Making An Offer

What can a home buyer afford?

Even before starting to look at houses, find out what price house or condominium you can afford, says syndicated real estate columnist Dian Hymer. Roughly speaking, Hymer says, you can afford to buy a home equal in price to three times your gross annual income. More precisely, the price you can afford to pay for a home will depend on six factors:

1. your income;
2. the amount of cash you have available for the down payment, closing costs and cash reserves required by the lender;
3. your outstanding debts;
4. your credit history;
5 .the type of mortgage you select; and
6. current interest rates.

Lenders also analyze your income in relation to your projected cost of home ownership and outstanding debts to determine the size loan you can have. Hymer says your housing expense-to-income ratio is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance. The sum of these costs is referred to as "PITI."

Monthly homeowner association dues, if you're purchasing a condominium or townhouse, and private mortgage insurance are added to the PITI. Your housing expense-to-income ratio should fall in the 28 to 33 percent range, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.

What contingencies should be put in an offer?

There are two standard contingencies: a financing contingency, which makes the purchase conditional on the buyers' ability to obtain a loan commitment from a lender, and an inspection contingency, which allows the buyers to have professionals inspect the property to their satisfaction.

A deposit could be forfeited by the buyers under certain circumstances, such as the buyers backing out for a reason not provided for in the contract.

The purchase contract must include the seller’s responsibilities, such things as passing clear title, maintaining the property in its present condition until closing and making any agreed-upon repairs to the property.

What obligations are there to disclose?

Obligations to disclose information about a property varies from state to state.

Under some strict laws, the seller and the seller’s broker, if there is one, are required to disclose all facts materially affecting the value or desirability of the property which are known or accessible only to him.

Items sellers often disclose include: homeowners association dues; whether or not work done on the house meets local building codes and permits requirements; the presence of any neighborhood nuisances or noises which a prospective buyer might not notice, such as a dog that barks every night or poor TV reception; any death within three years on the property; any restrictions on the use of the property, such as zoning ordinances or association rules.

How do you find out the value of a foreclosure?

People considering a foreclosure property would want to contact the lender directly first and obtain as much information as possible regarding what range of bids are being sought.

In cases where you are unable to obtain permission to enter a property in foreclosure, consider knocking on a few doors in the immediate neighborhood, says William H. Pivar, author of "Real Estate Investing from A to Z," Probus Publishing, Chicago; 1993.

Explain that you will be bidding on the property and ask the neighbors if they had been in the house and when, as well as the general condition at the time of their visit, Pivar says.

Individuals also can do their own cost comparison through researching public records kept at local county recorder's and assessor's offices.

Generally, most county recorder's offices have indexes to match street addresses and parcel numbers, so the interested researcher will want to have these numbers before going to the recorder's office.

In addition, private companies, using records from county recorders and assessors, now offer property profile information.

Are low-ball offers advisable?

A low-ball offer is a term used to describe an offer on a house that is substantially less than the asking price. The term often scares real estate agents, as well as sellers, because such offers question whether the home is priced properly.

Some experts contend that while any offer can be presented to the seller, a low-ball offer can sour a prospective sale and discourage the seller from negotiating at all.

Moreover, unless the house is very overpriced, the offer will probably be rejected. Some persistent buyers overcome these odds by making a raft of low-ball offers until they succeed. "A seller's advertised price should be treated as only a rough estimate of what (the seller) would like to receive," write Ralph Warner, Ira Serkes and George Devine in their book "How to Buy a House", Nolo Press, Berkeley, Calif.; 1993. "Some deliberately overprice, others ask for pretty close to what they hope to get and a few (maybe the cleverest) under price their houses in the hope that potential buyers will compete and overbid," they write.

Most real estate experts encourage buyers to learn about the seller's motivation so that they can get the best deal possible. For example, a lower price with a speedy escrow may motivate a seller who must move, has another house under contract or must sell quickly for other reasons.

Also, learn what comparable homes have sold for in the area so that you can determine whether the home is priced right.

What is the difference between list and sales price?

The list price is the amount an owner would like to receive for a property, according to the "Dictionary of Real Estate Terms," Third Edition, Jack P. Friedman, Jack C. Harris and J. Bruce Lindeman, Barrons; 1993.

The sales price is the amount a property actually sells for. It may be the same as the listing price. It may be higher or lower, depending on how accurately the property was originally priced and on fluid market conditions.

The listing price may need to be adjusted if offers are not made within the first few months of the property's listing period.

Can you buy homes below market?

The typical home buyer looks at three to five houses before buying, writes John T. Reed, author of How to Buy Real Estate For at Least 20 % Below Market Value, John T. Reed Publishing, Danville, Calif.; 1993. The investors who consistently make bargain purchases consider far more properties for every one they buy from about 50 to about 1,000.

Reed recommends several approaches to buying property below market value:

•Buy a house that's due to be torn down, move it to a new lot, and resell. Carefully done, this technique often produces a property which is worth twice what it costs to buy a resale home.
•Interests in real estate which are less than 100 percent fee-simple often sell at enormous discounts. Tenants in common are an example. Sometimes, the owners of tenant-in-common interests want to sell or are forced to sell.
•Life and remainder estates are another way.
•Home-builder leftovers. When home builders put up a housing development, they almost invariably end up with a handful of hard-to-sell houses.

Finding these unusual deals is a challenge. It takes a great deal of research and determination.

Who gets the furnishings when a home is sold?

Deciding what stays and what goes is usually up for negotiation. Dian Hymer, author "Buying and Selling a Home, A Complete Guide," Chronicle Books, San Francisco; 1994, says sellers wanting to take fixed items out of a house should specify so in the sales agreement. "Appliances that are not built in (washer, dryer, refrigerator, portable dishwasher, portable microwave, freestanding stove) are all negotiable," Hymer says.

"Sellers who are undecided at the time of listing about which appliances will stay with the house can either leave this section blank or state that the appliances are negotiable. Built-in appliances, window coverings, tacked down carpets, and fixtures permanently attached to the property are assumed to be included."

Are there discounted properties out there?

The typical home buyer looks at three to five houses before buying, writes John T. Reed, author of How to Buy Real Estate For at Least 20 % Below Market Value, John T. Reed Publishing, Danville, Calif.; 1993. The investors who consistently make bargain purchases consider far more properties for every one they buy from about 50 to about 1,000. Reed recommends several approaches to buying property below market value:

•Buy a house that’s due to be torn down, move it to a new lot, and resell. Carefully done, this technique often produces a property which is worth twice what it costs to buy a resale home.
•Interests in real estate which are less than 100 percent fee-simple often sell at enormous discounts. Tenants in common are an example. Sometimes, the owners of tenant-in-common interests want to sell or are forced to sell.
•Life and remainder estates are another way. The owner of the life estate is called the life tenant who gets to do whatever they want with the property as long as they live. They too might be interested in making a quick sale.
•Home-builder leftovers. When home builders put up a housing development, they almost invariably end up with a handful of hard-to-sell houses. The houses may be on the worst lots in the development. Or the developer took them back to settle a construction-defects lawsuit.

Finding these unusual deals is the challenge. It takes a lot of research.

What are some tips on negotiation?

Most real estate experts encourage buyers to learn about the seller's motivation so they can obtain the best deal possible. For example, a lower price with a speedy escrow may be more acceptable to someone who must move quickly due to a job transfer. People going through a divorce or are eager to move into another home are frequently more receptive to lower offers.

A seller's advertised price should be treated only as a rough estimate of what they would like to receive, according to Ralph Warner, Ira Serkes and George Devine in their book, "How to Buy a House," Nolo Press, 1994. "Different sellers price houses very differently. Some deliberately overprice, others ask for pretty close to what they hope to get and a few (maybe the cleverest) under price their houses in the hope that potential buyers will compete and overbid. In considering the list price of a house you're serious about, take the time to learn about the seller's personality," the authors write.

Some experts discourage making deliberate low-ball offers. While any offer can be presented to the seller, a low-ball offer can sour a prospective sale and discourage the seller from negotiating at all. And unless the house is extremely overpriced, the offer probably will be rejected anyway.

Before making an offer, also investigate how much comparable homes have sold for in the area so that you can determine whether the home is priced right.

Do I need an attorney when I buy a house?

In some states, you do need an attorney to complete a real estate transaction, but in others you do not.

The vast majority of people buying a home do not use the services of a real estate attorney but all do in states such as Florida, for example. Even real estate lawyers admit that attorneys usually are unnecessary. Most home buyers are capable of handling routine real estate purchase contracts as long as precautions are taken. "They should definitely make sure they understand every single term of the contract. Every contract is different, even though they're on preprinted forms," says Marc Weissman, of Weiss & Weissman, adding that buyers should closely study the contingency clauses allowing them to back out if they cannot obtain financing or an inspection turns up problems.

Hiring an attorney after a conflict erupts may be too late. Lawsuits are costly and time-consuming, so Weissman advises, "People who anticipate a problem should stay out of the transaction altogether." Ilyce Glink, author of "100 Questions Every First-Time Homebuyer Should Ask," Random House, New York; 1994, says, "Not all real estate attorneys are competent, let alone good. And it's important to find one who will help, rather than hinder, the deal."

Buyers who need an attorney should call several and inquire about fees, but be willing to pay for someone with experience. Do not hire "Uncle Harry, the tax attorney" to handle a transaction that may be the biggest investment of your life, she advises. "On a $100,000 home, the attorney's fee is minuscule, and on a bad deal, that fee could save you a tremendous amount of heartache as well as money to fix whatever problems crop up," Glink said.

What are the standard contingencies?

The two basic contingencies in a purchase contract are financing and inspections.

What do you think of low offers?

Desperate sellers will sometimes consider such offers. "While a very low offer in a normal market might be rejected immediately, in a buyer's market the below-market offer will usually either be accepted or generate a counteroffer. When few offers are being made, an outright rejection of offers becomes unlikely," writes William H. Pivar, author of "Real Estate Investing From A to Z," Probus Publishing, Chicago; 1993. Plus, Pivar writes, "There are always some sellers who for some reason must sell quickly" and will consider a reduced price.

There are other considerations:

•Is the offer contingent upon anything such as the sale of the buyer's current house?
•Is the offer made on the house "as is," or does the buyer want the seller to make some repairs before close of escrow?
•Is the offer all cash? An offer at less than the asking price may be more attractive to the seller than a full-price offer with a financing contingency.

What is the difference between list price, sales price and appraised value?

A seller's advertised or list price should be treated as only a rough estimate of what he or she would like to receive. Some deliberately overprice, while others ask for close to what they hope to get and a few actually under price their houses with hopes that potential buyers will compete and overbid, according to Ralph Warner, Ira Serkes and George Devine in their 1994 book, "How to Buy a House," Nolo Press, Berkeley, Calif.

The appraisal price is another estimate of value. The appraised price is how much money a professional appraiser estimates the home to be worth and usually is based on "comps," or sales of comparable homes in the same area.

Purchase price and sales price are the same thing. Both terms mean the amount of money the successful buyer actually pays out to purchase the home.

Is a low-offer a good idea?

There are always some sellers who for some reason must sell quickly, writes William H. Pivar, author of Real Estate Investing From A to Z, Probus Publishing, Chicago; 1993. While a very low offer in a normal market might be rejected immediately, in a buyer's market the below-market offer will usually either be accepted or generate a counteroffer. When few offers are being made, an outright rejection of offers becomes unlikely. While it is true that offers at or above full price are more likely to be accepted by the seller, there are other considerations involved.

•Is the offer contingent upon anything, such as the sale of the buyer's current house? If so, such an offer, even at full price, may not be as attractive as an offer without that condition. Is the offer made on the house as is, or does the buyer want the seller to make some repairs before close of escrow or make a price concession instead?
•Is the offer all cash, meaning the buyer has waived the financing contingency? If so, then an offer at less than the asking price may be more attractive to the seller than a full-price offer with a financing contingency.