The Lowest Offer Isn't Always the Best Deal

When people think about negotiating a home purchase, they think about price: how low can I go, and how high will the seller accept? Price matters, but it is only one number in a contract full of them. Two offers with the same price can leave you thousands of dollars apart, and an offer with a lower price can leave you worse off. The smartest buyers learn to compare offers by what they will actually cost and how likely they are to close.

Think in total cost, not just price

The total cost of buying a home includes the purchase price plus everything that shapes what you pay to close and to own. A fair comparison of two offers asks:

• How much cash do I need at closing?
• What will my monthly payment be?
• What repairs or updates will I need to pay for after I move in?
• What is included, such as appliances, window coverings, or pool equipment?
• How much risk and delay is built into the timeline?

Terms that look small on paper can move those numbers a lot.

Closing costs and seller credits

A seller credit is money the seller agrees to apply toward your costs at closing. It can cover things like lender fees, title and escrow charges, prepaid taxes and insurance, and discount points or a rate buydown. A common approach is to offer a somewhat higher price in exchange for a credit. The seller nets a similar amount, and you reduce the cash you need to close or lower your payment.

Who pays each closing cost is set in the purchase agreement, which in the Las Vegas area has a section listing items such as the appraisal, inspections, and various association and transfer fees, with checkboxes for who pays each one. All of it is negotiable.

There are limits on credits

Loan programs cap how much a seller can contribute. As a general guide at the time of writing, these limits are:

• Conventional loans: 3 percent of the lesser of the price or appraised value with a small down payment, 6 percent with a mid-sized down payment, and 9 percent with a larger one. Investment properties have a lower limit.
• FHA and USDA loans: up to 6 percent.
• VA loans: closing costs generally are not capped, but certain additional concessions are limited to 4 percent.

These numbers change and have exceptions, so confirm the current limits with your lender before you structure an offer. Credits above the limit can reduce the value the lender uses, which can cause problems at underwriting.

Interest-rate strategies

Seller credits can be used to buy down your rate, either permanently by paying discount points, or temporarily. A common temporary structure is a 2-1 buydown, where your rate is lowered by two percentage points in the first year and one point in the second before settling at the full rate.

Here is an illustration, not a quote. Suppose you borrow $400,000 on a 30-year loan at a note rate of 6.5 percent. The principal and interest payment would be about $2,528 a month. With a 2-1 buydown, the first-year payment would be about $2,027 and the second-year payment about $2,271. The difference over the two years is roughly $9,100, which is about what a seller credit would need to fund. A credit like that might do more for your budget than a $9,000 lower price, because it lowers your payment during the years when a new homeowner often has the most unexpected expenses. On the other hand, a permanent price reduction helps for as long as you own the home, so the right choice depends on how long you will stay and your finances. Your lender can run the real numbers for your loan.

Repairs and appliances

After your inspection, you can ask the seller to make repairs, give you a credit, or reduce the price. These look similar but are not the same. Seller-completed repairs are done on the seller's schedule and may vary in quality. A credit lets you hire your own contractor. A price reduction lowers your loan amount and payment. If the lender or appraiser requires specific repairs, the deal may be tied to them. Appliances, window coverings, and similar items are also negotiable and have real value, so make sure the contract lists what stays. See Never Skip the Home Inspection for more on repair negotiations.

Timelines and flexibility

For many sellers, time is worth money. Terms that can make your offer more attractive without raising the price include:

• A closing date that fits the seller's plans.
• Possession after closing, or a short rent-back, so the seller can move on their schedule.
• A shorter or more focused due diligence period, if you are comfortable with it.
• A strong pre-approval and an earnest money deposit that shows commitment.

Each of these shifts risk, so discuss the trade-offs with your agent. Never give up protections you need just to look more appealing.

Certainty beats a bigger number

An offer only helps if it closes. A higher price with weak financing, or a price above what the home will appraise for, can fall apart. If a home appraises for less than the contract price, your lender will base the loan on the appraised value, and you and the seller will need to bridge the gap, renegotiate, or walk away. A lower price with strong financing and clear terms is sometimes the better path to the keys. Your agent can help you judge how the numbers, the comparable sales, and the terms fit together.

If you are selling

The same thinking works on the other side. The highest price is not automatically the best offer. Compare offers by what you will net, how likely each is to close, and how well the terms fit your timing. A slightly lower price from a well-qualified buyer with flexible, clean terms can be worth more than a higher offer with credits, contingencies, and uncertainty.

Make your next offer a smart one

Before you write an offer, talk to your lender about credits and payment options, and talk to your agent about what the comparable sales and the seller's situation suggest. If you have questions, see Ask Questions, Lots of Them, and we will help you build an offer that fits your goals.

Contact The Perna Group