So you’re ready to make an offer, huh?
Great! Let me share how it all works…
After 23 years of experience getting offers successfully accepted for my buyer clients, I have been able to break down all offers to purchase or Residential Purchase Agreements as a series of 10 steps from start to finish, otherwise known as the Open and Close of Escrow. Since you have already secured financing with your loan pre-approval and you’ve seen a number of homes, narrowing down your choice to the home you really want, you’re now ready to reach Step 1 of 10 by submitting an offer to the seller. So here’s how we get your offer accepted by the seller …
Offer Structure
As an educated buyer and home searcher you have a sense of home values in your area. The best chance of a successful bid will be the formation of a reasonable offer based on local housing price information. David can help you gather this information to make a “good” offer.
Gauge your market as market conditions play a role. Buyer or Seller markets can move short-term prices up or down based on current buyer demand or number of homes for sale. The number of other buyers interested in your home will definitely influence where the ultimate sales price will land. Beware of making lowball offers as they are often roundly rejected or can not compete given a multiple offer situation. David can help you gauge where your market lies and will be in contact with any other agents or sellers to report how many other buyers may be writing an offer too.
David will prepare your Residential Purchase Agreement (RPA) which includes all the necessary pieces of information and protections for you the law allows, such as:
- Legal address of the property, and individuals purchasing and selling [called the “parties”]
- Purchase price and terms [money, dates, timing, etc.]
- Details of the earnest money deposit [how much and when expressed as a % of your total down payment]
- Contingencies on the sale [otherwise know as your 5 or 6 “outs” should you decide not to purchase]
- Closing costs, including your loan fees and title and escrow fees
- Duration of offer (expiration) and expected closing date
Time is of the essence. Standard time to hear back on your offer from a seller is 3 days. Talk to David about shrinking or lengthening the expiration time if you have questions.
Contingencies
Smart real estate buyers include contingencies or conditions that must be satisfied before the purchase can go through. They also protect your good faith deposit should you find a “deal breaker” during the discovery phase of your offer.
For example, while you may have been pre-approved for a loan, David will insist you include a contingency that final loan approval must be in place before the escrow closes. Getting your loan approved requires the house to appraise which means David will include an appraisal contingency as well. One of your “outs” should the house not appraise for your offer price, giving you have the choice to walk away and get back your deposit. Here are some common contingencies and “outs” available to every buyer:
- Final approval for financing [typically 21 days from acceptance of your offer]
- Appraisals [17 days is customary]
- Inspections [17 days, shorter if you want your offer to be more attractive to the seller]
- Obtaining Hazard Insurance Policy quote/commitment [called “home” or “fire” insurance]
- Reviewing seller disclosures and title report documents
- Sale of a buyer’s existing home [if applicable, and can range from 7-30 days]
- Close of Escrow or Expected move-in date [technically not a contingency but enforceable nonetheless]
Earnest Money / Good Faith Deposit
Your written offer tells the seller you want to buy his/her home. Your earnest money deposit shows them by putting your money where your mouth is. Earnest money is deposited in the Title Company’s Escrow Holding Trust account and held there until buyer and seller tells them what to do with it.
Good faith deposits essentially pull the house off the market for any other buyers. The amount of earnest money is typically 1 to 3 percent of the purchase price otherwise known as “liquidated damages”. All terms David can explain in detail as well.
Negotiation
All offers are made up of positives and negatives. The objective is to offer as many positives as possible to make your offer a “win/win” for both parties. If it has enough positives and minimal negatives, the seller will have an easier time accepting your offer over all other buyers. The seller always has the choice to accept your offer in full, reject it outright, counter with another offer, or allow your offer to expire [least common and most disrespectful of their choices!] Here’s what it looks like…
- Strategize your offer with David, he prepares what you decide so you can sign and date, then he presents your offer package to the seller. Your offer package will include:
- Your offer
- Your bank statement[s] called Proof of Funds where your down payment is coming from
- Your preapproval letter
- Your personal introduction letter to the seller [ask David what sellers like to hear]
- Any seller provided disclosures and reports acknowledged ahead of time
- Seller is presented your offer and can either accept, reject or counter
- If countered then you can accept, reject or counter again until all parties come to an agreement
- When the buyer and seller have accepted the price and terms of the Residential Purchase Agreement, David contacts you to say Congratulations you have reached Step 1 of 10!
The Offer is Accepted! Now What?
Here’s what happens after your offer is accepted – the remaining steps carried out in the final phase of the home buying process.
Appraisals
An appraiser will visit the house and determine what it’s worth. Why does this matter? For home buyers that use financing (as most do), it’s important to know that lenders will not make loans in amounts that exceed the fair market value of the home. Buyers can pay more than the appraised value, but they will have to come up with the difference – in cash – between the purchase price and the loan amount. Example:
- $500k proposed purchase price
- $480k approved loan amount
- $475k appraisal
- Result: Bank will not lend more than the fair market value of the property
What’s more, loan program guidelines state a maximum loan to value (LTV) ratio. Some programs allow ratios as high as 97%, but let’s look at an example of similar transaction where a conventional loan, with a cap of 80% LTV, is used. Example:
- $500k proposed purchase price
- $400k approved loan amount ($100k down payment, 80 LTV)
- $475k appraised value (84 LTV)
- Result: Loan to value exceeds 80% maximum, the buyer would need to bring $120k to closing because the new maximum loan amount is $380k
These are two reasons why low appraisals can make deals go sideways, if not die altogether.
Inspections
Not to be confused with appraisals above, inspections reveal the condition of the home, not the value of it. Inspections are not required unless VA or FHA loans are used. However, inspections are highly recommended as they can reveal flaws not easily identified by sight. You’ll feel better about buying a home that is in good condition where the plumbing, electrical systems and foundation (to name a few) perform as expected.
Even for new construction homes, inspections are a good idea. Inspectors will look for shoddy workmanship, incomplete work, or anything not built to code.
Legal Disclosures
The law requires that home buyers receive a certain number of disclosures that itemize any material facts that could affect their decision move forward with the deal. Each state has a certain number of required disclosure forms. Here are some potential issues that may arise:
- Defects like mold, leaky roof, lead-based paint
- Pest infestation – damages to wood caused by termites or carpenter ants
- Natural hazards – seismic hazard zones, flood zones, fire risk
What’s more, sellers must divulge any known defects via a legal document called a Real Estate Transfer Disclosure Statement (TDS).
Title Report
Escrow companies will pull a title report showing the ownership history of the subject property and any encumbrances placed upon it such as liens. Title reports identify anything that would prevent you from owning the home free and clear when the deal closes and ensures that the seller owns the home and has the legal right to transfer title.
Lender Docs
Assuming you were already pre-approved for a mortgage, your lender’s underwriting team will take a final look before giving the “thumbs up” to proceed, known as “clear to close.” Your credit report is pulled again to make sure no new debts have been taken on since the initial approval.
A Closing Disclosure (formerly the HUD-1 Settlement Statement) is drafted showing all the transaction fees and impounds (like pre-paid taxes) down to the penny. If the final Loan to Value (LTV) is less than 80, mortgage insurance is ordered.
Order Insurance
Hazard insurance will also be ordered at this stage. Here’s why. Houses securitize (back) a mortgage. As the underlying asset, lenders want to protect the value of the property in case something goes wrong. Thus, lenders will require insurance coverage.
Depending upon the location of the property, flood and earthquake insurance may also be required.
Home warranties, which typically cover major systems (heating, cooling, plumbing) and appliances are not mandatory. However, many buyers choose to purchase a warranty to prevent unexpected out-of-pocket expenses.
Final Walkthrough
You’ll have the opportunity to make a final walk-through of the home before taking possession of it. Walk-throughs are not required, but recommended, to make sure nothing about the house has changed since the last time you viewed it. You have the right to review any agreed-upon repairs or double-check appliances, windows, plumbing, heating, air conditioning, etc.
Contingency Removal
If there were contingencies included in the purchase contract, the satisfaction of them would have also been specified in the RPA. Many common contingencies would be completed as a matter of routine, such as a home inspection, appraisal, final loan approval, etc. With contingencies removed, the status of the home changes to ‘pending.’ The only left to do is finalize the deal at closing.
Closing
This is it, the moment for which you’ve been waiting. Closings typically take place at the offices of a title company and sometimes an attorney’s office. Just a heads up: there’s lots of paperwork. You’ll sign so many documents that your hand and wrist may be cramped when finished.
After the signing ceremony, down payment funds will be transferred (less the earnest money you’ve already committed) from your bank to the escrow company.
Voila!
Those are the steps to making an offer on a home and the follow-up steps to complete a home purchase. The only thing left to do is get the keys and start moving into your new home!
