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It’s Time to Make an Offer!
Once you’ve found a house you love, it’s time to make an offer! For most people, their home purchase is one of the biggest financial decisions they’ll make in their lives. No pressure, right? Because it’s such a big decision, when considering what you want to offer, it’s important not to let your emotional attachment to a prospective home completely overwhelm objective considerations. As your Realtor, we’ll be there for you to help navigate all the considerations.
Here’s an explanation of some of the things you will want to consider:
Several things impact what price you will want to offer on the property. The size and condition of the home, it’s location, and local market conditions, to name a few. Vanderhoef Properties will provide you with up to date information about market conditions, and we’ll search comparable home prices and sales nearby. We’ll explain all the data to you, and discuss with you the right strategy to help you arrive at the right offer price. We’ll do all of this to help make your dream of owning your targeted home come true!
Earnest Money Deposit / Escrow
Once you and the seller have reached a written agreement for the purchase of a home (or any other property), you will have to provide an Earnest Money Deposit (EMD), usually between one and three percent of the contract amount. This deposit is proof to the seller that you’re serious about purchasing the home, since by accepting your offer, the seller is agreeing to take the property off the market. In general, if you back out, the earnest money goes to the seller as compensation, and if the seller backs out, the money is returned to you. In a competitive bidding situation where multiple buyers are making offers on the same property, you may want to increase your EMD, to let the seller know you’re serious about the offer. Unless agreed otherwise, as your Realtor, Vanderhoef Properties will hold your EMD in escrow until the deal is completed. At closing, the EMD will be credited toward your down payment and closing costs. If the deal falls through due to your breach of the agreement, however, you will likely forfeit the EMD and the seller would receive it.
If you are financing the property, the amount of your down payment may impact your interest rate, closing costs, and monthly payments. For conventional loans, if your down payment is less than 20%, you’ll likely have to escrow your property tax payments and pay private mortgage insurance (PMI). PMI helps protect the lender if the borrower forecloses on the loan, but PMI payments are an added expense borrowers can generally avoid by putting at least 20% down on their real estate purchases.
Your down payment will be more important to your lending institution than to the seller, but the seller may also take your down payment into consideration when weighing your offer against other offers. Sellers like to see larger down payments, because that signals to them that the buyer is more likely to receive their loan and has “more skin in the game.”
How to Hold Title
Whose name or names you include on the purchase offer will impact how you “hold title” and may have different legal, estate and tax implications, especially when selling or upon death of the title holder. As your agent, Vanderhoef Properties can put you in contact with attorneys in your area who specialize in real estate deals. Just ask!
Contingencies? What Contingencies?
When you make an offer to purchase a home, you want to protect yourself against certain things happening. By including contingency clauses in your purchase offer, you can specify what conditions must be met for the purchase to be binding and finalized or closed. If the contingency is not met, then the contract is considered null and void. As the buyer, it gives you a way out of the contract if the contingency isn’t removed, and in many cases, you will receive your earnest money deposit back in full. The seller is also protected, because the contingency clause will usually specify a time period within which the buyer can terminate the agreement without penalty. If the buyer waits too long, the seller will generally be entitled to the earnest money deposit if the buyer terminates the purchase agreement.
Although contingency clauses are very important aspects of most real estate offers, it is important to recognize the effect they will have on your offer, particularly in a hot real estate market or competitive bidding situation. When presented with multiple offers by different buyers (or just a very good market where the seller feels other offers may be coming), sellers may view offers with fewer or no contingencies more favorably, because there’s less risk the deal will fall through. So, for example, a seller may be more willing to accept a lower cash offer than an offer for a higher price with a financing contingency. That’s because the deal won’t be jeopardized if the buyer isn’t able to secure a mortgage. Similarly, a seller may look more favorably on an offer without an inspection contingency, because the seller won’t have to worry about the buyer trying to renegotiate the deal because of defects in the home identified during the inspection. That said, if you make a deal without a contingency clause when you need one and then have to break the deal because of it – if you’re not able to get financing, for example – you will lose your earnest money deposit. In some circumstance, you potentially may face other liability, as well.
Below is an explanation of some of the common contingencies addressed in real estate purchase agreements. There may be others, as well, unique to your particular circumstances. For example, if you’re interested in the home only if you can add a swimming pool or addition to the home, you may make the deal contingent on municipality approval of your plans.
- Inspection Contingency. One of the contingencies we’ll recommend you include in your offer is an inspection contingency. The inspection contingency gives you a certain number of days (often a week) after you have a signed agreement to have a licensed, professional property inspector inspect the property. If any serious defects are uncovered during the inspection, you can use this period to negotiate with the seller to address the defects. If a defect is identified, there are several approaches the parties can take to address the repair costs. The buyer and seller may agree to reduce the purchase price; the buyer may receive a credit for the repair costs at closing; or the seller may agree to remedy the defects before closing. As long as the inspection contingency period has not yet expired, if you and the seller aren’t able to agree on acceptable terms, you can generally cancel the agreement altogether and receive your earnest money deposit back, or you could decide to move forward with the agreement and address the defect at your own expense after closing.
- Mortgage Contingency and Appraisal. If you’re getting a loan to purchase the property, you will want to include a mortgage contingency in the purchase agreement. The mortgage contingency states that if you are not approved for the mortgage you want within a specified period(usually about 30 to 45 days), you can terminate the agreement and receive your earnest money deposit back.
- Title Contingency. Most purchase agreements will automatically include a title contingency. This will ensure that you receive clean title to the property, without any liens or other encumbrances that would allow someone else to claim title to the property after you’ve purchased it.
Other Important Terms
- Closing Date. As you decide on the closing date you specify in the purchase agreement, consider a date that’s convenient for you, the seller, and your lender, if you’re financing your purchase. The seller will care about the closing date because that’s when they’ll get their money and usually when they have to give up occupancy. If you don’t have to get financing, a closing date sooner than later will generally be more attractive to the buyer. But choosing the right closing date can help ensure that the whole home purchase process runs smoothly. If you specify a date that’s too soon and your mortgage or closing documents aren’t yet ready, the entire deal could fall apart. If you choose a date that’s after your lender’s loan commitment expires, though, you risk having to pay a higher interest rate. If you’re financing the purchase, it’s generally best to schedule the closing date about 45 days after both parties have signed the purchase agreement.
- Possession Date. The possession date you include in your purchase offer may influence the seller just like the closing date can. Sometimes a seller needs time to find a new home, so in the listing they may ask for something like “60 days possession.” While the seller may be somewhat negotiable, the possession date you specify in your offer can make or break the deal. If they don’t need extra time after closing to move out, the listing will indicate that possession is immediate. In that case, your offer should indicate that the seller should be entirely moved out and the property “broom cleaned” at closing. As soon as the closing is done, then, you will have access to the property and the fun process of moving can begin! If the listing indicates the seller needs possession after closing, you may want to negotiate for the seller to pay you rent until they’re fully moved out, to help offset your mortgage interest and other costs.
- Unique Terms. There may be other issues that are unique to you that should also be included in your purchase offer. For example, if you want to undertake extensive renovations on the home before moving in, the offer may specify that the seller agrees to let your contractors in to take measurements or photos before closing.
CONGRATULATIONS, YOU HAVE AN AGREEMENT … NOW WHAT?
The Process, Step-by-Step
The Initial Agreement and Deposit
The escrow process officially begins when the buyer and seller have both signed the Purchase Agreement and the buyer’s earnest money deposit is being held by the buyer’s broker. Now it’s time for you and the seller to work on removing your respective contingencies. With Vanderhoef Properties as your Realtor, we’ll be there to counsel you and negotiate with the seller every step of the way.
Some important tips to keep in mind:
- Keep written records of everything. Make sure all verbal agreements including counter-offers and addendums are converted into written agreements that are signed by both parties, otherwise they may not be enforceable. As your agent, we will assist you in documenting and completing each part of the agreement.
- Stick to the schedule. Your written offer and then the signed purchase agreement will give both you and the seller a timeline to mark every stage in the process of closing the real estate contract. Meeting the requirements on time ensures a smooth flow of negotiations so that each party involved is not in breach of their agreements. Vanderhoef Properties will explain each step, and we’ll always keep you informed of where we are in the process, so you’ll be prepared for the next step.
- Don’t hesitate to ask questions. We know this process may be new to you, and even if you’ve bought or sold real estate before, you may have questions about the process. Or maybe you’re looking for a lead on a mortgage broker or home inspector. As your agent, that’s what we’re here for!
If your agreement includes an inspection contingency, you will want to act quickly to schedule your inspection as soon as you have a signed purchase agreement. Timing is important because once the contingency period has ended, you’ll forfeit your earnest money deposit if a defect is discovered in the property and you want to get out of the deal due to the inspection.
Your inspector can examine the condition of the home, covering everything from plumbing and electricity to mold and termite damage. If you wish to obtain professional opinions from inspectors who specialize in specific areas, such as roof, HVAC, or structure, you may elect to have different inspectors inspect the property. We have worked with many different inspectors and can recommend several you can choose from. Plan to attend the inspection with your inspector or inspectors, because the feedback they share first hand during the inspection may help you better understand what they later include in their written report.
When you go into the home for the inspection, that may also be a good time to take measurements or photographs to share with your contractors if there are alterations you plan to make to the home before you move in. While sellers may be willing to permit you into the home later for that purpose, they are under no obligation to do so.
If you’re obtaining financing, you will want to contact your lender as soon as you and the purchaser have signed the purchase agreement to formally apply for your loan and lock in your interest rate. Speaking to your lender sooner rather than later will give you more time to obtain loan approval before your mortgage contingency period expires. It will also give you a little more flexibility to try to lock in a favorable interest rate. A good lender will watch interest rates closely and can tell you whether they are trending up or down. You can also check interest rates online. Rates fluctuate, though, so you may not be able to lock in the absolute lowest rates. Your interest rate and loan closing costs may differ depending on other things, as well, such as your credit score, your down payment, and the length of your loan, so be sure to discuss with your lender all options that may be available to you.
If your loan is approved within the mortgage contingency period, that contingency can be removed. Again, you will want to speak with your lender quickly, so that the loan process has sufficient time to be completed before the contingency period ends.
When you apply for a mortgage, your lender will have the property appraised by an independent, licensed appraiser to determine its market value for the lending institution. This is done so that the lending institution is satisfied that if the borrower defaults on the loan, the lender can still recoup its investment. Appraisers determine the value of a property based on a combination of square footage measurements, building costs, recent sales of comparable properties, etc. On occasion, the appraiser may determine that the property is not worth what you have agreed to pay for it. If that happens, speak to your lender about your options. Generally, lenders care about the appraisal as it pertains to the loan-to-value ratio. Your loan may still be approved if you’re able to increase your down payment to decrease your loan or convince the seller to lower the purchase price. The seller may be willing to negotiate because if you’re not able to get financing, the seller will likely have to start the process of finding a buyer all over again. The seller will also have to recognize that if the appraisal was low once, the next appraisal for a different buyer may be low, too. If you’re not able to increase your down payment or adjust the purchase price and you are unable to secure financing during the mortgage contingency period because of the appraisal issue, you will generally be able to terminate the agreement and receive your earnest money deposit back.
It is imperative that you keep in close communication with your lender, who will let you know when additional documents are needed to approve your loan application and fund your loan. When you are within two weeks of closing, double check with your lender to be sure the loan will go through smoothly and on time.
Now’s the time to resolve any other contingencies in your agreement, as well.
Sometimes a purchase of property is conditional upon an association approval, such as when purchasing some condominiums or homes with certain homeowner’s association rules. It’s important to request the rules, regulations, and other important documents from the seller as soon as you have an effective agreement to purchase, because any delays in the association approval process may delay closing. Make sure that the application documents and processing fees are submitted to the appropriate person at the association within the required time. Fill out all of the information completely and legibly so there is no delay in processing the application. If you are required to meet with the association for your approval, make an appointment as soon as possible for the interview. Most associations require a certificate of approval before move-in. Your closing agent may request that the original copy of this approval letter be brought to the closing, so that it can be recorded with the deed in the county public records.