Once you find the home you want to
buy, the next step is to write an offer – which is not
as easy as it sounds. Your offer is the first step
toward negotiating a sales contract with the seller.
Since this is just the beginning of negotiations, you
should put yourself in the seller’s shoes and imagine
his or her reaction to everything you include. Your goal
is to get what you want, and imagining the seller’s
reactions will help you attain that goal.
The offer is much more complicated
than simply coming up with a price and saying, "This is
what I’ll pay." Because of the large dollar amounts
involved, especially in today’s litigious society, both
you and the seller want to build in protections and
contingencies to protect your investment and limit your
risk.
In an offer to purchase real estate,
you include not only the price you are willing to pay,
but other details of the purchase as well. This includes
how you intend to finance the home, your down payment,
who pays what closing costs, what inspections are
performed, timetables, whether personal property is
included in the purchase, terms of cancellation, any
repairs you want performed, which professional services
will be used, when you get physical possession of the
property, and how to settle disputes should they occur. It is certainly more involved than buying a car. And
more important.
Buying a home is a major event for
both the buyer and seller. It will affect your finances
more than any other previous purchase or investment. The
seller makes plans based on your offer that affect his
finances, too. However, it is more important than just
money. In the half-hour it takes to write an offer you
are making decisions that affect how you live for the
next several years, if not the rest of your life. The
seller is going to review your offer carefully, because
it also affects how he or she lives the rest of their
life.
That sounds dramatic. It sounds like
a cliché. Every real estate book or article you read
says the same thing.
They all say it because it is true.
Contingencies in a Purchase Offer
In most purchase transactions there
may be a slight challenge or two, but most things will
go quite smoothly. However, you want to anticipate
potential problems so that if something does go wrong,
you can cancel the contract without penalty. These are
called "contingencies" and you must be sure to include
them when you offer to buy a home.
For example, some "move-up" buyers
often agree to purchase a home before selling their
previous home. Even if the home is already sold, it is
probably a "pending sale" and has not closed. Therefore,
you should make closing your own sale a condition of
your offer. If you do not include this as a contingency,
you may find yourself making two mortgage payments
instead of one.
There are other common contingencies
you should include in your offer. Since you probably
need a mortgage to buy the home, a condition of your
offer should be that you successfully obtain suitable
financing. Another condition should be that the property
appraises for at least what you agreed to pay for it.
During the escrow period you are likely to require
certain inspections, and another contingency should be
that it pass those inspections.
Basically, contingencies protect you
in case you cannot perform or choose not to perform on a
promise to buy a home. If you cancel a contract without
having built-in conditions and contingencies, you could
find yourself forfeiting your earnest money deposit.
Or worse.
Earnest Money Deposit
After you have come up with an offer
price, the next step is to determine how large a deposit
you want to make with your offer. You want the "earnest
money deposit" to be large enough to show the seller you
are serious, but not so large you are placing
significant funds at risk.
One recommendation is to make sure
your deposit is less than two to three percent
(depending on your location) of your offered price. The
reason for this is that if your deposit is larger than
that, the lender will pay particular attention to how
you came up with the funds. You might have to provide a
copy of a canceled check along with a bank statement
showing you had the money to begin with. Normally, this
is not a problem, but if you have a short escrow period
or are barely coming up with your down payment, it could
pose an inconvenience.
Another reason to limit your deposit
is "just in case." Although significant problems are the
exception and not the rule, they do occur. "Just in
case" there is a nasty or prolonged dispute between you
and the seller, the less money you have tied up in a
deposit, the fewer funds you have placed at risk.
As with practically everything in
real estate, there are exceptions to this rule, too.
During a hot market there may be multiple offers on the
property that interests you. A large deposit may impress
a seller enough so they will accept your offer instead
of someone else’s, even when your unknown competitor is
offering the same price or slightly higher.
Since large deposits do impress
sellers, you may also find that by making a large
deposit you can convince the seller to accept a lower
offer. More money up front may save you money later.
There are also times when closing can
be delayed by weeks, through no fault of your own. Have
back-up plans prepared for such a contingency.
The Closing Date
It is absolutely essential that you
include a closing date as part of your offer. This way
both you and the seller can make plans for moving, and
the seller can make plans for buying his or her next
home. Though most transactions actually do close on the
right date, do not be so inflexible that a delay creates
insurmountable problems.
For example, if you are renting and
need to give the landlord notice that you are moving
out, you may want to allow a little flexibility.
Otherwise, if your purchase closes a few days late you
could find yourself staying in a motel with your
belongings packed in a moving van somewhere while you
pay storage costs.
There are also times when closing can
be delayed by weeks, through no fault of your own. Have
back-up plans prepared for such a contingency.
Transfer of Possession
A transaction is considered "closed"
once the deeds have been recorded. Then you own the
home. However, it is not always possible for you to
occupy it immediately. This can happen for several
reasons, but the most common is that the seller may be
purchasing a home, too. Usually, it is scheduled to
close simultaneously with your purchase of their home.
It is sort of like being at a red
light when it turns green. Although all the cars see the
light change at the same time, the guy at the back of
the line doesn’t begin moving until all the cars ahead
of him have started.
As a result, it has become customary
to allow the seller up to a maximum of three days to
turn over actual possession and keys to the home. When
transfer of possession actually occurs should be clearly
laid out in your offer to prevent confusion later.
