What Is an Offer Letter in Real Estate?
When you want to make an offer to purchase real estate, you need to write a letter to express your interest in purchasing the property and include all other details regarding the purchase. In other words, you are letting the seller know how you want to buy a particular property and on what terms before you can commit to the purchase and make payments. If the property seller accepts the offer, you can secure the property as yours as you complete the final arrangements.
Starting off real estate transactions with a real estate offer letter also allows for easy negotiations. The seller can respond with a counteroffer or alternate terms without re-writing lengthy legal pages. After the property buyer has inspected the property, a sale agreement can be drafted. However, an offer letter for a house is not a legally-binding contract. The buyer can opt not to continue with the real estate transaction before signing a sale agreement without legal repercussions. Even though a letter of offer is a significant primary document, some property buyers who want a fast purchase may by-pass it.
Related: The Beginner’s Guide on How to Buy an Investment Property
Writing a Real Estate Offer Letter
In a seller’s market, bidding wars are much more common. So, many potential buyers may send a real estate offer letter to the same seller. With such high competition, it is imperative that you know how to write a real estate offer letter well.
First, it is important to ensure that all the essential elements are included. When offering a deal on the MLS, your real estate agent will likely help you write the letter. However, if you are buying a house without a realtor, you are on your own. So, here are some of the most important things to include in a strong real estate offer letter:
1. The Property Buyer and the Property Seller
Much of the basic contents of a real estate offer letter are similar to those of any real estate contract. The most important is the names and current addresses of both the seller and the buyer. It is crucial to ensure that all this information is accurate so as to avoid any possible delays or problems as a result of inaccurate information during the purchase process.
2. Description of the Property
This should be the legal description of the property as outlined in the original title. It may include the address, lot and block numbers, physical boundaries, and numerical measurements.
3. Purchase Price
The purchase price is also one of the most important elements of a real estate offer letter. The property seller usually lists their property at a certain amount. However, in most cases, this is not what the buyer pays. You can choose to give an offer price that is less or more than the seller’s asking price, depending on a number of factors. Any additional terms relating to the purchase price should also be included, especially when part of it is to be financed.
To come up with a reasonable purchase price, you need to conduct a comparative market analysis. This involves looking at the prices at which similar properties in the same location recently sold. Based on those real estate comps, you can make adjustments to account for differences between your target property and the comps. You can use Mashvisor’s investment property calculator to quickly and easily get real estate comps of properties listed on the platform.
Related: Comparative Market Analysis: The Fastest Way to Get It Done
4. Financing
Property sellers will need to know the kind of financing you will use to purchase the property. Sellers usually want this information to be certain that you actually have the money that you are offering. Will you be getting a conventional loan from a financial institution? Can you buy it with cash? Will you use a hard money loan? This is because they don’t want to accept an offer and tie up the property for weeks only for the buyer to back out later because they really can’t buy it. For instance, you can provide a pre-approval letter from your lender to show that you have already been approved for a loan. This shows the seller that you are a serious buyer.
Related: The Best Approach to Investment Property Financing in 2019
5. Offer Expiration Date
When buying an investment property, you will often be looking at several different properties on sale. When you make an offer on a property, you usually won’t make an offer on another. Therefore, the property seller needs to give you feedback as soon as possible. It is important to include in the real estate offer letter a set deadline by which the property seller has to either reject or accept your offer. If not executed by that date, the offer is automatically terminated and you can continue your property search.
6. Earnest Money Amount and Terms
This is an indication that the buyer is serious about buying the house. You should spell out the earnest money deposit on the offer, typically about 1% of the total offer price. If the deal is successfully closed, the earnest money deposit will be refunded at closing. Depending on the state law, the earnest money deposit may or may not be refundable if the deal fails.
7. Investigation Period
A real estate offer letter should state the period for the buyer to perform feasibility and due diligence investigations regarding the property for sale. The property seller is expected to reasonably cooperate with the buyer’s due diligence and feasibility investigations. The buyer performs an official search on the property to ascertain the registered owner. The payment of deposits on the property for sale should not be done before the seller is confirmed as the registered owner. This helps to prevent potential fraud.
8. Contract Contingencies
Your offer letter should also spell out all the contract contingencies. This clause gives you the right to back out of the offer under certain circumstances without penalties. For instance, if your financing falls through, when you find something wrong with the house after an inspection, when you are unable to get homeowner’s insurance, when there are title issues, etc.
9. Closing Date
A real estate offer letter should also include the target date of closing. This clause stipulates when the real estate transaction should be completed.
The Bottom Line
A real estate offer letter shows your intention to purchase property and outlines the terms and conditions. By itself, it can’t necessarily provide an assurance that you will get the property you have interest in. Sometimes it is hard to compete with other buyers, especially those who are willing to pay more cash upfront. However, a well-written offer letter can motivate a property seller to consider selling the property to you.
A Final Tip:
Since most homeowners have probably lived in their homes for a number of years, selling it can be an emotional experience. You should keep this in mind when writing a real estate offer. Apart from including the above important elements, you should also show them why you are a good choice in order for you to stand out. Find a way to connect with the property seller on a personal level and keep the offer short and sweet. To avoid making mistakes when writing an offer letter, make sure you involve an experienced real estate agent.