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 sellerÍs shoes and imagine
his or her reaction to everything you include. Your goal
is to get what you want, and imagining the sellerÍs 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 IÍll pay." Because
of the large dollar amounts involved, especially in todayÍs
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 clich³. Every real estate book
or article you read says the same thing.
They all say
it because it is true.
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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.
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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 elseÍs, 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.
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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.
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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 doesnÍt 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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