|
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 percent 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.
|
