter”) is a series of documents which detail how much the buyers are willing to pay for the house, the type of loan the lender has pre-approved the buyers for, the size of the buyers’ down payment, the “good faith” deposit for escrow, closing costs and their terms, personal property and desired fixtures terms, as well as the closing and purchase dates.

When Can I Expect to Receive an Offer to Buy?

From the perspective of the buyers, the offer letter comes later in the journey. Depending on market customs and market conditions, the buyers will secure a pre-approval for a mortgage and save up earnest money to be deposited well before touring homes. At the very least, the buyers will have already signed with an agent who will represent their side of the transaction.

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From here, the buyers will shop around, armed with the pre-approval, and will have their agent on retainer to facilitate communication. If you’ve held an open house (or if you’ve fielded appointments), you have more than likely crossed paths with the buyers at one of your showings. Even if you have not met the potential buyers, it is the buyers’ agent who helps them prepare the offer. Once the buyers have found the right listing, the buyers’ agent will submit an offer to you.

What Does an Offer Letter Look Like? And How Do I Read One?

Due to legal complexities regarding real estate, offer letters will vary by state, including the boilerplate language used in the purchase contract. For example, in California, the most common offer is called the “California Residential Purchase Agreement and Joint Escrow Instructions” and is ten pages in length.

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This offer letter template was created by the California Association of REALTORS® (C.A.R.) in association with the state bar and the Bureau of Real Estate. (There is no default offer template, but C.A.R.’s is the most widely recognized.)

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What Makes an Offer Letter Strong?

It is up to you to decide whether to accept, deny, or negotiate the buyers’ offer. Although it is ultimately up to you to decide which offer to choose (in accordance with the law), there are plenty of ways for the buyers to stand out from the other offers. Most offers are strong, but consider a few hypothetical scenarios that could make it less worthwhile to negotiate:

  • Escrow greater than 30 days
  • Considerably below asking price
  • Unusually small down payment
  • A disproportionate number of contingencies
  • Contentious terms (e.g., a free month of ‘luxury’ utilities)
  • Inability to negotiate and presented “as-is”

[Tip]In “cold” markets where there is more supply than demand, buyers’ agents will be more likely to add contingencies. Always keep your eye on the market to know when your negotiating power may shift away from your favor.[/tip]

I Like an Offer From a Buyer. What Happens Next?

If you agree to the terms, you and the buyers will enter the next stage called “mutual acceptance.” (Entering mutual acceptance does not guarantee a close as this is not the final stage in the home-buying process.)

Upon obtaining a ratified offer known as the Purchase and Sale Agreement, escrow will open and the buyers’ earnest money deposit will be given to the escrow company. A preliminary title report will be ordered as well for the buyers’ agent to research and uncover any liens. In addition, you will release your disclosure packet (if you haven’t already) and all contingency time periods will begin (e.g., inspections, loan, title, close of escrow, etc).

[tip]Disclosures cannot be used as an inspection on the buyer’s behalf. It is in both parties best interest hire their own inspector who can also cross-reference permitted construction with municipal codes.[/tip]

What Does Contingent Mean?  Can a Buyer Back Out?

During the “mutual acceptance” period, there is an opportunity for you and the buyers to negotiate based on contingencies. (Although the Purchase and Sale Agreement will contain the agreed sale price, this price is subject to change.) To ensure a smooth transition, the buyers’ agent will monitor their progress to resolve all contingencies. It is very important you also maintain the same level of diligence during this process. If a certain contingency is not resolved by its agreed due date, the buyers can legally back out of the deal with their earnest money returned in full.

Continue Reading: How Do I Negotiate?

Known officially as an offer to purchase, an offer letter is an official document from the buyers stating their intent to purchase your home. It outlines the exact dollar amount they are willing to pay (provided by a lender unless paying cash), their contingencies for purchase, and when they expect the deal to close. Expect to receive offers from buyers once they’ve had a chance to tour your home.

More often than not, buyers will be pre-approved with earnest money ready before they send in an offer letter. What is contained in an offer will depend on the state in which you and the buyers’ agent are doing business. If you like an offer and accept its terms, you’ll enter into a phase called mutual acceptance where you and the buyer can continue to negotiate. Read more on how to negotiate with buyers.

We hope that you enjoyed reading this article on How to Handle, Read, and Negotiate an Offer to Purchase! Now you have a blueprint for FSBO success., you are ready to visit to list your house for sale by owner.

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