Once you’ve found right property, you need to put together a purchase offer. Most buyers in Colorado, use the standard purchase contract developed by the Colorado Real Estate Commission. Real estate agents are required to use this form, though most will delete irrelevant clauses or supplement the form with additional provisions designed to protect their client’s interests. A buyer, or any attorney they hire, can draft a purchase offer without using this form. In most cases, however, if the buyer hires an attorney, she will, probably use the standard Colorado form as the basis for the offer. The standard form does a good job of covering many of the necessary issues in a manner consonant with Colorado law and practice. And, if filled out properly, it includes many safeguards for buyers and sellers. The standard form also has the virtue of familiarity. Any real estate professional in Colorado, including real estate agents, attorneys, title company staff and lenders, will be familiar with the contents of the form. Its use simplifies the process for everyone.
Do Not Go It Alone
The Preliminary Evaluation of the Property
First, there may be specific issues regarding the property or your intended use of the property that you want information on before you feel comfortable submitting an offer. If you are a ham radio operator or if you want to run a business out of the home, you may want to review the subdivision covenants or talk with the city or county planner before moving forward. If you are concerned about schools, you may want to verify what school district the property is in and get detailed information on the specific schools your children would be attending. If you noticed a crack in the foundation or if the home is near a stream, you may want to have a structural engineer look at the property or you may want to look into the property’s flood plain status before you put together an offer.
In most situations, however, it is best to make the offer contingent on a satisfactory review of these issues and pursue a detailed evaluation once you have a firm purchase contract. There are two arguments for this approach: (1) given the dynamics of our market, you may well lose the property while you are trying to get a structural engineer out to look at it or while you are pulling together information on the school districts, and (2) it makes little sense to spend a lot of time and money evaluating these questions before you know whether you and the seller are going to find common ground on price, closing date, and other issues. If the evaluation is going to take much time or money, make it part of the inspection you carry out after you are under contract. But remember, if this is the plan, you need to make the contract explicitly contingent on a satisfactory resolution of these issues.
Second, you need to take a hard look at the asking price prior to making the offer. If you are getting a loan to purchase the property, the lender will hire a professional appraiser (usually at your expense) to verify that the contract price that you and the seller have agreed upon is reasonable. This does provide some protection for home buyers from making fatal errors in assessing the property values. But you need to look at this issue on your own prior to contracting on a property. Two reasons: (1) appraisers are fallible and (2) you will have spent a lot of time and money on the deal before the appraisal is completed.
We typically look at several pieces of information before deciding on an offer price. First, we take a hard look at what comparable properties in the same neighborhood have sold for over the past 3-12 months. In large condominium complexes or neighborhoods with 5 home models built by the same builder, this will often give us a very clear feel for the value of the home. In these neighborhoods, sales of comparable properties may differ by only $10,000 of so. In more heterogeneous neighborhoods where homes are more difficult to compare with one another, this formal market analysis may give us a much broader range of values to work with. However, if you have seen enough homes — and if you have driven by all the comparable homes sold in the previous year — you can still make good judgments on value. If you know that the home is in the bottom, middle, or top third of comparable homes in the neighborhood, and if you know that comparable homes have sold in a range between $225,000 and $275,000, it is not that difficult to decide how reasonable an asking price of $250,000 or $280,000 is.
For buyers looking in a hot seller’s market, please be aware that it is not unusual for buyers to find that the home they are looking at is priced slightly higher than anything else that has sold in the neighborhood. If this didn’t happen — and if the sellers of the better properties didn’t get these prices fairly regularly — prices wouldn’t go up the way they do. Because sellers in this kind of market understand what is going on, they are unlikely to accept offers that are substantially less than their asking price within the first few weeks after the property hits the market. It isn’t necessarily a bad idea to pay top dollar for a good property. You may get more bargaining room if you find a property that nobody wants. But if the current owner is having a hard time selling the property in a hot market, imagine the fun you’ll have trying to sell it when things slow down.
Structuring Your Offer
- Price: In addition to the information on market value discussed above, the respective situations of the buyer and the seller are generally the most important factors influencing the decision on the amount of the initial offer. If the property has come on the market in the past day or two, and the asking price seems to reflect reasonable market value, it is very unlikely that the seller is going to compromise significantly on price. If the property has been on the market for six months and the seller has dropped the price three times in the last month, there is likely to be more room for negotiation. Similarly, if the buyer has been looking for the magic property for six months — and the kids need to be enrolled in school in the next month — most buyers would be foolish to risk losing the right house over a few thousand dollars. If the buyer is seeing acceptable properties every week and has no time constraints, the buyer risks less by trying to bargain hard. Try to be realistic in evaluating your situation and that of the seller.
- Dates: A purchase contract is filled with dates and deadlines, which are often as important as price in the negotiation process. The dates for closing and possession can create difficult negotiation issues. If the seller is waiting for a new home to be built — or for his children to finish school — this can extend the closing date longer than the buyer wants to wait. It may also force the buyer to accept risks of substantial interest rate changes (see Mortgage Lenders). If the seller needs to have the sale completed within two weeks, the buyer may lose money on his lease or be unable to close if he hasn’t already initiated the loan process. Most of the other dates in the contract put time limits on the buyer’s right to evaluate the property. Typically the seller will want this done quickly, while the buyer needs to make sure that he has the time to gather and evaluate critical information.
- Conditions: If you need to verify that the property isn’t built over a coal mine or that the school system is good, or if you need money from your parents or from an retirement fund to complete the purchase, you need to make your offer contingent on these things happening in a satisfactory manner. However, you also need to understand that these contingencies will generally make the offer less attractive to the seller. In a hot market, or with an outstanding property, contingencies can kill your offer. To the extent that you can address these issues prior to making an offer — or very quickly after the offer has been accepted — you will increase your chances of getting the property at a price and terms that you’re comfortable with.
- Inclusions: In our market, window coverings and some kitchen appliances are typically included in a sale. Refrigerators, washer/dryers and hot tubs are sometimes included. Furniture and other personal property are almost never included, in part because lenders will generally not provide loan if large amounts of personal property are included. I have seen buyers lose a good property over the refrigerator — and then pay $5,000 more for a lesser property 2 months later. Stay focused on the big picture and on what is truly important.
Negotiating the Contract
- You need to evaluate your own situation honestly and realistically before you get involved in negotiations. Don’t negotiate like an investor who is willing to buy any decent 3 bedroom home — and willing to lose out if the seller won’t compromise on price — if you’re really a parent who needs to get their child settled into their new school next month — or if your lease is up next month and you have nowhere to go.
- If you have a psychological need to buy 5% under market, don’t bother to make an offer on a property that has just hit the market. The seller generally won’t be interested. And keep in mind that if it takes you a year to find a seller who will negotiate on these terms, you may still lose money if the market has gone up 10% in the interim.
- If you’ve found a house you need or want badly, don’t let the desire to win the negotiation cause you to lose it over $1000 — or $100. We’ve seen this happen and the emotional devastation that follows — too many times. Keep the big picture in mind. The important question is not whether you or the seller wins the negotiation, but whether you are likely to win over the long term if you buy this home at this price and under these terms.
- If it is a house you need or want badly, don’t let the dynamics of the negotiation make you overextend yourself financially or buy the wrong house. Keep your goals and limitations in mind and take them seriously.
- If you do a lot of negotiating on the job — and take pride in your negotiating skills — consider a bit of restraint in your home negotiations. It is important to remember that most of the sellers you’ll be dealing with don’t sell homes professionally and aren’t professional negotiators. More importantly, they often don’t really see the sale of their home as a business transaction. Selling the home where they’ve raised their kids and where they’ve spent their weekends finishing the basement, weeding the garden and planting trees is a very personal — and highly emotional — process. Don’t lose the house by irritating the seller for no good reason.
- Always keep in mind that you may need to call the current owner after you’ve bought the house to ask about the sprinkler system or to find out what some pipe in the basement was put in for. Or you may need the seller’s approval to extend the date set for loan approval or closing. Good relations not only make the process more pleasant for everyone, they may be worth real money to you down the road. Don’t put them at risk them over trivial issues or the desire to “win” the negotiation.
- And, please, don’t tell the seller that you are making a lower offer because you don’t like their landscaping, their paint colors, or their wallpaper — even if it’s true. They will be offended. They will wonder why you are offering to buy their house rather than one of the others on the market if you don’t like it. They’ll want to find another buyer who likes their wallpaper. People want to pass their treasures on to people who appreciate them, and for many sellers, their home means more to them than anything else they’ve ever owned.