Making An Offer on a House
An offer needs to include the following information:
Deposit/Amount of Escrow
Included or Waived Contingencies: sale is contingent upon securing financing (this is called the Mortgage Contingency), property appraising at purchase price, Inspections. These are all items you can include with your offer or state that you choose to waive any of these options.
Additional Terms to include: ex any property or items that are included in the sale (pool equipment); or if you're buying a multi family property do any of the units need to be vacated by the time of the closing.
How do you know how much to offer?
Here are questions that need to be answered:
1) How long has the property been listed & what's the condition of the property? If it's new to the market it's unlikely that the price is negotiable--especially if it's in pretty good condition. If it's a sellers market that will mean that there will likely be a lot of people looking at the property & it's highly likely there will be multiple offers. You and I will discuss how in demand this property is--if I think we can offer lower than the list price I'll certainly tell you that.
2) What are the neighborhood comps (comparable homes that have sold)? I may send you an overview of similar homes that have sold in the area. I'll advise you on what I think the market may be able to bear in terms of offering more than the list price. It's important that you also do your own research to understand the markets in particular neighborhoods as well--I'm certainly here to guide you and also share my expertise.
3) Does the math work? If you don't know how to use a mortgage calculator let me or your lender know. Or ask your lender to run the numbers for you. What's the difference in the down payment amount & total monthly mortgage when you offer $220k vs $230k? If the house is listed at $220k and you love it but there are multiple offers what's the difference in payments at $230k or $240k? You need to understand real estate math so that you can decide what's best for you. Check out my video on using a Mortgage Calculator so that you can truly understand the math!
4) Is there anything that you can do to increase your equity in the property--a basement that can be finished? A bathroom vanity and light fixtures that can be updated? When you purchase a property in a sellers market you should look for a property that has one or two things that you can do to increase or maintain its value in the future. That can impact how much you decide/are willing to offer.
What is an Escrow Deposit & how much do you have to submit?
I have a video on this topic that you can review. If you haven't subscribed to my channel please do so! You have to have some skin in the game, & it has to be substantial enough that you're not going to just walk away from the transaction. Typical escrow deposits (aka Good Faith Deposit) are 3-5% of the purchase price. A higher escrow deposit will be more appealing to a seller so that may be something to consider when crafting a competitive offer.
Here are common questions that I get:
Who holds the escrow deposit: The listing brokerage or the sellers Attorney
Can the seller keep the deposit: If the buyer breaches the contract then yes, the seller can keep the deposit but there are very specific ways that would happen.
Here's how a buyer can get their deposit back.
1) Terminate the Purchase Agreement during the inspections contingency. If you do not waive your right to the inspection then you will have 10 business days to have any inspection, at your cost, that you choose. I have a list of inspectors that I can recommend to you. If you're not satisfied with the inspection then you can terminate the Purchase Agreement & you will get all of your deposit back--as long as we're within the 10 business days. If we try to renegotiate with the sellers but cannot come to an agreement you can decide to terminate the contract.
2) Loan Denial. Known as the 'Mortgage Contingency', the Purchase Agreement will set a specific deadline that you will need a 'mortgage commitment' from the lender. You have a preapproval but you cannot actually apply for a loan until you have a specific property under contract. In order to issue a mortgage commitment, thereby satisfying the mortgage contingency deadline, you have to apply for the loan, submit paystubs, bank account info, tax documents, verify employment, go through an extensive credit check, & the appraisal has to be complete. The underwriter will review all of the information & determine if the bank is willing to underwrite the loan &, if so, will issue a mortgage commitment & then will submit for Clear To Close. If for some reason the bank issues a denial we want that on or before the commitment deadline. This is a date that both you & I will monitor. If we need an extension for that deadline we can make that request, in writing, & the seller needs to agree. If the denial is issued we can terminate the agreement & your deposit will be returned. If you waive the mortgage commitment but end up getting denied for the loan then you would be in breach of the contract because you would not be able to close & the seller would be able to keep the deposit.
When would someone be denied a loan: job loss while in the process of trying to get a loan, submitting incorrect information during the preapproval (this is why you should get a full pre-qualification), making a major purchase during the loan application (like buying a car---no new loans!!), etc. Your lender will give you a list of things NOT to do & it's important that you understand those guidelines.
Disclose your Financing Details
This info needs to be disclosed in your offer. Are you going with an FHA loan, VA (Veteran), or Rhode Island Housing (RIH) loan program? Or are you applying for a conventional loan & if so what is the down payment amount (3%, 5%, 10%, 20% etc). I also need to include a copy of your preapproval. Not only will a seller need to consider the offered Purchase Price, the type of financing is also important as it can impact the appraisal as well as indicate your ability to purchase. FHA loans & RIH loans take longer--45-60 days and have specific items that will not pass the appraisal: ex, a house that has peeling paint on the exterior or windows will not pass & those would have to be fixed before the loan would be approved; Knob & Tube wiring would not pass VA, FHA or RIH & would have to be removed prior to closing; Asbestos Wrapped heating pipes may need to be removed or wrapped prior to closing. These are all things that a seller may not be willing to address & that needs to be taken into consideration. In a sellers market you may want to improve your credit or save more for your down payment so that you can qualify for a 3% or 5% conventional loan as that may inhibit getting an offer approved. All things equal, a buyer with a conventional loan will have a competitive edge over FHA/RIH/VA loans simply because they can close sooner or have less hurdles. I don’t tell you this as a deterrent but simply that we will need to discuss your financing in the context of presenting your offer & the pros/cons of certain loan programs.
Disclose your Closing Date
Your offer will state your closing date. It's important that we understand the sellers motivation for moving & what their plans are. Do they have to find suitable housing or do they already have someplace else to go? Do they want a quick close or is a flexible timeline more appealing?
Once you & I have answered all of these questions I will draw up the offer. In certain instances I may decide that we should submit an executed Purchase Agreement rather than the one page offer. In some cases this may show that we are very serious buyers & that we're ready to go! In addition to your preapproval I will also have you sign the disclosures to include in the package.
The seller will respond in one of three ways: Accept, Counter, or Decline.
If your offer is accepted we will sign a Purchase & Sales Agreement, the formal contract, & you will submit your deposit right away--just like the offer we want to do this as quickly as possible because we don’t actually have a contract until both parties have signed & your deposit is submitted. If the seller makes a counter offer you can either accept, counter with a different offer, or decide to walk away. If the seller declines the offer (or your counter offer) you can try again to make a more appealing offer or move on to find another house.
Does a personal letter make a difference? Sometimes! It’s certainly worth submitting along with our offer. If it's a house that has been "flipped" I don't usually think it makes a difference--the sellers sole intent in that case is usually to maximize their profit.
Check out my video below to watch my video about the offer process!
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Buying or Selling? Here's some useful advice!