What is it?
Offer Negotiation is the ignition phase of the closing process that results in a Contract between you (the Buyer) and the Seller for the purchase of the Seller’s property. During this phase, you make an offer to the Seller to buy the Seller’s property, and then negotiate the basic terms of the transaction with the Seller — purchase price being the most obvious — until an agreement is reached and a Contract is signed.
Our explanation of Offer Negotiation will focus on the technical / logistical aspects of that phase and how they lead to the formation of a Contract. For strategic guidance on property valuation, making bids and local real estate markets, consult with a real estate agent in your area.
Why is it important?
Quite simply, Offer Negotiation leads to the formation of a Contract between you and the Seller for the purchase/sale of a property. Without a Contract, there can be no closing.
Looking a little deeper, however, Offer Negotiation is a period of negotiation between you and the Seller when neither of you are represented by legal counsel yet. (Attorneys jump into the transaction once an offer is accepted and the Contract has been signed by both parties, which marks the start of Attorney Review). Major Contract terms are being discussed and agreed upon by the parties during the Offer Negotiation phase, such as price, closing date, and various contingencies, which, although technically subject to change during Attorney Review, create an initial understanding between the parties and set a tone for the transaction that you should take care not to disrupt unnecessarily.
Because of the importance of not making promises during Offer Negotiation that you end up reneging on during Attorney Review, it’s important for you to understand the meaning and implications of what you include in your offers.
How does it work?
STEP 1: Make the Offer
In New Jersey, the standard way for you to make an offer on a property when you’re working with a real estate agent is as follows:
(a). You consult with your agent about the specific features of the offer you’d like to make on the chosen property. Those features generally include a proposed purchase price; down payment amount; mortgage amount; deposit amount; closing date; and deadlines for the mortgage and inspection contingencies.
Additional features you might include to make your offer more attractive to the Seller might be things like limitations on the scope of your inspection contingency, or your waiver of any appraisal contingency. Moreover, your agent will have communicated with the Seller’s agent at some point to try to glean information about the Seller’s circumstances that might assist you in making your offer more attractive to the Seller, such as a closing date preferred by the Seller.
(b). Your agent fills in the blanks of the New Jersey Realtors Standard Form of Real Estate Sales Contract with the specific features of your offer. This NJR Contract is the form contract used by virtually all real estate agents in New Jersey, so 9.9 times out of 10, the NJR Contract will form the basis of your offer (and, thus, your contract) with the Seller. (Note: This is why the initial contract with the Seller is oftentimes referred to as the “Realtor-prepared form Contract”.)
In the meantime, you need to obtain a mortgage pre-qualification or pre-approval letter from a reputable lender, to be included with your offer.
Quick Tip! Your real estate agent should ask you for a pre-approval letter when she or he first starts working with you on your house search, in order to confirm your qualification to make any offers you wish to make. Look at it as your agent’s professional obligation to do so. And remember that getting a pre-approval letter from a lender does not lock you into using that lender for your mortgage loan. You are free to go with another lender when it comes time to begin the mortgage application process.
(c). You review and sign the Realtor-prepared form Contract. Typically, you’ll be able to sign the Contract electronically, as most agents use e-signature platforms like DocuSign or DotLoop to handle the preparation, circulation and signing of contracts.
(d). Your agent submits the Contract to the Seller’s agent, typically electronically.
You have now officially made an offer!
STEP 2: Continue Shopping Lenders and Select a Closing Attorney
Ideally, by the time you have an accepted offer and a countersigned Contract, you’ll have already lined up your closing attorney so you can jump right into Attorney Review, and you’ll be down to your final few lender choices so you can proceed with obtaining Loan Estimates from them.
Unsure about how to pick a closing attorney?
CHECK THIS OUT: 5 Keys to Choosing the Right Closing Attorney
STEP 3: Receive the Seller’s Response
Once the Seller has received and reviewed your offer, the Seller’s response is typically communicated via email or verbally, from the Seller’s agent to your agent.
The Seller’s response will be one of three things :
- The Seller accepts your offer;
- The Seller rejects your offer while making a counteroffer; or
- The Seller rejects your offer without making a counteroffer.
If the Seller accepts your offer as is, then GREAT, you can proceed to “Step 5” below!
A counteroffer, on the other hand, is the making of a “new” offer and most typically revolves around the proposed purchase price, but can also involve any of the other features of your offer. For example, the Seller might push for a shorter mortgage contingency, an earlier closing date, or a larger deposit.
A counteroffer from the Seller is communicated to your agent by the Seller’s agent. If you wish to accept the Seller’s counteroffer, your agent will revise the form Contract that she’d originally prepared so that it reflects the newly agreed upon price/terms. You’ll then review and sign the revised Contract, and your agent will send it off to the Seller’s agent so that she can have the Seller sign, formalizing the agreement.
If, however, you don’t accept the Seller’s counteroffer and wish to counter it, then you would repeat “Step 1” and continue the negotiation with a revised offer.
STEP 4: Proceed with Additional Rounds of Negotiation, As Necessary
You and the Seller will continue with back-and-forth offer negotiation until either you come to an agreement or one or both parties walks away.
STEP 5: Sign the Contract
When an agreement has been reached between you and the Seller as to the basic terms of the purchase, the Seller will countersign the Contract. At that point, both you and the Seller have signed the Contract and it’s called a “fully-executed Contract.”
The Seller’s agent sends the fully-executed Contract to your agent, who in turn sends the Contract to you and your closing attorney. Your and the Seller’s receipt of the fully-executed Contract triggers the start of Attorney Review, the next phase of the closing process.
How do I prepare for it?
1. Start shopping for lenders early — i.e., before or during house hunting. The lenders will let you know how much you can borrow and help you hone in on an appropriate price range for your house hunting. (Click here to learn more about shopping for lenders.)
Beyond that, you might even try to get credit-approved for a loan before you make an offer on a property, as that will make your offers all the more strong.
Finally, and perhaps most importantly, speaking with multiple different lenders early on in the process can save you a significant amount of money in the long run, because you’re giving yourself the time to effectively shop and compare interest rates and loan products before you have to actually apply for your loan (once you’re under binding contract on a home).
Believe it or not, less than half of borrowers shop rates before applying for a mortgage or refinancing, even though small differences in rates can mean big savings. Why? Because home buying is often an overwhelming experience for buyers, so rationality and efficiency go out the door:
“Unfortunately because of the moving parts, lack of familiarity with the process, and also the pace that you have to get things done, many buyers will go with that first person they get referred to. Unfortunately they’re going to pay a very, very high premium over the life of the loan for doing that.”
2. Start looking into closing attorneys while you’re still house hunting. It’s never too early to pick an attorney. The Offer Negotiation phase can sometimes move surprisingly quickly, especially when there aren’t multiple offers/buyers in the mix, so researching and selecting a closing attorney before you’re in the thick of Offer Negotiation can save you a lot of stress and keep your transaction humming along efficiently as you move from Offer Negotiation into Attorney Review. (Remember, attorneys get busy and take vacations, so they may not be available when you want them.)
Talk to at least two — preferably three — different closing attorneys before deciding which one you will hire. We suggest you get referrals from both friends and your agent.
Unsure about how to pick a closing attorney?
CHECK THIS OUT: 5 Keys to Choosing the Right Closing Attorney
Important Things to Remember:
* Don’t bait and switch! A big mistake that buyers make is over-promising during Offer Negotiation, only to renege on their promises during Attorney Review. While legally, such reneging is permissible (during Attorney Review, the Contract is not yet binding on the parties), the disruption of the Seller’s understanding of the bargain that s/he originally agreed to can set your transaction on a path of antagonism and distrust between the parties. This discord can cause stress, inefficiency, and even threaten the transaction.
* Get in the right mindset. Many buyers go into the home buying process thinking it’s an adversarial process — that it’s “buyer vs. seller”. But this isn’t true…and neither is it a good way to approach the transaction. At bottom, there’s a huge element of cooperation that needs to happen between the parties at all levels and points of a home purchase transaction in order to even get to a closing. This means the idea of compromise should be at the forefront of your mind as you proceed toward closing.
What happens next?
Get the fully-executed Contract to your closing attorney quickly. The Attorney Review period is triggered when both you and the Seller have received the fully-executed Contract of Sale — not when your attorney has received it from you. So send your fully-executed Contract to your attorney as soon as you receive it from your agent (or have your agent send it to your attorney and cc you), and then get confirmation from your attorney that s/he has actually received your Contract.
You don’t want a situation where you’ve emailed your attorney the Contract, but the attorney overlooked it in his inbox, or it somehow never made it to his inbox altogether.
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MY CHECKLIST: Offer Negotiation
Before or during house hunting:
◻ Start shopping lenders to determine how much you can borrow, available loan products, and to get pre-qualified or pre-approved. Speak to at least three different lenders.
◻ Obtain three referrals for closing attorneys from your real estate agent and friends
◻ Interview three closing attorneys.
◻ Select and retain a closing attorney.
◻ Find a property you’d like to purchase.
When you’re ready to make an offer:
◻ Decide on the features of your offer with your agent and have your agent prepare the offer by filling out a form Contract.
◻ Obtain a mortgage pre-qualification or pre-approval letter from a reputable lender to include with your offer.
◻ Review and sign the form Contract prepared by your agent.
◻ Your agent submits the form Contract to the Seller, via the Seller’s agent. You have officially made an offer.
◻ Continue shopping lenders and narrowing down the field of contenders.
◻ Receive and review the Seller’s response to your offer.
◻ Submit a counteroffer to the Seller, if desired. Proceed with additional rounds of negotiation until an agreement is reached (or either party walks away).
◻ Once an agreement is reached, receive the countersigned Contract back from the Seller. Attorney Review has begun!
◻ NEXT STEP: Email a copy of the countersigned Contract to your closing attorney as soon as you receive it from the Seller.