Buyer's Guide
Introduction and Overview
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.
All articles © 2000
RealEstate ABC. No articles may be reprinted or
displayed without permission.
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