Note to Readers - Real estate is very specific by jurisdiction. While this article will cover the general process of making an offer on a house, it is intended as an educational piece covering the subject in general. Be certain to consult a local real estate agent or attorney before making any decisions regarding your specific circumstances.

Buying a house can be intimidating. Along with a car and an education, it's the single largest purchase most people will ever make.

It's also one which takes some doing. Appropriately enough, too. The house you buy will be where you live, play and (increasingly these days) work. It will occupy your finances and tie up your savings. It's not the immovable object that many people fear, but it's certainly a much bigger financial commitment than picking up a used Camry. After all, the median homeowner stays in a given property for 13 years.

So you've shopped and waited and made sure now is the right moment. You've found a home you could see spending a decade (or more) in.

Now what?

How to Make an Offer on a House

Find the House and Financing

This article assumes that you have already found the house you'd like to buy and secured approval for a mortgage. While outside the scope of this article, if you have questions on this part of the process we have excellent guidance on applying for a mortgage.

Extending the Offer

The first step to making an offer on a home is to extend the actual offer. You do this through your real estate agent. After you've viewed the property and decided to buy it, sit down with your agent and review the asking price. You should consider this the opening bid in a negotiation, and will now extend a written offer to the homeowner.

Things you should consider include:

  • What is the strength of the local market? Are there other buyers waiting in line behind you, or are there several other homes for sale in the area?
  • How desirable is the area?
  • What are alternatives? If you can't get the price you want, can you easily move on to another place you like just as much?
  • What is your walk-away point? How much money can you spend, and at what amount will you walk away from the deal?
  • How much will you need to spend on this house in repairs and changes?
  • How long has the house been on the market?
  • What non-financials can you offer? For example can you offer to adjust the closing period around their schedule in exchange for a discount?
  • How much are they asking relative to other homes in the area?

All of these factors and more should influence how you consider the homeowner's asking price. Work with your real estate agent to come up with an offer that makes you comfortable, then you will make that offer in writing. This is considered a firm offer.

The Firm Offer

This is so important that we've pulled it out separately.

In most states, your written offer is what's known as a "firm offer." That means that once extended, you must honor it. If the seller accepts, you have no opportunity to change your mind. The deal is done. Buyers must therefore be very, very careful about written offers. It's a contract from the moment you extend it, not from the moment they accept.

If the seller doesn't accept, doesn't accept within a period of time specified in the offer, or counters with a different number (by even a single penny) then your offer is considered rejected. You're released from the firm offer and the seller can't turn around and claim that you still are bound by it.

For example, say you offer $200,000. Hoping for more, they ask for $250,000, which you reject. You are now free to honor the original $200,000 offer or not at your discretion. Their counteroffer cut off your obligation to the previous offer.

Elements of the Offer

Even if you found your house on your own, it is generally very important to use a real estate agent or an attorney when drafting the offer letter. This is because most (if not all) jurisdictions have rules about elements that must be present in an offer on real estate. These requirements might include:

  • The address, acreage and other physical details of the property;
  • All current owners of the property;
  • The purchase price, earnest money, distribution of closing costs and any other financial elements of the transaction;
  • The precise nature of the title being transferred;
  • Details regarding closing costs and tax issues that must be resolved between the parties.

In addition, you will want specific elements of the offer letter to protect you from unexpected events. A well-drafted offer letter should include protection clauses such as:

  • An expiration date (so the owner cannot sit on your offer while shopping for better ones);
  • Clauses against encumbered, clouded or disputed title (in case the government has an easement on the land or the homeowner shares joint title with their cousin);
  • Clauses against any unanticipated defects not covered by local real estate law (so that you don't take possession of a home only to discover that it needs thousands in repairs that you couldn't see);
  • Clauses stating that the deal is only valid upon final approval of financing (at this point the bank will have approved your mortgage but not issued it);
  • Clauses regarding any final inspections of the property or review of any disclosures by the seller (in case professional inspectors find red flags);
  • Repairs that you require, modifications to the property, or any other requests that you and the homeowner agreed upon as part of this deal.

At this point many real estate agents or lawyers will also conduct what is known as a "plat check." This is when they review the property records to confirm ownership of the property.

This is not a DIY project. Yes, you might spend some money by having a professional draft this letter, but it can save you from catastrophic expenses in the long run.

Form Does Not Matter

This is a commonly misreported subject. Many articles on this issue report that an offer is not binding unless you use specific forms or otherwise tick boxes of legal arcana. This is not true. In most jurisdictions an offer is real and binding regardless of the specific forms used to make it.

As long as an offer is written, clearly states the buyer's intent, and contains all of the elements that the jurisdiction requires, it is a binding offer. This is usually true whether that offer comes in the form of a formal document from an attorney or a hastily tossed off e-mail.

Negotiation and Earnest Money

At this point the seller may come back with a counteroffer. The counteroffer may address issues related to the process of this sale such as closing time. It may involve substantive issues related to the property itself, such as repairs. Or it may simply be a request for more money.

Regardless of the substance, if the seller comes back with a counteroffer of any kind then your original offer is no longer binding. You and the homeowner, typically working through your real estate agent, will now negotiate to see if you can find terms that all parties can agree on.

During this process you will stake what's called earnest money. You will make this payment when you extend your initial offer. Generally it is around 2% of the total asking price. This will be kept in an escrow account. Most jurisdictions specify by law the conditions under which you lose this money to the seller, such as if you back out of your firm offer without cause. If your offer is rejected without a counteroffer, the seller must return this money.

If the seller accepts your offer, your earnest money typically goes toward the down payment on the house.

Closing

If the seller accepts the offer you will now move on to what is called "closing." Among other parts of this process, you will:

  • Get final approval from the bank, which in particular must accept this property as collateral for the mortgage;
  • Conduct professional inspections of the property;
  • Ensure that the seller makes any necessary or agreed-upon repairs or modifications to the property;
  • Transfer the money for the sale from the bank to the homeowner.

Closing typically takes 30 to 90 days, and the exact duration is something which the parties can negotiate over.