Offering to Purchase Real Estate – the Basics
Writing an Offer to Purchase Real Estate
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 the closing costs, home warranty, what inspections are to be 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.
This document is typically prepared by a real estate professional and contains the terms and conditions of the home sale. When it is signed by both the buyer and the seller it is referred to as an executed contract. The executed contract, earnest money, along with other documents, is used by the the title and escrow company, mortgage company and others to complete the sale of the home. When asking about availability of a home the seller or real estate professional may say “It is under contract.” meaning a contract has been accepted. No more offers can be accepted unless the contract is cancelled.
Inspections and Home Warranty
Please see the Inspections section for more information.
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.
Good Faith Estimate
When a home buyer has been pre-approved and has found a home to buy they contact their mortgage professional. The mortgage professional collects information about the home like price and taxes and based on the buyer´s financial information and, with the information from the lender, prepares a good faith estimate (commonly referred to as a GFE). This form summarizes key loan information, details escrow costs and displays the total estimated settlement charges associated with obtaining the mortgage. All mortgage professionals and lenders use the same form so loan terms and costs from different lenders can be easily compared by the home buyer. The GFE cannot change unless the home buyer has been informed of the change and given a new GFE at least three business days prior to closing. The buyer can either agree to the new terms or cancel the loan.
HUD stands for Housing and Urban Development and is a government organization. HUD enforces the Fair Housing Act and other laws that prohibit discrimination based on race, color, national origin, religion, sex, familial status, or disability. These rules apply to nearly all types of properties and housing transactions including rental, sale and mortgage loans. The Federal Housing Administration is part of HUD. In a real estate transaction you as the buyer will receive a preliminary HUD. This will show you exactly what cost you are paying and the seller is paying. If there are any discrepancies you should contact the lender as there are restrictions on what can and cannot change. Once you approve the HUD you will move forward to complete the purchase and close escrow.
This is also referred to as a settlement statement. Based on the information received on the Good Faith Estimate from the mortgage professional the title company will prepare this form as an accounting of all the monies needed to complete the home purchase. This will include property taxes, HOA fees, property insurance, title and escrow fees along with the key loan information. It also displays the total amount of cash and borrowed money the home buyer needs to complete the home purchase. Once all the terms have been met and the monies paid then the deed will be recorded, escrow will be closed and the home belongs to the buyer.
In a real estate transaction escrow is where the contract documents and earnest money is deposited with a neutral third party called an escrow agent to be held until all the conditions of the home purchase have been completed. This is called closing escrow. Escrow can also refer to an account held by the lender where a portion of the monthly payment paid by the home owner is held to pay future property insurance and taxes.
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.
This document is typically prepared by the title company, signed by the seller, notarized and recorded in the County
Recorder´s Office to document the transfer of the property from one person to another.
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.