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- Buying a Home
- First Time Home Buying
- Buy vs. Rent
- The Buying Process
- Mortgage Calculator
- Community Information
- Working with a REALTOR
- Getting Pre-qualified for a Loan
- Finding a Home
- Making an Offer
- Understanding Mortgages
- Choosing a Lender
- Home Inspections
- The Appraisal
- The Survey
- Title Insurance
- Homeowner's Insurance
- Property Taxes
- Closing Successfully
Making an Offer
When you have found the home that combines the best of your dreams with the realities of your financial situation, it's time to make an offer.
While you don't have to offer the seller's asking price, if you put in a lower bid for the home and someone else makes a higher offer, you could lose it. Your REALTOR® can help you come to your decision, but ultimately the decision is yours.
You'll need to consider several factors:
- How much can you pay? It's easy to be caught up in the emotion of the moment and decide that you want the home at any price. If you buy the home, however, and later lose it because you really couldn't afford it, you'll be in much worse shape - financially and emotionally. Review the steps you took when you pre-qualified for a loan to determine what you can really afford.
- How much should you pay? Even if you can afford more than the asking price for a home, you shouldn't pay more than the home is worth; you want to be sure that someone else will pay at least what you paid for the home when it's time to sell. To determine the fair market value of the home, ask your real estate agent to search the MLS for sales of comparable homes in the area. Knowing what they sold for will give you some idea of what the market will bear. Sometimes, however, it may be difficult to find comparable sales (in a new development or in an area that's being revitalized, for example). In this case, you may want to ask for an independent appraisal, and make your offer contingent on the appraised value being in line with the sales price.
- How badly do you want this home? Other factors might influence your decision of when and how much to offer: How long have you been looking? What other viable options do you have? How quickly do you need to make a move? If any of these factors are weighing heavily in your decision, you may want to offer the list price (or more earnest money, but more about that in a moment) in order to speed up the process.
You might consider offering the full price of the home if:
- You think the house is accurately priced or under-priced.
- The house is just what you have been looking for, and there are few other houses on the market that meet your needs.
- The owner does not appear to be in any hurry to sell quickly.
- The house has just come on the market and similar houses have recently sold very quickly.
- You have inspected the house thoroughly and there are no indications of problems.
- You can afford it.
When you submit an offer, you must include a cash deposit, called earnest money. This deposit indicates to the seller that you are serious in your intent to purchase the home.
There is no specific required amount, but general practice says that it should be enough to discourage the buyer from defaulting, compensate the seller for taking the property off the market, and cover any expenses the seller might incur if the buyer defaults. As the buyer, on the one hand, you don't want to put all of your savings into earnest money; you'll need to save some for other expenses. On the other hand, if you really want the home and have reason to believe that the seller may receive other offers, a higher offer of earnest money might sway the seller in your direction. Talk with your real estate professional to determine a fair amount.
Earnest money is generally given to the listing agent who places it in an escrow account where it is held until the closing (or until the transaction falls through). At closing, the deposit becomes part of your down payment.
If the transaction never makes it to closing, the earnest money is either returned to you or given to the seller. You will get the deposit back if:
- The seller fails to live up to the terms of the sales contract
- An inspection reveals major defects in the home
- You cannot obtain financing
- If any specific conditions in the sales contract cannot be fulfilled
If you fail to live up to the terms of the sales contract, the seller can keep the earnest money.
The Sales Contract
An offer to purchase spells out all of the details of the transaction. If, for example, you want to be sure that the washer and dryer are included in the sales price of the home, that intention must be specified in your original offer. A verbal agreement is not enough.
An offer to purchase typically includes:
- The buyer's name and statement of intent to purchase the property
- The address of the property
- The purchase price and how it is to be paid (e.g., amount of earnest money, where it will be deposited, amount of down payment, amount of mortgage, terms of the loan, etc.)
- A provision for the closing of the transaction and the transfer of possession of the property to the buyer by a specific date
- A provision for title evidence
- A provision for the completion of the contract should the property be damaged or destroyed between the time of signing and the closing date
- A statement of remedies available in the event of default
- Dated signatures of all parties
- An expiration date and time (at which point the offer will no longer be valid if the seller has not responded with either an acceptance or a counteroffer)
- All contingencies (e.g., no major defects uncovered by an inspection or title problems discovered in the title search)
It may also include:
- Personal property included in the transaction (e.g., refrigerator, dining room chandelier, storage units in the garage, etc.)
- Any real property to be removed by the seller before closing (e.g., a storage shed)
- The transfer of any applicable warranties
- The identification of any leased equipment that must be transferred to the purchaser or returned to the lessor (e.g., a water softener or security system)
- Closing or settlement instructions
- The transfer or payment of any outstanding taxes or special assessments
- The buyer's right to inspect the property shortly before closing
Any offer may be revoked at any time before it has been accepted. Once the seller acknowledges acceptance of the offer by signing it, the offer to purchase becomes a valid sales contract.
Just as you don't have to offer the list price for the home, neither does the seller have to accept your offer. Most home sales involve a process of offers and counteroffers until both parties are satisfied with the price.
A counteroffer is a new offer, and it voids most of the terms of the original offer. The buyer may then accept or reject the counteroffer. He/she can continue the process with another counteroffer.
During this process, your real estate agent will serve as a go-between. Be careful not to reduce your negotiating power by revealing too much (e.g., how badly you want the home, how high you are willing to go, etc.)
Like the original sales contract, all counteroffers should be submitted in writing with a specified expiration date and time. They may be revoked at any time prior to the other party's acceptance and become valid contracts when they have been signed by both parties.
Contingencies are additional conditions that must be satisfied before the contract is fully enforceable. They include:
- The actions necessary to satisfy the contingency
- The time frame within which the actions must be performed
- Who is responsible for paying any costs involved
The most common contingencies are:
- Mortgage contingency-protects the buyer's earnest money until financing can be arranged
- Inspection contingency-the buyer may request inspections for termites, lead-based paint, structural and mechanical systems, sewage systems, and radon or other toxic materials
- Survey contingency-a survey confirms lot boundaries and reveals any zoning or code violations associated with the property (e.g, is the property in a flood plain-which will require additional insurance?)
- Property sale contingency-the buyer may make the sales contract contingent on the sale of his/her current home to ensure the availability of cash for the purchase. Likewise, the seller may accept the offer contingent on their purchase of another home.
Sometimes a seller will accept an offer with contingencies but will include an escape clause. This clause permits the seller to continue to market the property until all of the buyer's contingencies have been removed. In this case, the buyer should retain the right to eliminate the contingencies if the seller receives a more favorable offer.