You’ve spent hours searching the internet, looking at photos, comparing prices, and touring houses. Now you want to know how to make an offer on a house you’ve fallen in love with.
Work With A Realtor
There’s no point making an offer on a house on your own. Working with a Realtor will be at no cost to you since the seller will pay your Realtor’s commission.
Additionally, an experienced Realtor will be able to advise you on how to make an offer on a house, and draw up the paperwork for you. So, why do it yourself when you can get professional help for free?
Now, even though you’ll have a Realtor advising you, it’s important you learn how to make an offer on a house because, who knows, maybe one day you’ll decide to get your real estate license, and take the commission for yourself?
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how to make an offer on a House (To flip)
Regardless whether your goal is to buy and flip or buy and hold the house long-term as a rental, I’m going to assume that you want to make money.
Here are some steps to follow in either scenario to help you prepare a reasonable offer and increase the chances of your offer being accepted.
Have Your Realtor Pull A CMA
You’ll want your Realtor to pull what’s called a Comparative Market Analysis (CMA) to help determine what the house is worth or will be worth once you renovate it.
This value is determined by reviewing properties that have recently sold that are similar (comps) to the one you’re interested in (known as the subject property). The comparable properties should meet the following criteria:
- similar size to subject property
- comparable age to subject property
- similar condition to subject property (present condition or future condition – depending)
- close proximity to subject property (no more than a mile away)
- have sold recently (last six months is ideal)
For example, let’s say you want to submit an offer on a 3 bedroom 2 bath home that’s listed for $60,000. The CMA suggests the ARV (After Repair Value) is $100,000.
This means, based on the CMA, you can expect to sell your property after it’s renovated for – you guessed it – $100,000. However, you also need to consider the following:
#1 Did the CMA factor in seller concessions?
Seller concessions are money the seller brings to the table at closing to help the buyer cover costs such as:
- Processing fees
- Origination fees
- Inspection fees
- Transfer taxes
Look at the screenshot below. You’ll notice that this property sold for $149,900, but the seller paid seller concessions of $2,000. So, in reality, the property sold for $147,900. Be sure your Realtor factors in seller concessions when doing the CMA.
#2 Real estate commission
Now, when you flip the house as the seller, you will pay the real estate commission for Realtors on both sides of the transaction.
The total commission you’ll have to pay will likely be 6% of the sales price. So, assuming a $100,000 sale, that’s $6,000 in real estate commissions.
This cost needs to be considered when you’re preparing your offer as the buyer.
#3 Other fees at closing
Additionally, you’ll probably pay title insurance & potentially transfer taxes or recording fees. For the sake of our example, let’s assume these items add another $750 to your costs.
So, at this point, we know that if we buy and renovate this house and sell it for $100,000, after paying real estate commissions and other fees, our net proceeds will be $93,250 ($100,000 – $6000 – $750).
#4 Consider renovation costs
There’s simply no way for me to provide you with a formula to use to accurately determine renovation costs since every property is different.
If you’re working with an experienced real estate agent, they may be able to give you a ballpark, but I would strongly suggest you seek the advice of a reliable, experienced contractor if you have little to no prior experience renovating properties.
Here’s a great estimating and budgeting spreadsheet to use when walking the property and identifying needed repairs. Let’s assume, for the sake of our example, that you estimate the renovation costs to be $20,000.
#5 Consider Cumulative Days on Market (CDOM)
CDOM is the total amount of time a property has been on the market including intervals of time where the property may have been taken off the market.
The higher the CDOM, the more negotiating power you probably have. Similarly, if the CDOM for the comps your Realtor used in the CMA were all low, it’s likely to assume the property you’re interested in won’t last long on the market either.
You’ll want to consider the CDOM when determining the amount you’re willing to offer.
Look at the screenshot below from earlier. You can see that the CDOM was only 12. That means that this property sold in 12 days.
#6 What is your target roi?
ROI. Return On Investment. Personally, I aim for at least 20%, so let’s go with 20% for our example. So, in this example that would be $20,000 (100,000 x .2)
#7 Determining your offer amount
The seller is asking $60,000 for the property, let’s say the CDOM is 20, and we’ve determined the ARV to be $100,000.
We know our net proceeds from a $100,000 sale would be around $93,250 after paying real estate commissions and other closing costs. We’ve estimated the renovation costs to be $20,000, and we want to make $20,000 on the flip.
Let’s calculate what our offer should be.
$93,250 – $20,000 (reno costs) – $20,000 (target profit) = $53,250. Additionally, I like to “pad” my offers with $5.000 to allow room to negotiate, so the offer in this example would be $48,250.
how to make an offer on a house to keep as a rental (buy & hold)
If your goal is to buy and hold, you would still follow the same process for determining your offer, however, if you’re looking to finance the property after you renovate it, you’ll want to factor in another $1,000 to $2,000 to cover bank fees & an appraisal (which the bank will require to issue a loan).
Other Things To Consider
As you’re working with your Realtor on making an offer on a house, your Realtor will likely ask you the following:
How will you pay?
Cash deals will give you the most leverage when negotiating, but financing is fine too. You should include a pre-approval letter with your offer if you’re financing the purchase.
How soon can you close?
The sooner you can close, the better you’ll look in the eyes of the seller. Bank financing will likely take 30-45 days, but if you’re paying cash, you can possibly close in as little as two weeks.
Consider Earnest Money
Earnest money is a deposit made to a seller showing the buyer’s good faith in a transaction. An earnest money deposit of even $500 will go along way. Of course, this deposit comes off the purchase price.
Hopefully this post has answered the question, “how to make an offer on a house?”
At the end of the day, whether you’re looking to buy a rental property, a flipper, or a house to call home, you want to make sure your Realtor pulls a CMA to help you determine how much you should offer. If you don’t do this, you run the risk of either paying too much, or throwing a low-ball offer that will likely get rejected.