We found the house! How do we make an offer?
Making an offer is incredibly exciting but equally as stressful! The realization that this is actually going to happen can be down right overwhelming. Will they accept? What if they do accept? What if they don't accept? Can we afford to do this? Don't worry, these are all normal feelings and reactions. Your Realtor is there to help you wade through the reality of the offer and disassemble the provisions and contingencies that go along with it.
The offer price:
Obviously the first item of business will be the price you are going to offer. What you choose to offer can depend a lot on the circumstances of the market and your personal circumstances. Do you need closing costs? Is your offer contingent on the sale of your home? Are properties moving incredibly fast? How long has this one been on the market? Your Realtor will take the time to review all the contingencies and what might be a fair offer for the property, but ultimately it is up to you do decide what you are willing to pay and what concessions you need the seller to make. Many buyers make the mistake of low-balling a seller with an offer that is not realistic. This can be particularly damaging on a newer listing. There is a time and a place for offers far below list. Circumstances such as a distressed property or a property that has been on the market for a very long time can constitute offers far below asking, but if you genuinely want a property, make a fair offer that may get accepted or at least prompt a fair counter. Many a seller has turned their back on a buyer and refused to work with them or their agent because of a ridiculously low offer. Do not disregard the possibility of offending the seller.
There are standard contingencies on any real estate offer. In addition there are some that are not uncommon but maybe not something you are familiar with. Your Realtor will help you navigate these contingencies and the timelines that accompany them.
Any offer you make, unless you are paying cash, will be contingent on you being able to obtain financing. If the bank decides that they are unable to finance your purchase, then the contract will be terminated. It is wise to submit a pre-qualification letter, or even better, a pre-approval letter with your offer to demonstrate your ability to obtain financing.
The majority of offers also include an inspection contingency. This allows you to hire a professional home inspector to come in and inspect the home for any issues, repairs or defects that a layman may not notice. The inspection will usually occur fairly quickly so that all parties can resolve any points of contention and move on. Keep in mind it is these professionals jobs to pick the house apart and make note of everything they find. Just because it is on the inspection report, does not mean you should ask for it to be replaced or repaired. This is another area that it becomes valuable to have a Realtor representing you. It is the buyer's agent's job to review the report and come up with an agreement with you on what are non-negotiable items that you expect to be repaired. A good rule of thumb is any items that constitute a safety issue or a livability issue should absolutely be addressed because they will more than likely be addressed by the appraiser as well. You have a right to ask for repairs, but a seller also has the right to refuse them. There have been many an overzealous buyer that has blown a real estate deal with excessive or unreasonable requests, but even a lengthy repair request doesn't mark the end of the deal. It is up to you and your agent and the seller and their agent to see if you can come to an agreement as to what they are willing to do and what the you require to be done. There is a set time line in the contract that will lay out the term in which this must be done. If you come to an agreement, the contract remains in place. If you cannot come to a resolution the contract will be terminated.
The insurance contingency is another standard in a real estate contract. It gives you, the buyer, the opportunity to call for quotes on homeowners, flood, fire or other pertinent insurance quotes and determine if they work with your budget. This is rarely a point of contention but occasionally if you are dealing with a home with excessive claims or one that is in a high risk area, a buyer may discover that the insurance is cost prohibitive. At this point you can renegotiate the contract or you can choose to terminate the contract.
All real estate transactions come with a title contingency. Upon acceptance of an offer, the title company the seller chooses will begin backgrounding your property. They will compile a list of all liens, judgements and any other claims against the property. This are often referred to as "clouds" on the title. These clouds can be many things, anywhere from a claim of an easement for the power company to an astronomical tax lien from the government. It is the title company's job to find any of these items that could hinder the sale. When the title report is delivered to you, you and your agent will have a couple days to review the commitment and determine if there are any issues that need to be resolved. It generally will not affect a sale unless the liens exceed the purchase price, in which case, you could choose to renegotiate or terminate the contract.
Any homes that are subject to financing will usually require an appraisal and virtually any loan will require that the property appraise for at least the purchase price. The appraisal is commonly the last piece of the puzzle that everyone is waiting on before closing. Some appraisals are more restrictive than others. VA or example has more strict requirements for condition than say a Conventional Loan. The appraisal is the bank's way of protecting itself against an overpriced home which would put them in a situation where there was more owed on the home than what it was worth. The same is true for the buyer. The appraisal gives them the confidence that the property is indeed worth what they are paying for it. Should an appraisal come in low, that is still not the nail in the coffin for your sale. Yet another negotiation of price can occur at this point. The seller can drop the selling price down to the amount the home is appraising for or if you are willing, you can come up with additional down payment to make up the difference (Keep in mind this is not common. Who wants to pay more than something is worth). There are very strict guidelines on appraisals and requesting a reconsideration or a new appraisal is rarely a solution unless the seller is willing to make substantial changes to the property to increase the value. In some cases, the appraiser may even determine that the home is not financeable at all if there are significant structural issues, mold or other prevalent defects, although this probably would have been pointed out in the inspection period, not this late in the transaction. The appraisal is paid by the buyer and must be ordered as soon as possible. Appraisers in some markets can take weeks or even months to be able to get to a property so you want to make sure that your lender orders it in a timely fashion or you could encounter an inability to meet a closing date.
Occasionally you will encounter other contingencies. Probably the most common would be the contingency on the sale of the buyers home.
You may encounter other contingencies as well and your Realtor will walk you through what they mean to you and the sale of your home.
Provisions is another area of the offer where the buyer can make certain requests. These requests can be just about anything. Some examples may be Closing Costs (The buyers request that the seller pay part of the expense of closing their loan), early occupancy, or any number of other requests that are not addresses elsewhere in the contract. Request for Closing Costs are a fairly is a fairly common practice in most markets. Purchasing a home can be an expensive endeavor and it enables some clients to make a purchase and cover expenses where they may otherwise not be able to. Keep in mind that asking for closing costs reduces the seller's proceeds at closing so it is essentially the same as making a lower offer. For example, if you offer $250,000 on a home listed for $260,000 and request closing costs up to $4000, it is essentially the same as the seller accepting $246,000 for the home. Keep this in mind when calculating your offer.