So you’ve found a house you want and you’re ready to buy. It’s not as simple as knocking on the front door and announcing that you’ll take it. Your decision triggers the start of an intricate dance between you and the seller, typically with real estate agents guiding and advising you both. You’re about to make an offer, which can be daunting whether you’ve done it before or are a first-time buyer.
Purchase offers and the documents they entail vary in different parts of the country. In some regions, only attorneys can draw them up. In other regions, your real estate agent will fill out the standard forms. They are usually quite long and detailed. You can always have a real estate attorney look over the standard contract and explain the provisions to you. This isn’t overly expensive and provides you with a neutral third-party who won’t benefit from the sale to explain the contract. It’s worth it. But here’s a tip. In a competitive market, you aren’t going to want to take the time to consult an attorney once you’re ready to make an offer. In that case, get your agent to provide you a copy of the standard contract for your area and have an attorney explain it to you and red-flag any areas of concern before you even find a house.
When you make an offer you are telling the seller not just what you’re willing to pay, but how you’re going to do it. You’re also going to put an expiration date on your offer and either give yourself an escape route if you find out something about the house that the seller won’t fix, or you are going to handcuff yourself to the house no matter what.
The seller set their price when they listed the home. But that’s just a starting point. Your agent should do a comparative market analysis, looking at what similar homes have sold for and helping you reach a price. You can also do your own research by looking at market “comps” on Zillow. In fact, you have quick access to more reliable information about real estate pricing than any time in history, so use it. With your agent’s help and your own research, you are an informed consumer. So now’s the part where you set your price. If the market’s hot, and the house just came up, you may actually offer more than what the seller was asking. If it’s been languishing on the market, maybe you offer less than asking. You won’t know what to offer until you do your homework and talk with your agent.
If your offer is much different from the asking price, you should consider “loading” it. Essentially, that means including a letter that recaps your offer in simple terms as well as the information you got from doing a comparative market analysis. If you offer less than what the seller listed the property for, it could be a shock to them. Or they could be offended. You can’t rely on their agent to present them the comps you found, but they are legally bound to provide anything you present in writing to the seller. So let them know how you reached your offer price and that it isn’t because you didn’t like their taste in window coverings. Your letter will both help them understand your offer and the market conditions that led you to make it.
Just like milk, an offer to buy a house has a shelf life, and you get to set it. How long your offer is good depends on what’s customary in your area and how hot the market is. It can range from hours to days. There are different strategies for setting this sell-by date, depending on how competitive the housing market is and your real estate agent will help you decide that.
In a hot market, you want a short window for the seller to consider your offer to prevent someone else from sneaking in another offer and getting the house. (In a really hot market, you may want to consider an escalation clause.) And in some cases where the seller is already gathering multiple offers, they may set a specific time that they will open and consider all offers.
Your offer will also include a closing date for when you want the deal to be finished and the house to be yours.
In addition to how much you’re willing to pay for the home, the offer will also include details about how you’re going to do that. The seller is going to want to know that you have financing in order and that it’s solid. A pre-approval letter, which is often required by sellers, can help give the seller confidence to accept your offer. It will demonstrate that you are working with a lender and that the lender is willing to loan you the money needed to finance the home. The seller doesn’t want to accept your offer, take the house off the market and then discover in three weeks that you can’t get a home loan.
You’ll likely be asked to write a good faith “earnest money” check or money order. If the seller accepts your offer, the check will be placed into an escrow account and used as part of your down payment. Earnest money is essentially a deposit and shows the seller that you are serious. Without it, you could be making offers on several houses at the same time, costing sellers precious days on the market. How much should you put down? Your agent should help advise you what’s customary for the market. It can range from 1 percent of the purchase price to 10 percent or more in a particularly hot market. It’s the money you are putting at risk if you back out for reasons not outlined in the offer.
Depending on your jurisdiction, you may have a specified amount of time to just back out without giving a reason. But those “cool-down” laws are actually quite rare. So you may want to create your own escape route so you don’t lose your earnest money if you find something wrong with the house or your financing falls through. The way to do that is with contingencies. The most common are inspection and financing contingencies. With an inspection contingency, your offer will specify that the seller has to make the home available within a certain number of days for you to bring in a professional inspector. The offer will also outline what happens if the inspection unearths any problems you’d like to have addressed.
Another common contingency is based on financing. If you can’t secure a loan, a financing contingency will let you get out of the sale without losing your earnest money. This is rarely a problem if you’re truly pre-approved and it won’t help you if you simply decide you don’t like the interest rate you’re getting.
Beware! In a seller’s market, each one of these escape routes is going to count against you and you’ll be tempted to avoid them, especially if you’ve lost out on houses before. But think very hard about making an offer with no contingencies. Sometimes it can’t be avoided but it’s usually a bad idea. Instead of eliminating an inspection contingency altogether, consider shortening the amount of time you give yourself to complete it.
Once you’ve completed the offer, your agent will meet with the seller’s agent to “present the offer.” Neither you nor the seller has to worry about any emotional “tells” destroying your negotiating leverage. This may be the house you’ve dreamed of all your life, but the seller won’t see that on your face because the seller won’t see your face. It’s all business for the agents.
Now you wait to hear back. Once again, you’ll hear from your agent, not directly from the seller. The seller will have either accepted your offer as-is, rejected it outright or made a counter-offer. If they accept within the time frame you allotted, you are now legally bound by its terms.
If they reject it, they either accepted another offer or yours was so far from what they want that there’s not much point in continuing the discussion.
The last scenario is a counteroffer. Maybe they want a little more money. Or you asked to include appliances in the purchase and the washer and dryer have sentimental value so they can’t part with them. (This has happened. Actually, pretty much everything you can imagine has happened in the world of real estate.) Or they need a couple more weeks to get into their new place so they want a later closing date. Essentially, unless you nailed everything exactly as they wanted it in your offer, you’ll get a counter. And then the clock starts ticking for you. The counter is technically a rejection of your offer accompanied by their new offer to you. Just as you gave them a time limit, they will outline how long you have to respond. This back-and-forth can go on for a few hours or a few days until you’ve reached an agreement you can both live with. And, with an inspection contingency you’ll likely have a miniature version of it once you complete your inspection and have a list of repairs you’d like the seller to address. If you can’t come to an agreement, the contract is cancelled and you get your earnest money back.
There is one last possible escape route. Once you have a contract signed by all parties, the seller has a certain number of days within which to make a full disclosure of anything he knows to be defective on the property. Once you get it, you have a certain amount of time review it and to modify or rescind your offer if you wish. The rescission must be in writing and presented to the seller or the seller’s agent. If this happens in a timely manner, you will get your earnest money deposit back.