The make-up of an offer: Price vs. Terms

When buyers draw up an offer to purchase real estate the first thing that comes to mind is price. But price is not the only thing that makes up an offer. In fact, with inventory so low these days, sellers can be very picky and demanding. For instance, making an offer without proof of funds or a preapproval letter is akin to making an offer without a signature - it is worthless. This was not the case years ago.

Here are the most important aspects of an offer:

• price
• contingencies
• cash versus financing
• earnest money deposit
• closing date

Looking at each one individually we start at price. Obviously, it should go without saying that price is the single most important part of an offer. In fact, it is been my experience that price can overcome any obstacle thrown at it, so long as the seller is a reasonable and sane individual.

Contingencies include an inspection period, financing, sale of existing property, feasibility period, etc. In a very hot market like the one we are in, sellers can expect to be in multiple offer situations if their property is priced well. Having this advantage allows them to pick offers that provide the fewest "escapes" for the buyer. This is why it is critically important to have a proof of funds or preapproval letter, a very short inspection period and very few, if any, other contingencies. No seller wants to have their property locked under contract for months on end.

When it comes to a cash purchase versus financing many sellers will deem one more important than the other depending on their need to sell the property. For instance, if the seller must sell and vacate as soon as possible they will view cash in a much better light than financing. Conversely, if the seller has time on their hands they may be willing to accept an offer subject to financing so long as the price is right.

Earnest money. This is a very interesting one. Most investors and real estate brokers view earnest money as a very important part of the offer. But for the most part, sellers don't think of it as a significant or "threshold" issue. I have seen some offers in which as little as $10 was offered as earnest money. In fact, I would say that earnest money is one of the easiest things to overcome so long as the offer price is right. After all, if you had a preapproval letter from a buyer does it really matter what the earnest money amount is? Since there are so many different ways in which a buyer can get out of the contract free and clear, and since sellers seem to know this, they don't put much weight on the amount of the earnest money, and neither should you.

The closing date is one part of the offer that gets a lot of investors confused. You would naturally assume that a shorter closing date would be superior to a longer closing date. But that is not necessarily the case. Many sellers want some amount of time to move their stuff or provide notice to their tenants. Some sellers who are relocating for a job may not need to move for some time, but still put their properties for sale, expecting that it will take time for an offer to be made. Best practices with the closing date is to have your real estate broker contact the listing agent or seller and ask him or her what closing date they would prefer.

In conclusion, although there are many aspects to an offer, one thing that trumps them all is price – to a certain point. Imagine if you get an offer for your home that is 50% higher than your asking price but subject to a lengthy inspection period and no earnest money. While most sellers may jump at that offer with both feet, unless that buyer can provide proof of funds or preapproval letter, I don't think it's a strong offer at all. It smells like someone trying to lock up your property under contract for some sort of nefarious reason. However, an offer that is 5% to 10% above asking price, with a five day inspection period, that comes with the pre-approval letter, and offers 1% of the offer price as earnest money is a strong offer.