Don't Hesitate
To Make A Low Bid To A Seller
By Benny L. Kass
Q. I am a first time home
buyer, and have been pre-approved for a $255,000
mortgage purchase. In my search, I have seen a number
of houses in the $300,000 - $500,000 range in good,
move-in condition. The problem I am having is where
to start my offer. My realtor is telling me that
those houses are priced too high, but that no one
there will sell their house for under $300,000.
What do you recommend?
A. I have to ask you two preliminary
questions first.
Are you approved for a mortgage in the amount
of $255,000 or for a home purchase in that amount.
If you have been approved for a $255,000 mortgage,
that means that you can probably buy a house worth
at least 10 percent more. Most lenders will lend
you up to 90 percent of the purchase price; some
will lend you even more. Check this out with your
lender to make sure you understand exactly what
you have been qualified to purchase.
Second, you used the words "my realtor."
Is the real estate agent or broker really your
agent? Have you signed a "buyer broker"
arrangement with him or her? If not, it is important
that you keep in mind that the broker (Realtor)
really represents the seller. If the realtor knows
your mortgage limit, he/she is duty bound to disclose
that information to the seller. And you certainly
do not want the seller to know exactly how much
you are prepared -- and able -- to obtain a mortgage
loan.
And even if the broker claims to represent your
interests only, my suggestion is to keep the lender’s
information to yourself. If you are able to sign
a contract, then you can provide the letter from
your lender. Many standard contracts state that
“Purchaser will provide seller, within three
business days after ratification of the contract,
with a letter from a legitimate lending institution
indicating purchaser’s ability to obtain
a loan.”
This is known in the trade as a “comfort
letter”. It is not a formal loan commitment;
the lender has to review the sales contract and
have the property appraised before such a final
commitment can be made. However, it does mean
that a lender has reviewed your financial history
and based solely on that history, believes that
you are qualified for the loan.
Thus, whether or not the realtor is your agent,
I strongly suggest that you keep silent on your
mortgage availability. You should also not divulge
to anyone (other than your family or your lawyer)
what your top price will be.
In answer to your question, as this column has
suggested on many occasions, everything in real
estate is negotiable. Don't be afraid of making
a low offer. The real estate agent is obligated
to transmit your offer -- regardless of amount
-- to the seller.
The seller has three choices:
- Your offer can be accepted, in which case
you have a contract;
- Your offer can be rejected in its entirety.
In this case, you can either make a new -- higher
-- offer or walk away from this house; or
- Your offer can be counter-offered. This means
that the seller is rejecting your proposal,
but is putting a new offer on the table. Keep
in mind that if you receive a counter-offer,
you then have the same three alternatives just
described.
Let's look at the following example: the seller
is asking $300,000 for the house. You prepare
a written offer in the amount of $245,500. The
real estate agent submits it to the seller, who
in turn counters for $290,000. The ball then goes
back to your court.
How much do you really want to pay for your new
home? Is this property really worth $290,000?
Should you try to make another -- lower -- offer
or should you accept the seller's proposal? These
are questions that only you can answer -- even
if you can afford the higher price.
However, by reducing the price, the seller has
sent you a signal. The price is negotiable. If
this is the house you really must have, and clearly
if you can afford it, you may want to accept the
counteroffer. But, as you know, there are many
other houses out there, and if you are prepared
to continue shopping around if you lose this house,
I recommend that you make yet another counter-offer
-- this time in the amount of $255,000.
The negotiations will continue until someone
takes a hard-line position and "draws a line
in the sand." One of you will ultimately
say "this is my final offer; take it or leave
it."
It should also be noted that price is but one
of the many items of negotiation in a real estate
transaction. Often, a seller may be more interested
in the timing of the settlement than in the price.
For example, does the seller have to sell immediately
and are you prepared to settle quickly. I have
negotiated many a deal whereby purchasers received
a very favorable sales price because they were
prepared to go to settlement just 10 or 15 days
after the contract was signed.
On the other hand, some sellers may want to stay
in the house for several more months. Are you
prepared to wait? Are you prepared to purchase
the house now -- so as to preserve a favorable
mortgage interest rate and begin to get the tax
benefits of homeownership -- but allow the seller
to stay in your new house on a "post occupancy
agreement" arrangement? In effect, you purchase
the house and the sellers pay you rent until they
move out. The rent should be equivalent to the
monthly mortgage payments you make (principal,
interest, taxes and insurance -- also known as
PITI).
Another important factor to consider is whether
the seller is willing to take back financing --
either for the full amount of the purchase price
or a small second trust. This is an issue which
should be explored with the seller before you
make an offer; once a sales contract is entered
into, it may be too late to try to renegotiate
that contract. You also have to get your lender’s
approval if the seller is prepared to take back
financing.
In the final analysis, once you have decided
to purchase your new home -- and have zeroed in
on the neighborhood you want -- don't be pressured
into buying a home. Shop around, check prices,
and negotiate everything.
Realtors -- whether they be buyer’s brokers
or seller’s agents -- will tell you that
this is a hot market, and that if you do not put
in a contract for the full price, you will lose
the house. That may be true. But if you can only
afford a lesser-priced house, nothing ventured,
nothing gained. The worst case is that your offer
will be flatly rejected.
The Realty Times
Published: July 28, 2003
www.RealtyTimes.com
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