If you've found the perfect house that you know you want to purchase, you are probably thinking of making an offer. Making an offer is much more complex than calling the seller up and telling them you want the house. In fact, an offer is a legal and binding document that is usually chock full of contingencies, agreements and places for you, the buyer, to sign and agree. So how can you make an offer on a home? This article looks at each part of the structure of an offer so you know what you're signing and how to best prepare for the offer process.
Prepare to Make an Offer
Once you've found the home you have fallen in love with, make sure you have a Realtor and an attorney working with you to make an offer. This article, while helpful to go over the basics of an offer, cannot provide you legal advice, not to mention, many states have different laws concerning real estate that you must observe. Working with a Realtor and an attorney can ensure your best interests are being met.
The Parts of an Offer
When you make an offer, your Realtor will have you fill out and sign a contract that details your offer price, financing details and more. Most offer letters are quite long and usually include these parts:
This is usually the most important part of the offer; how much you are willing to pay for the home. This can be above or below the listing price, depending on a wide variety of factors, including a competitive market analysis of the other homes sold in the area.
The offer will also show the seller that you are prepared to finance a home purchase. It will show how much you're able to pay for a down payment, and then what type of loan you're pre-approved to get. If you haven't been pre-approved for a loan, there may be a chance that the seller will reject your offer because you don't seem like a serious candidate, and they don't know if you'd actually be approved to purchase a home in the price range they're selling if they accept your offer. To be taken seriously as a buyer and prove that you can afford to buy a home at the price you're offering, make sure to get pre-approved for that amount and include the pre-approval letter in your offer.
Earnest Money Deposit
Although legally it's not required to include an earnest money deposit with an offer, in this day and age an offer will be seen as weak without an EMD. An earnest money deposit is a check for 1% of the offer price. It's seen as a good faith deposit, or a way for the seller to see you're committed to purchasing their home only. The earnest money deposit will be held in escrow until closing, where it will be used as part of the down payment on the home if everything goes well.
Read more about Earnest Money Deposits here.
Closing Cost Stipulations
Purchasing a home costs more than just the offer price. There are loan origination fees, title company fees, home inspector and appraisal fees... the list goes on and on. Depending on the location and the size of the home, the closing costs can be between 2-5% of the home's price. In some places, it's customary for the seller to pay all of the closing costs. In other places, the closing costs are divided up evenly. This also depends on what type of market the home is in and how motivated the seller is to move.
The offer will include what you'd like to do with the closing costs, such as the seller assuming all of the costs or splitting the costs equally.
When you Want to Close
The offer will also include a timeframe of how long the offer is good for and when they'd like settlement (when ownership of the home is transferred to the buyer) to take place. This can be a factor of the seller accepting the offer. If the seller is extremely motivated to sell (say they're currently paying two mortgage payments) they're probably going to want a faster settlement date.
Finally, the offer will probably include a few contingencies. These are requirements that allow the legal offer to be broken, and let the buyer walk away from the deal. Some common contingencies are:
Financial Contingency "“ The offer is only valid if the buyer is approved for a loan on the property.
Home Selling Contingency "“ This contingency might be put in place if a buyer is trying to use the profits from their home's sale for a down payment on the home on which they're making an offer. If the home isn't sold, the buyer cannot go through with the contract and it is broken.
Home Inspection Contingency "“ This contingency usually states that once the home inspection is completed, the buyer can walk away from the deal if the repairs are too numerous and if the seller isn't willing to pay for the repairs. A buyer may not have this contingency available if the property is an "as-is" home.
Home Appraisal Contingency "“ A mortgage lender will appraise the home to ensure the loan the buyer is getting for the property isn't more than what the property is worth. If the appraisal finds the property is less than what the offer price is, the buyer can pay more money out of pocket to the seller, have the seller reduce the price, or walk away from the deal.
Finally, the offer will include a section on home warranties. If the buyer wants a home warranty on the property to protect the systems and appliances when they fail from normal wear and tear, the buyer can ask the seller to include one. If the seller is trying to sweeten the deal, they can advertise that the home is covered under a home warranty (usually the home is protected through listing coverage while on contract and the seller will pay to transfer that coverage to a full home warranty plan at settlement). This will also be included in an offer.
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