Putting An Offer In On A New Home

When you’ve found the home you want the next step is decide whether or not you want to make an offer, meaning that you want to tell the seller that you want to purchase the home. Making an offer is where you put pen to paper and outline exactly how much money you’re willing to pay for the home and under what conditions you will purchase the home (i.e. move-in date, repairs requested, financing conditions, etc.) Emotionally, making an offer on a home is sort of like asking somebody out. It’s exciting, nerve-wracking, and you’re often uncertain of what sort of response you’ll receive. This month we’re going to demystify the process involved in making an offer on a home.

Where to Begin?
If you’re using a real estate agent you’ll have help in negotiating with the sellers and filling out the paperwork. If you’re buying a home on your own the seller may have an agent that will handle the process. Remember, however, that the seller’s agent does not work for you and is being paid to look after the seller’s interests, not yours. If neither you nor the seller has an agent, then you’ll need to jointly draw up a contract. Many office supply stores carry standard home purchase agreement forms that you can use. If you do draw up a contract on your own, it’s a good idea to have it reviewed by a real estate attorney. You can find a real estate attorney in the phone book and ask if they will review contracts for a flat fee. Whether you have an agent helping you walk through the process or not, the most important thing to know is that when it comes to making an offer on a home everything – everything – must be in writing.

What’s Involved in a Contract?
Once you begin filling out the paperwork to make an offer on a home, called a contract, you’ll see that it’s more than just offering to pay a set amount for the home. There are a lot of variables in buying a home that can be negotiated. Let’s review the most common items covered in a contract:

Sales Price
How do you know how much to offer for a home? Is it safe to just always pay the asking price or should you offer less hoping to leave room for negotiating? The answer really depends on what type of a real estate market you’re in. For example, if you’re buying a home in a hot selling market, meaning that homes are selling quickly, you’ll likely want to offer the asking price. If it’s not such a competitive buying environment and houses are staying on the market longer, you have more room to maneuver and might want to consider offering less than the asking price. How much? That depends. You’ll want to take into consideration:

  • How much you’re looking at paying in closing costs;
  • What if any repairs you’ll have to make upon move-in;
  • How much other comparable homes in the neighborhood have sold for (not just what they listed for, but their actual sales price). You can find that out by asking your agent or hiring an agent for a flat fee to run what’s called a “comparative market analysis.” A comparative analysis is a printout of all the recent home sales in the area where you’re looking to buy. The analysis can help you determine how much you feel comfortable offering for the home and whether or not the home you’re looking to buy is overpriced or is a “good buy.”
  • How long the house has been on the market;
  • Whether or not the price on the house has been reduced;
  • How much the sellers bought the home for (you can find that out by looking for information on the property you’re looking to buy at your county’s tax office);
  • What the seller’s situation is – for example are they relocating and need to move quickly.

You can also have an appraisal done to get an accurate value on your home before making an offer, but you’ll have to find a professional home appraiser yourself (or your realtor should be able to help you find one), and pay for it. The bank that is handling your mortgage application will require that you have an appraisal after your contract has been accepted because they want to make sure that the home is not overpriced.

Financing Assistance
The largest out of pocket costs you’ll encounter when buying a home are the down payment and closing costs (the costs associated with transferring ownership from the seller to the buyer). Closing costs alone can add up to around 3% of the purchase price of the home. And that’s money you’ll need to pay upfront in cash (as opposed to taking out a loan to finance the fee.) You can write it into your offer that you’d like to ask the seller to help you pay some or all of the closing costs.

Personal Property
The general rule of thumb is that anything that is attached to the home conveys, or is sold along with, the home. For example, a deck or cabinets that you wanted to have the owner sell to you along with the property. If, however, there are other items that you’d like to purchase along with the home you’ll want to note that in your offer. For example, do you want to ask for window treatments (curtains, blinds, shades), deck furniture, refrigerator, washer & dryer, storage units/sheds, etc.? Be aware, however, that if you ask for items to convey the seller may want to renegotiate the selling price of the home.

Terms and Conditions
In addition to the sales price, financing assistance, and personal property, you’ll want to include your requests for terms and conditions of the purchase such as:

  • Are there any repairs you want the seller to make? You’ll have the opportunity to re-negotiate for other potential repairs after the home inspection, but if you notice anything prior to making the offer you should include it in the contract.
  • Do you want them to have the house professionally cleaned, or “broom-swept”?
  • What is your preferred date to settle on the house (meaning the date you go to closing to finalize the sale)?
  • What is your preferred date to move in?
  • Do you want the seller to provide you with a home warranty? It’s not required, but you may want to request it, particularly if the current homeowner has a policy that he/she can transfer as part of the home sales. A home warranty will provide insurance against any major appliance malfunction or repair.

You can request an assortment of tests to be run on your home prior to purchase, including a test for radon, lead-based paint, asbestos, and termites.

  • Termite Inspection. The termite inspection is required. If the home fails the termite inspection, the seller will be required to have the property treated for termites prior to selling.
  • Lead-Based Paint. If the home you’re buying was built before 1978 you may also want to consider ordering an inspection for lead-based paint. Prior to 1978 lead-based paint was commonly used in residential homes. By law the seller is required to disclose if they know of any lead-based paint present in the home. Lead-based paint is of particular concern for young children who tend to touch and ingest things more so than adults. Elevated levels of lead in paint can lead to nervous system, muscular, brain, and a host of other disorders.
  • Radon. Radon is a colorless, odorless gas that moves up through the ground and enters homes typically through the foundation or basement area. Radon has been linked to lung cancer, particularly in smokers.
  • Asbestos. Although asbestos is harmless unless airborne, if you’re looking to purchase an older home, chances are good that the builder used asbestos in the flooring, walls, siding, or other area of the home. If you’re considering doing major renovation to an older home it’s good to know if you’ll be working with materials that contain asbestos. Asbestos has been linked to lung cancer.

Remember that in addition to ordering the tests, you can also negotiate to have the seller pay a portion or all of the fees for the tests to be performed.

A contingency is a clause in your contract saying that if something goes wrong you are not legally bound to purchase the property. It’s basically a way of giving you an “exit door” out of the contract. There are two standard contingencies that most homebuyers include in their offer: a home inspection contingency and a financing contingency.

  • The home inspection contingency means that you have the right to renegotiate the terms of the offer or can walk away from the deal altogether if the home inspection turns up something that you weren’t aware of or is something that carries a high dollar value, such as replacing a roof, furnace, or major appliance.
  • The financing contingency means that you are not obligated to buy the home if you aren’t able to secure financing from a lender either because you don’t qualify for the loan or because you’re unable to sell the home you’re currently living in that you were planning to use as money for the down payment.

Earnest Money Deposit
You will have to make an earnest money deposit to show the seller that you’re serious about your offer. A seller doesn’t want to take his/her house off the market, which is what happens when they accept a contract, if he/she is not sure that you’re genuinely serious about buying the home. The amount of the deposit that you’ll be required to make varies, but is typically between 1-5% of the sales price. The check will not be cashed right away. Instead it will be held by a third party (such as a title attorney or a real estate agent) to ensure its safety. If your contract is accepted and you purchase the house your check will be cashed and the deposit is subtracted from your down payment (meaning you’ll be required to put that much less down at closing).

There are a few different scenarios if the contract falls through.

  • If you back out of the deal you’ll forfeit your deposit.
  • If the seller breaks the contract the deposit will be refunded to you.
  • If you have a home inspection contingency and the home inspection reveals something that you want to ask the seller to repair and the seller refuses, you have the right to walk away from the contract and the deposit will be refunded to you.

The contract should indicate who would hold the deposit and under what circumstances it will be refunded to the buyer (usually only if the financing falls through or if the seller backs out of the agreement to accept another contract).

Before Sending the Offer
Review it! Remember that if the seller accepts the contract it’s legally binding. So take a few minutes to carefully review the document. If you’re not working with a real estate agent you might want to find a real estate attorney to review it for a flat fee. Also, it’s a good idea to include a time limit on your offer. By giving the seller a certain amount of time to accept or reject your offer you won’t have to wait on pins and needles indefinitely.

Hearing Back from the Seller
Once you make an offer on a home, one of three things happens:

  1. The seller accepts your offer and you have a legally-binding contract,
  2. The seller rejects your offer and the contract offer is null and void, or
  3. The seller presents a counter offer with revisions to your original offer. This is where negotiating happens. Think of it like a dance. You know what you want; the seller knows what he/she wants; and the counter offer process is the dance you’ll both go through to find the agreeable middle ground. Remember that everyone wants to feel like they’re getting something that’s important to them.

Once you receive a counter offer, you’ll want to review their requested changes and then add any additional changes on your part or sign/initial to accept changes and send back. Theoretically this could go on forever, but typically buyers and sellers reach agreement by the second or third go-around. Remember that all counteroffers (yours and the seller’s) need to be in writing. Even if he/she calls you to discuss changes, request that they fax you a copy in writing. Nothing is valid or legally-binding if it’s not in writing!