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.
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