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7. Pre-offer Analysis
Once you have found the home you want to place an offer on, the next step is reaching an agreement with the owner about the price, terms and conditions. There are many important considerations to make that can impact your finances, tax situation and legal obligations. Your buyer's representative can help you navigate your way through much of the transaction process, but may also advise you to consult legal and tax experts.
Assess your negotiating position prior to making an offer. Here are some basic rules to help you. You are in a strong bargaining position if:
- You are an all-cash buyer
- You are pre-approved for a mortgage
- You do not have a house you need to sell or other contingency that must be met before you can purchase the home
- You can close right away on a home that is vacant or can be flexible on a settlement date for a home that is occupied
- Have a letter from your financial institution showing availability of funds for your down payment
- The home has been on the market for an extended period of time
- The amount of earnest money you include with your offer is reasonable *
With these factors in your favor, you may be able to negotiate a reduction on the listed price. On the other hand, in a "hot" seller's market, and your "perfect" home just comes on the market, you may want to offer the list price (or more) to beat out the other offers depending upon the results of your Comparative Market Analysis (CMA) of recent home sales in the area.
It is helpful to find out why the house is being sold and if the seller is under pressure to close a deal quickly. Consider that:
- Every month a vacant house remains unsold represents considerable added expense for the seller
- If the seller are divorcing, they may just want to close quickly
- An estate sale often yields a bargain in return for a promptly closed transaction
* Earnest Money: This is a cash deposit you make when submitting your written offer on a property to show your "good faith". Sellers are understandably suspicious of offers that are not accompanied by such a deposit. An agent, attorney or sometimes a builder holds the deposit in escrow until closing. The deposit is applied at closing towards your down payment or closing costs if the offer is accepted or is refunded if negotiations fail to result in a sales contract. The amount of earnest money can vary by the negotiations and from market to market but most often increases in proportion to the price of the home.
In Virginia, sellers are required to disclose any known property defects, such as roof leaks and foundation settling problems. The Virginia Residential Property DisclosureAct (§55-517 et seq. of the Code of Virginia) requires the owner of certain residential real property to furnish to the purchaser a Residential Property Disclosure Statement. Certain transfers of residential property such as new construction and foreclosures are excluded from this requirement. There are also required seller disclosures pertaining to Lead Based Paint for homes built prior to 1978, whether the home is located within a high aircraft noise or accident potential zone and if the sellers have had to treat for wood destroying insects such as termites. Your buyer representative will tell you what seller disclosures are required for the property on which you are interested in making an offer.
With the foregoing in mind it is time to develop an opinion of the market value of a property by using a comparative sales approach similar to the approach used by an appraiser. For investment properties, such as a duplex, an income approach might be used. If you are contracting to have a home built you and your agent will be negotiating with the builder to establish the price for the home based upon the lot and model you choose plus the options your want in the home.
This is where a buyer representative becomes invaluable. Remember the listing agent is working for the seller and the site agent is working for the builder. Your buyer representative will be able to show you several recent home sales similar to the home you want to buy or have built. The home sales should have occurred within the past six months. The homes should be similar in square footage, style, age, condition and amenities. They should all be located within the same public school district. If adjustments need to be made for comparison purposes because one property is located on a busy street, has a pool or other amenity, your buyer representative can advise you on how much value these features add to or subtract from a property. It becomes a lot more complicated when you start comparing waterfront properties and homes with views.
There is a reason why we don't go into a court room without an attorney. If you had a $200,000 income tax problem, you wouldn't attempt to deal with it without the help of a CPA. Real estate professionals know the market and can help you understand the value of a property. They can advise you how to structure the offer you want to make for it. Seek professional help. To learn from your own mistakes is called experience. To learn from someone else's experience is called wisdom.
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