Making an Offer On a Home

FAQ about offering and buying questions I often see asked online. There's a copy of this on the "Offering and Buying" page as well.

Can I offer "X"?

• Lots of people ask if they're allowed to offer "X" amount, given the asking price is this, or the real estate agent said this, etc.

• You can offer anything, there are no rules. If you give a very low offer, the vendor may choose not to bother negotiating with you.

How to I tell the vendor I'm willing to negotiate?

• You don't need to tell the vendor this, just make your offer and if they want more, they'll offer back with a higher number (this probably happens most of the time).

Do I discuss my offer with the agent?

• Don't get into a discussion about what you're willing to offer, as you'll be talked up. Just send your formal offer.

I offered and the vendor counteroffered with a higher amount - now what?

• Again, don't get into a discussion. Just send your counteroffer back when you've decided what it is. You're allowed to counteroffer anything - even the original amount if you're not willing to go up.

• E.g. you offer 500k, the vendor counteroffers 550k. You can offer 500k again if you think that's more than fair. You could offer 525k if you think that's reasonable.

• Because of this, it is useful to make a reasonable offer but not go right up to your max - it's likely they'll want you to go higher. Alternatively you could offer your best and just refuse to budge.

What if someone else offers?

• The real estate agent will let you know if someone else offers, for sure.

The real estate agent is telling me there's another offer - what do I do?

• Ask if the offer has been sent, or if it's just another interested party - unless the other person has formally made an offer I wouldn't take it too seriously.

• If someone else has made an offer, ask for a 'multi offer agreement form' - this will provide proof the agent isn't just saying there is an offer when there may not actually be one.

• As well, the agent must tell you if other buyers in the multi offer process pull out and you're the only one left.

• See this page for more information - https://www.settled.govt.nz/buying-a-home/making-an-offer/understanding-a-multi-offer-process/

Can you back out of an offer?

• Not unless you've done a conditional offer and the conditions aren't met. E.g. say you make a conditional offer based on finance, building report, LIM. If there are no problems obtaining finance, and the building report and LIM don't have any new issues, then you have to buy the house. You may be asked to provide proof if something falls through - e.g. proof from the bank that they did not approve you for finance.

• An unconditional offer cannot be backed out of no matter what.

• Some people get caught out making multiple conditional offers, if more than one is accepted you're legally liable to them.

The real estate agent hasn't presented my offer yet?

• All formal offers must be presented to the vendor by the agent - real estate agents are not allowed to say 'the offer is too low, offer again' and not present your offer.

What conditions should I put on a conditional offer?

• The standard conditions are: Finance, building report and LIM check by lawyer.

• Finance is approval from the bank, this tends to include an insurance check (if you can't get insurance, the bank won't lend to you, so you usually don't need an insurance clause).

• Building report is an inspection from an inspector noting any structural issues with the building.

• LIM check from the lawyer looks at legal issues like consent issues, titles, etc.

I want to go to auction - how much time do I need to prepare?

• Going to an auction is a bigger monetary commitment, and requires a fair bit of up front work.

• You can get ready in a short time (I saw some people doing it in a week), but at that time frame I'd question whether it was a measured idea. Buying a house is a huge thing, so you want to do it right.

• We preferred having 2-3 weeks minimum to get finances/insurance/building report sorted, hash out any potential issues, have the mental space to decide what price we were willing to pay.

Auctions are unconditional - be warned!!! 

All offers at auction are unconditional - this means you CANNOT GET OUT and must buy the house, no matter what problems it may have, or if insurance denies you and thus the bank refuses to give you a loan. If you pull out, you lose your entire deposit and can be sued to pay the loss between your offer and what the house eventually sells for.

Make sure your conditional offers have ALL necessary conditions written in S and P 

Conditional offers, if accepted by the vendor (seller), mean that you must buy the house if it fulfills your conditions. E.g. you put conditions of finance, building report, LIM. If the bank does not approve your finance, or the building report finds issues with the house, then you don’t have to buy the house if you have a relevant condition in writing. But if everything comes back clear you have to buy the house and cannot back out.

You can put unconditional offers on houses not going to auction, but you are adopting FAR more risk and most people don’t as you could waste money on due diligence for a house you don’t get. 

When making offers, offer less than what you think it should sell for - because they’ll always come back asking you to go up a little. (Either that, or just offer the fair price and refuse to budge, but I think they feel more satisfied if you’ve gone up a little bit)

Auctions 

Auctions are stressful because you have to get all due diligence sorted before the auction which costs you, to go unconditional on the day of auction.

The only nice thing about them is the process is transparent - everyone's bid is in the open. For everything other than an auction, you can make a conditional offer.

Deadline sales

They artificially ask for all offers before a certain date, the idea is everyone presents their best offer. The ‘deadline’ is not legally binding, it’s just a sales technique - they are not obliged to accept any offer in the end.

The dodgy part of deadline sales is where there are multiple parties, and they essentially try to make you bid against each other, but you don't actually know what the other person is offering. The good part is that you can make conditional offers so it's low commitment, so you could offer on a lot of houses without losing any money. Absolutely do not offer on multiple homes at the same time, as you might still be obligated to purchase them. They may ask for proof that conditions weren’t met.

You can ‘deadline their deadline’ by making your own offer that expires in 48 hours and they’re forced to bring the deadline forward. This can be good if the house has only had 1 weekend of open homes so other people may not have visited or made their minds up yet. The vendors may be tempted to accept this offer, if it’s a good fair offer.

Asking price/price by negotiation

This ones easy in principle, you can just give a conditional offer of what you think is fair. Don't be afraid to offend, if they're asking for a price - they will likely accept less if you negotiate. 

Usually houses first go either to auction or a deadline sale before this - sometimes the fact it hasn’t been bought yet can be a bad sign (that perhaps vendor expectation is too high, or house isn’t that desirable) - be curious why it hasn’t sold.

If it is a deadline sale or asking price/price by negotiation, you can make a conditional offer.

Make your offer conditional on

• Finance (which is contingent on insurance)

• Insurance 

• Building report

• LIM

• Optional: Sunset clause (an amount of time until they must accept the offer by or it expires). Can be useful if you want to put on some time pressure, e.g. you make a solid offer 2 weeks before a deadline sale, before anyone else can offer, and force them to decide. Also useful if you are interested in another house, and don't want to wait around too long for them reply to your offer for this house.

You write the conditions on the S&P (Sales and Purchase agreement) which the agent should provide. Usually this is a standard S&P and it’s pretty easy to just add your conditions, but ask your lawyer before you make an offer to make sure they're okay with it.

There’s something called a multi-offer process if multiple offers are received, where you all get a chance to increase your offer. Request the multi-offer form which is quasi-formal and supervised by the REA branch. If there's no official form involved, the agent could imply there are other offers when there aren’t, in order to talk your price up.

What to offer?

Set a minimum you think the house would be a steal for, a fair price, and a maximum price you’re willing to pay.

Depending on the circumstance, we’d offer slightly below the fair price, as the vendor always comes back asking for you to go up, or even lower if it’s a house with little interest. Deadline sale is more tricky. We may offer more than our fair price if it appeared to be an excellent house with lots of interested parties or if we were prepared to pay a reasonable premium. 

So many people ask “Is it rude to offer x under the asking price” - no, you can offer whatever you want. However, depending on the vendor’s expectations (which can sometimes be unrealistic) they may or may not bother to respond, or will come back with a lower price. If you are following this guide and offering a fair price based off your research, then I wouldn’t worry about being rude.

When to go for it and offer? Our personal experience 

We were buying during a 'buyer's market'. We were picky and hardly made any offers during the whole 8 months. We favoured the approach of figuring out what the best house would be and wait until it appeared. This strategy of watch and wait, make few offers on great homes, and not overpaying, probably only works in a buyers market. In a sellers market you'd probably just not make enough offers to get a house and would need to make many offers.

We saw some good homes which sold for a lot more than we thought (presumably fell in love, or were influenced by agent marketing techniques) and some that sold for more reasonable prices. Multiple times we saw someone pay a premium 40-80k above what we thought something was valued for things such as a low quality renovation, a nicely done outdoor spa or a nicely landscaped garden.

We eventually found a house which had objective value in our eyes (e.g. new roof, new fences, quality renovations, double glazing, land, good house orientation), but this was quite rare, took 8 months of looking. We paid what we thought it was worth - 30-40k above the highest online valuations and 100k above RV (we thought the RV was undervalued), but we saw it had objective value put into it.

Desirable houses are competitive 

The reality is, most houses that are good, other people will see value so you have to either: get in quick, be able to pay more, or hope others may not notice it or not get in on time for the auction (unlikely).

When to go to auction

I would only go to auction if you think you can pay an amount slightly more than what others would pay. E.g. your budget if you stretch is 700k and you think the house is worth around 700k, it's not unlikely you'll be outbid by someone who has a little more room to move. The advantage of an auction is some people don't bother with them and you have to invest money to get into one, and some people don't get finance in time.

If you have a small deposit, it may be better to avoid auctions if possible, as if you are unsuccessful several times then the multiple due diligence process costs can eat up your deposit.

Auctions are final 

DISCLAIMER - If you buy a house at auction, this is unconditional and you CANNOT BACK OUT. You are legally obliged to finance it, even if the bank withdraws finance. The bank may do this if your insurance company refuses to cover you without exclusions, and then you may lose your entire deposit. The insurance company may refuse to cover you completely if: 

- There are unconsented works which they exclude - e.g unconsented extra bathroom, a fire there means no insurance coverage 

- Your home is flagged as being prone to a natural hazard (flooding, subsidence etc)

- If your home is TC3/flagged as prone to subsidence some insurance companies may require further testing/investigation- e.g floor level survey and structural engineer sign off.

Get your own independent (not REA recommended) lawyer review done ASAP as they can advise you of the above potential risks to your insurance coverage. 

You NEED to have your lawyer review the S&P before going to auction for the reasons above - it's unconditional and binding.

Another reminder that when you go unconditional you often have to pay a 10% deposit - on the day of the auction. (This % is listed in the S&P). It takes time to take money from kiwisaver so we'd recommend having this in cash or negotiating a lower % in your offer

Decide your price before the auction

Set 3 numbers - 1) minimum you think the house would be a steal for, 2) a fair price, and 3) the maximum price you’re willing to pay.

Set a strong price as your max e.g. 680 not 676. Most people say don’t go a cent above - realistically I think sometimes people let themselves have another 2-3k in the heat of the moment.

Auction strategies

It helps to observe an auction in person to get an idea how they work, before you have your auction. Harcourts/Ray White have recent auction streams on their website you can watch.

Arrive early (but if possible, don’t spend too much time watching the auctions for other houses, as it hypes up your fight or flight response). We like to stand in the back so you can see all the other parties bidding.

Go strong with clear, confident bids in consistent amounts - we chose 5k. Other people do bids of 1k or even $500 when it gets tight, but it just shows you’re at your limit and encourages others to bid against you (which drives the price up anyway). Don’t be seen talking among yourselves appearing uncertain, it’ll be clear you’re near your max. Most of the time, we saw strong bids being the final bid - it shows strength. This was slightly less true at the lower end of first home buyers, as sometimes everyone seemed to be stretched to their max.

Last bid wins. Don't bid until the end when everyone else has slowed down and the auctioneer starts calling 1st call, 2nd call, 3rd call, then they say ‘sold’.

Everyone gets anxious about running out of time and missing out. Realistically, they won't let you miss out on bidding.

• There's a long pause after 2nd and/or 3rd call so you have plenty of time between then to enter the fray with a bid to throw people off. (Of course if everyone followed this advice no one would ever start the bidding, but lots of people just go for it).

• Once, we even saw someone bid as the hammer came down and it was accepted. The agents want to get the best price for the house, they won't let you miss out.

• We didn't bid for a long time, however the agent knew we were registered to bid - when the bidding quieted down, they came over personally to encourage us to bid, and the auctioneer waited as this happened - again, you're very unlikely to miss out.

The auctioneer will announce when the reserve has been met - if the reserve is met the house will sell for that price, and there is no further negotiation with the vendor.

If the bidding has stopped and the reserve has not been met, they will pull you aside to undergo a set of negotiations between you and the vendor to increase your price. Then if you both agree to sell, the new price will be taken back to the auction room and people will be invited to bid against it, and if no one bids then you get the house. Usually no one will bid (but rarely, some developers/investors will choose to bid here - I'm not sure why, but perhaps to throw the other party off).

Vendor bids

The auctioneer has the ability to make a ‘vendor bid’ - this is just a bid by the seller to try to raise the price. The seller cannot buy their own house. It’s not a true bid. They must declare ‘vendor bid’ when making the bid. If it is just you as the only bidder, and they make a vendor bid, DO NOT bid against them. Let it pass in, and then they will take you away for the negotiation process, where you'll be in a stronger position to negotiate. 

E.g. you start off bidding with 650k, they do a vendor bid of 670k, you need to just sit silently as they do 1st call, 2nd call, 3rd call, and don’t bid anymore. If you're the top bid, they will take you aside for negotation with the vendor.

Resources

Great podcast episode going through how the auction goes, step by step: https://www.rova.nz/podcasts/the-property-academy-podcast/episodes/ed-bids-at-auction-live-replay-will-he-win-a-house-ep-1903