How to make an offer on a house

Making an offer on a house can be a daunting prospect, especially for first home buyers or for anyone who has set their heart on owning a particular house after inspecting it.

Should you offer to pay the vendor’s asking price, or less?

What does the offer process look like? Is it verbal, an email, a formal letter or a contract?

We’ll guide you through the offer process step-by-step as we answer these questions, to give you the best chance of success.

Step 1: Get home loan pre-approval first

Talk to your bank or other lender even before beginning to look at properties, to find out how much they may be prepared to lend you based on your income, deposit savings and credit score.

Home loan pre-approval, or conditional approval, will allow you to narrow down your search to homes you can actually afford, and give you confidence to proceed with an offer once you have found one that you like.

If you are going to going to apply for a home loan with a guarantor, note that there are some other things to consider.

Step 2: Inspect properties you like and can afford

Armed with your loan pre-approval, you can start to look at prospective homes. In most cases you will be able to attend an ‘open for inspection’ at an advertised time, along with other hopeful buyers, although inspection may occasionally be ‘by appointment’, one viewer at a time.

Ideally, inspect lots of homes in your price range and chosen suburbs, in order to get a feel for the market. Consider each home’s general condition (especially the kitchen and bathrooms), size of living areas, number of bedrooms, and proximity to schools and public transport if these are important to you. Don’t be afraid to attend the ‘open for inspection’ on several occasions for a home you are interested in.

Step 3: Conduct market research

After you have narrowed down your choice to one or two properties, undertake some market research by checking out the asking price for similar properties within a two kilometre radius from the one you have your eye on. Inspect these properties to get a feel for whether your target property’s price is realistic, or whether you should offer a lower price.

Step 4: Research the vendor

It pays to find out as much as you can about the vendors of the property. For example:

• Why are they selling? You may be able to use this information to your advantage if there’s a relationship break-up involved, or if the vendor has already purchased elsewhere, or is moving interstate. They will be looking for a quick sale and settlement.
• Do they favour a particular type of buyer? A vendor with a sentimental attachment to their home may prefer to pass it on to someone they see as a worthy recipient. Empty nesters, for example, may prefer to sell to a young family at a stage similar to their own when they first moved in.
• If the asking price seems low, find out why. This may be because they are very keen to sell quickly, and may be more likely to accept an early offer.

Step 5: Research your competitors

Desirable properties usually attract several interested parties. You may be able to gauge the interest level if you have attended the ‘open for inspection’. Also ask the agent if there are any other eager buyers. The agent may say that there are, even if this is not the case, but you should be able to get nearer the truth by asking if there have been any other offers, already knocked back by the vendor.

Also check for any other recent sales in the street. You may be able to find out the selling price at realestate.com.au/sold.

Step 6: Submit your offer

Although many properties are sold at auction, and a few by tender, the type of property on which you are able to make a negotiable offer will be being sold by what is known as ‘private treaty’. In most cases this will involve the prospective purchaser submitting an offer via the vendor’s agent, verbally, or by email, or in a letter. In some states you may be required to actually sign a contract of sale and include your offer price.

Choose how much to offer

If you have done thorough market research you will have a good idea of what the property is actually worth. The recommended approach is to submit an offer that is 5-10% less than the property’s value to allow room for negotiation. Submitting an offer much lower than this, unless the property is significantly overpriced, may sour the relationship from the beginning or lead to outright rejection of your offer.

A realistic offer may be accepted immediately by the vendor, but in many cases they will reply with a counter offer – a price higher than your offer, but lower than their original asking price. This process may continue until an agreed price is reached.

Decide on the type of offer

There are two types of offer:

• Unconditional offer. If the vendor has stipulated a settlement period (usually between four and six weeks from exchange of contracts) and you have your finance already organised, you may be able to submit an unconditional offer.
• Conditional offer. However, most offers are necessarily conditional. As well as including in your offer the price you are prepared to pay, you may also want to make your offer conditional on:
  • Your ability to obtain unconditional loan approval
  • A settlement period more suited to your needs
  • Any obvious major repairs required
  • A satisfactory building and pest inspection

Think carefully about the conditions you are making, and the vendor’s situation. For example, if you are aware that the vendor needs a quick sale, proposing a shorter settlement period may make your low offer more acceptable.

Step 7: After your offer is accepted

Once the buyer and vendor have reached agreement on the price, the real estate agent may ask you to pay a deposit, usually between $1,000 and $10,000, to prove that you are genuinely interested in purchasing the property. This deposit is held in the agent’s trust account and is fully refundable until contracts are exchanged.

At this stage, neither party is legally committed to the sale. As a buyer, it’s a good idea to proceed as quickly as possible to exchange of contracts, in case the vendor gets a better offer and decides to take it in preference to yours.

So you need to take the following steps as soon as possible:

• Appoint a conveyancer or solicitor to handle the legal side of the purchase for you, including the transfer of title and settlement. The cost of conveyancing ranges a lot depending on location.
• Arrange for the building and pest inspections to be done if they were part of your offer conditions.
• Be prepared to pay a substantial further deposit when you finally exchange contracts.

Step 8: Exchange of contracts

The conveyancers or solicitors of both vendor and purchaser will prepare identical contracts of sale which include all the conditions agreed to by both parties. Each party signs the contract and hands the signed copy to the other party, and both are now legally bound to proceed with the purchase and sale. (There may, however, be a cooling-off period of between two and five days, depending on the state where the sale takes place. You can usually withdraw from the contract during any applicable cooling-off period by paying a small penalty, typically 0.25% of the purchase price. Note that some states do not have a mandated cooling-off period, and auction sales never have a cooling-off period.)

A significant deposit must now be paid by the buyer, usually 10% of the purchase price less any deposit amount already held in trust by the vendor’s agent. It is possible to negotiate a deposit of less than 10%, but most vendors – and their legal representatives – are likely to be very insistent on 10%. If you fail to meet your obligations under the contract and back out of the sale before settlement, you will run the risk of your deposit being released to the vendor by way of compensation.

Step 9: Building and pest report results

If you included receiving satisfactory building and pest reports as a condition of the contract of sale, you will be able to withdraw from the contract altogether if serious problems are revealed, or negotiate a price reduction to compensate for any defects you are prepared to fix at your own expense.

But think carefully before you proceed with either of these steps. You may be able to justify withdrawing from the purchase if major structural deficiencies or severe termite infestation are revealed, but the vendor is likely to pursue you for damages if you seek to withdraw when only minor repairs will be necessary.

For less serious repairs you have a choice between asking the vendor to fix them before settlement, or negotiating a price reduction to cover the cost post-settlement. The latter option is probably safer because you can control the quality of work, but once again you need to decide if the battle is worth fighting.

Step 10: Home loan unconditional approval

As already discussed, you should have obtained at least pre-approval of your home loan before making an offer. But pre-approval is conditional, and does not always translate into unconditional approval.

Most home loans rely on two incomes to support them, and it’s possible that one of you may have changed jobs in the interim, or something negative may have turned up in your credit history file recently (which is why it’s a good idea to constantly monitor your credit score). In addition, your lender will need to obtain a professional valuation of the property you are purchasing. If the property is overpriced you may fail the loan-to-valuation ratio test and face either a rejection or a delay until lenders mortgage insurance can be arranged. Also bear in mind that most loan pre-approvals only last for 90 days.

However, if nothing has changed recently in your financial situation, and you did thorough market research to make sure that you have not offered to pay more than the property is worth, you stand a very good chance of proceeding to unconditional loan approval and settlement of your purchase.

Step 11: Final pre-settlement check

A lot can happen to a property in six weeks, the standard settlement period after exchange of contracts. Houses can be damaged by storms or floods – which is why many insurance experts recommend insuring the property as soon as you have exchanged contracts – and internal fittings or gardens can be damaged by clumsy removalists. The vendor may have removed items that were stipulated in the contract as fixtures (such as a dishwasher or curtains), or may even have had a boisterous pre-departure party and left the place in a mess.

For these reasons it’s a good idea to arrange a final property inspection as close to settlement day as possible, and preferably on the morning of settlement day before funds are handed over and the title is transferred.

Regional considerations

A final word of warning: you should take regional variations into account if you are making an offer in a house located in another state or region.

Pay particular attention to:

• Market research of local prices, likely to be very different from those in your current locality
• The manner in which the offer is required to be submitted, which may vary between city and regional agents, and between states
• State variations in the legal requirements of the contract of sale and settlement
• Variation in state-mandated contract cooling-off periods (or absence of mandated cooling-off period)
• State regulations regarding what type of professional can carry out property conveyancing
• State variations in legal responsibility for damage to – and insurance of – the property after exchange of contracts and during the settlement period.

FAQs

What should I look out for when inspecting a property?

Most prospective home buyers will be on the lookout for the following potential problems:

• Large cracks in the wall
• Mould in bathrooms, kitchen, laundry, bedrooms
• Sagging roof line
• Rusty gutters and down pipes
• Long distance to public transport, schools, shops

Why should I get home loan pre-approval before making an offer?

Home loan pre-approval, also known as conditional approval, gives you an indication of how much you can afford to pay for a home. It will help you to focus on properties that are within your price range, and have some confidence that you are not wasting money when paying for conveyancing and building inspections (because your loan is more likely to be fully approved).

What is the difference between a conditional offer and an unconditional offer?

Most offers to purchase a house will be conditional, containing at a minimum conditions relating to the buyer’s ability to obtain finance plus satisfactory building and pest inspections. The offer may also stipulate a variation to the vendor’s requested settlement period.

If an offer contained none of this type of condition it would be regarded as unconditional, but in practice these conditions are not usually set until a price has been agreed on and a contract of sale (including the conditions) has been drawn up.

In what format should I submit the offer – phone call, text, email or letter?

Ask the vendor’s agent what format they require, and act accordingly. In some states you may be asked to submit the offer in the form of a contract of sale.

How much deposit do I need to pay to the vendor?

You may be required to make a small deposit (usually between $1,000 and $10,000) along with your offer, or once your offer has been accepted. This will be normally be kept in the vendor’s agent’s trust account, to be handed over to the vendor on settlement and deducted from the balance you will have to pay.

A further deposit, usually (but not necessarily) 10% of the agreed purchase price, will need to be paid on exchange of contracts. Again, this is held in trust and distributed on settlement.

Your lender takes account of the deposits you have already paid when calculating your loan amount. That is, if your home loan lender requires a 20% deposit, any deposits you have already paid are counted as part of the 20%.

Why do I need building and pest reports?

Qualified builders, professional building inspectors and pest exterminators are trained to observe problems that the layman cannot see. They will report any major structural defects and pest infestations (such as white ants) that could make you decide against proceeding with the sale, or decide to ask the vendor for rectification or a price reduction.

When do I need to start insuring the property?

Regulations about who is liable for property damage during the settlement period – the vendor or the purchaser – vary from state to state. A conveyancer or an insurance broker should be able to advise on the situation in your state. But if you’re not sure, always err on the side of caution and take out insurance as soon as contracts have been exchanged.

Can I withdraw my offer before the vendor accepts it?

Yes. An offer is not a legally binding contract and can be withdrawn at any time before exchange of contracts, but it’s easier to withdraw before the vendor accepts it.

However, once contracts are exchanged and any cooling-off period has expired, you are legally bound to proceed with the purchase if all your conditions (finance, building/pest reports, settlement date, &c) are fulfilled.

Can a seller back out of an accepted offer?

Yes, in most cases they can back out before exchange of contracts. This may occur because another buyer has submitted a higher offer (in what is known as ‘gazumping’), and although it is frustrating for the hopeful purchaser and may be regarded as unethical, it is not illegal.

The best way to avoid being gazumped is to request your lender to speed up your unconditional loan approval so that you can exchange contracts ASAP.

How much deposit do you have to pay when you make an offer?

The real estate agent may ask you for a small holding deposit ($1,000- $10,000) to accompany your offer and indicate that you are a serious buyer. It’s placed in a trust account and refunded if your offer isn’t accepted.

On exchange of contracts you will be required to pay a further deposit, usually 10% of the purchase price.

What is a cooling-off period in a house sale contract?

It’s the period during which a buyer can withdraw from the contract, after signed contracts have been exchanged.

The cooling-off period varies from state to state, as follows:

• NSW. 5 business days. Possible penalty of 0.25% of purchase price.
• VIC. 3 business days, 0.2% penalty.
• QLD. 5 business days, 0.25% penalty.
• SA. 2 business days. A $100 ‘holding deposit’ paid to the agent may be forfeited.
• WA. No mandated cooling-off period.
• TAS. No mandated cooling-off period.
• NT. 4 business days, no penalty.
• ACT. 5 business days, 0.25% penalty.