Making an Offer
Before putting down a deposit, it is important to know how to make an offer. Ask me as your agent as many questions as possible. The questions here are a good place to start.
· What are the requirements under Massachusetts law that make an offer legal?
· How can I tell what is the proper amount to offer?
· What contingencies do I need in the offer to protect myself?
· What would be the best financing contingency to ask for?
· How are deposits handled and who holds the money?
· What is the best strategy for getting my offer accepted?
· What do I do when the offer is accepted?
When you find the right home in the Upper Pioneer Valley, what can you do to maximize your chances of actually buying it? The first step you should take is to make an offer.
Whether you are in a buyers' or sellers' market, taking too much time to initiate an offer can cost you money, especially if you are planning to offer less than the asking price, or will be asking for special terms. If your offer is the only one on the table, the sellers are more likely to consider it, and even if they don't accept it, they may make a reasonable counter offer. If you don’t make an offer while you are "sleeping on it", or even going back and forth with the seller on offers and counter offers, if another buyer may appear on the scene. You may not wish to risk that possibility. If you really want that special house, make the best offer you can – as quickly as possible.
We Start by Making an Offer
Once you find the home you want to buy, the next step is to write an offer. Your offer is the first step toward negotiating a sales contract with the seller. Since this is just the beginning of negotiations, you should put yourself in the seller’s shoes and imagine his or her reaction to everything you include. Your goal is to get what you want, and imagining the seller’s reactions will help you attain that goal.
The offer is much more complicated than simply coming up with a price and saying, "This is what I’ll pay." Because of the huge dollar amounts involved, both you and the seller want to build in protections and contingencies to protect your investment and limit your risk.
In an offer to purchase real estate, you include not only the price you are willing to pay, but other details of the purchase as well. This includes how you intend to finance the home, your down payment, what inspections are performed, timetables, whether personal property is included in the purchase, any repairs you want performed, and when you get physical possession of the property.
Buying a home is a major event for both the buyer and seller. It will likely affect your finances more than any other previous purchase or investment. The seller makes plans based on your offer that affect his or her finances, too. However, it is more important than just money. In the short time it takes to write an offer you are making decisions that affect how you live for the next several years, if not the rest of your life. The seller is going to review your offer carefully, because it also affects how he or she lives the rest of his or her life.
The Basics of an Offer
A written proposal is the foundation of a real estate transaction (and the law too!)
Oral promises are not legally enforceable when it comes to the sale of real estate. Therefore, you need to enter into a written contract, which starts with your written offer. This offer not only specifies price, but the approximate date on which you will close and take possession. It also includes many of the major terms and conditions of the purchase. For example, if the sellers said they'd help with $2,000 toward a future repair, you want that statement included in your written offer.
In Massachusetts, as in most states, we have a standard offer forms that is kept up to date with the changing laws. As explained elsewhere, this offer, when agreed to by both parties, is an outline of what will appear in expanded form in the Purchase & Sale Agreement written by the two attorneys.
What the offer contains
The purchase offer you submit, if accepted as it stands, will become the binding sales contract until the Purchase & Sale Agreement is signed. It's important, therefore, that the offer contains all the items that will serve as a "blueprint for the final sale." These purchase offer items include such things as:
· Name of seller or “owner of record”
· Specific address for the property
· Offering price (most subjective part)
· Amount of earnest money deposit accompanying the offer
· Secondary deposit usually of 5 to 10 percent of selling price and when due
· Financing terms -- for example, all cash or subject to your obtaining a mortgage for a given amount If the loan can't be arranged, you won't be bound by the contract
· Target date for closing (the “on or before” sale)
· Inspection clause allowing you to inspect for any structural defects or environmental hazards. This means a satisfactory report by a licensed home inspector within 10 to 12 days (for example) usually after acceptance of the offer. If you are not satisfied with the report you can back out of the sale or, more commonly, negotiate with the seller for specific repairs to be done or appropriate credit be given for same.
· Provisions for termite and wood-boring insect inspection and who will pay for same
· A time limit (preferably short but usually two or three days) after which the offer will expire
· Any other provisions could include such contingencies (if not listed in MLS) as having a hot tub, window treatments, appliances, back yard play equipment, or other items beyond those mentioned above which you may want to remain with property.
The seller's response to your offer
You will have a binding contract if the seller, upon receiving your written offer, signs an acceptance just as it stands. The offer becomes a firm contract as soon as you, or I as your agent, are notified of this acceptance. If the offer is rejected, that's that, and the sellers can not later change their minds and hold you to it.
Usually, however, negotiations take place. If the seller likes everything except the sale price, or the proposed closing date, or the basement pool table you want left with the property, you may receive a counteroffer (usually verbally), with the changes the seller prefers. You are then free to accept or reject it or to even make your own counteroffer. For example, "We accept the counteroffer with the higher price, except that we still insist on having the pool table."
Each time either party makes any change in the terms, the other side is free to accept or reject, or counter again. Once agreement is reached the necessary changes are noted on the original offer and initialed by both parties finally becoming a binding contact. Or, if complex changes are agreed to a new offer is written and signed.
You're in a strong bargaining position -- meaning, you look particularly welcome to a seller -- if:
· You're an all-cash buyer; or
· It’s an empty house and you can close within in a reasonably short time, or conversely,
· Seller doesn’t want to close until end of school year and that’s your desire too, or
· You're already pre-approved for a mortgage (should be done prior to looking); and
· You don't have a present house that has to be sold before you can afford to buy.
In those circumstances, you may be able to negotiate some discount from the listed price. On the other hand, if a very well maintained home in an excellent location comes on the market, you may want to offer the list price (or more) to beat out other early offers.
It's helpful to find out why the house is being sold and whether the seller is under pressure. Note that the seller’s agent does not typically disclose the reason why the seller is selling, as he or she does not want to give a potential buyer a hint of the seller’s need to act. I, however, as your agent can tell you if I have this information. It’s just that obtaining this information enters a gray area of legality. Note that most homes come to market due to death, divorce, or transfer – all “have to” situations.
So, as a buyer keep in mind these tactical points:
· Every month a vacant house remains unsold represents considerable extra expense for the seller;
· Most all sellers are selling due to a transfer, where they need to act as soon as possible,
· Or they are divorcing, they may just want out quickly;
· Or, it’s an Estate where action requires a purchase at some price, often yielding a bargain
in return for a prompt deal.
To negotiate the lowest price consider:
· Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there.
· Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate.
· Ask what comparable homes are selling for. When the seller won’t budge on price, try to negotiate something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself.
Withdrawing an offer
Can you take back an offer? In most cases the answer is yes, right up until the moment it is accepted. After it has been accepted you can technically withdraw under the “inspection” clause, as the latter obliges you to be satisfied with the inspection itself. Note that the seller, however, may compel you to go through with the inspection. If you do want to revoke your offer, be sure to do so only after consulting with me and your attorney. You don't want to lose your earnest money deposit, or find yourself being sued for damages the seller may have suffered by relying on your actions. Note that none of my buyers have ever had to sue for a deposit, or lost one unfairly. Communication is the key; as long as one party understands a particular uncertainty in the other party they are less likely to feel aggrieved if the former changes his or her mind.
Some Frequently Asked Questions on “Offers”
Can I make a verbal offer on a property?
No. Verbal offers to purchase real estate are not accepted in Massachusetts. By law all offers must be made in writing, and be accompanied by consideration. In most transactions, a pre-printed one-page short-form Agreement to Purchase is used to begin the offer process.
What is an "earnest money" deposit?
Accompanying your offer will be an "Earnest Money” deposit. This is a deposit that you give when making an offer on a house. Besides being a legal requirement it shows the seller good faith that you wish to purchase the property. The amount will become part of your down payment.
Do I have to put down an "earnest money" deposit with my offer?
In order to make a valid offer to a Seller, a deposit in the form of a personal or bank check, accompanies the written offer to purchase. It is the “consideration” required in Massachusetts to bind any offer on real property. Depending on the value of the property being offered on, the amount of this initial deposit is usually between $500 and $1,000. Note that a second deposit is customarily between 5 and ten percent of the purchase price; this amount is usually put down at a specific date or at the signing of the Purchase & Sale Agreement, depending on how the offer is structured.
What contingencies are usually put in an offer?
Most offers include two standard contingencies: an inspection contingency, which allows you to have a licensed building inspector inspect the property to your satisfaction, and a financing contingency, which makes the sale dependent on your ability to obtain a loan commitment from a lender. If the seller is to make any specific repairs to the property, they should also be written into the offer, along with any other specific arrangements made between the parties. Note that once the inspection is done other repairs may be asked for.
What is a mortgage contingency?
A mortgage contingency is a stipulation that makes the sale dependent on your ability to obtain a loan commitment. If a commitment for loan cannot be obtained by the specified date, then you and the seller can either sign an extension to give the lender more time to approve the loan or you withdraw from the purchase and your deposit is refunded.
How can I make my offer stand out against competing buyers?
Being pre-approved for a mortgage gives you a distinct advantage when making an offer on a property. A seller is more likely to accept an offer when they know you will not have a problem getting a loan; in fact, without a pre-approval from a qualified lender a seller may not wish to cooperate with you on your offer. Avoiding unnecessary contingencies will also make your offer more acceptable to a seller.
How do I know what to offer?
My best advice is to make your first offer low enough so the seller is not likely to accept but not so low to cause insult so he or she will not give you a reasonable counter offer. Note that market conditions, such as several offers on a newly listed home, nullify the foregoing negotiating tactic, i.e. you need to be more aggressive. On the other hand, don't be afraid of competing offers; they support value.
What happens after my offer is presented?
Once your offer has been presented, the seller has three options. He or she can accept the offer as it was written, counter-offer with a price and terms that are more acceptable, or, if the offer is unacceptable, reject it. Frequently, the seller will counter price in an offer with an amount if less than what they are asking at least satisfactory. Note that the other major part of an offer that the seller may counter is the closing date.
What happens to my deposit if my offer is accepted?
Once all parties have agreed to a price and terms and have signed the short-form Agreement to Purchase, the deposit is placed in an escrow account, where is stays until the closing. Neither buyer or seller has access to escrow funds. Note the deposit is always counted as part of your total down-payment.
When should I submit a loan application to the bank?
If you need lender financing pre-approval for a loan must come before you begin looking at homes. Once you have an accepted offer, you immediately need to submit a full application to the lender.
What happens to my deposit if my offer is rejected?
If the Seller rejects your offer outright or if all parties cannot agree on price and terms, the deposit is returned to you.
Can I buy a home below market value?
It depends on the market. In some cases you can find a "bargain" and pay less than market value for a property. The most common examples of these are homes that need rehab work and foreclosures or government-owned property. If you have the time and money to put into a rehab, and are wise about how you go about the project, they can be a wonderful investment, sometimes giving an excellent return. If you are considering a bank or government-owned foreclosure, make sure you do your homework first, as most of these properties are sold "as-is” meaning that no structural or mechanical warranties are implied.
SPECIAL SECTION IN CASE YOU ARE OUT-OF-TOWN AND EMAILING/FAXING OFFER TO ME
(How to Fill Out the Offer Form when I am not with you)
Making an offer using the Massachusetts standard short-form agreement is not difficult. The form is simply a one-page memorandum of items required by contract law to start a purchase -- specifically price offered, address of property, money down, termite and inspection clauses, mortgage contingency, signatures of buyer and seller, and appropriate dates. From this one-page agreement the buyer's and seller's attorneys write the more definitive "Purchase and Sale" agreement which may run several pages. Generally, this P&S agreement follows the outline of the major terms of the sale as set forth in the short-form agreement. However, the attorneys will add details and insert appropriate clauses that protect both buyer and seller. If the P&S agreement does not get signed for one reason or another, the short-form offer is a binding agreement and will carry through to the closing. Note that this latter scenario is not an option when lender financing is being sought as the lender requires a copy of a fully signed P&S.
Most of this one-page agreement is fairly obvious. It begins with the date and the names of the owners. Next is the street address and town. The blank on line #1 is where you put how much you would like to offer. #1a is the initial deposit you will put down, usually $500 to $1,000 to accompany this offer. #1b is how much money you will put down as an additional deposit, usually 5 to 10 percent of purchase price, and by what date or “signing of P&S Agreement” you will do so if the offer is accepted. #1c is the subtraction of the two foregoing deposits from the purchase price that you will pay on the closing date that you indicate.
Regarding the initial deposit, there are three things to note: (1) “earnest” money down is required, (2) if you are emailing (or fax) your offer, this first deposit can be a photocopy of your check – made out to Lumley Real Estate Escrow Account (or agency who has property listed – check with me on this) – which you will PDF to me by email or fax along with the offer, putting the original check in the mail to me, and (3) note that this escrow check is not deposited unless your offer is accepted.
Paragraph #2 is the financing contingency where you put in the amount for which you wish to make mortgage application. Often this amount is a percentage of the price you are offering for the property. For example, if your offering price is $275,000 and you want a conventional loan, you would put 80 percent or less (a higher amount if you have lender approval for same) in the appropriate space. The next space is the date by which you will obtain the financing commitment. Often this date is anywhere from 4 to 5 weeks into the future.
Paragraph #3 refers to the building inspection (see also “Inspections” next section) that you will perform prior to a date that you choose, usually 10 to 15 days into future. Don’t even think about not having an inspection. The primary structural inspection is a rigorous 3-to-4 hour investigation of the property which usually turns up issues and/or potential problems that are not obvious upon the initial viewing. For other items – radon, water, mold, etc. to be inspected see “Inspections”.
After the inspection you may wish to bring some of the major items forward to the seller and request that they be fixed or appropriate credit be given. Note that sellers will often accept a reasonable request if something is found out to be wrong that they did not know beforehand. They are, however, under no obligation to agree to any request. And if you feel that the house shows a particular problem that is too severe and the seller will not fix it, your only choice is to notify the seller in a timely manner you will not be purchasing the property. In this latter case, the sale is canceled and your deposit is given back. Note that the inspection and negotiations should take place within the inspection period but oftentimes negotiations may continue afterwards; the key thing is to make your written request to seller before the end of the inspection period. The primary structural inspection is at your expense, costing between $350 and $450; examinations such as radon, water, etc., will have additional cost. Always use a licensed inspector (see list in “Inspections”) and plan on attending the inspection.
Paragraph #4 gives you the right to have a termite and wood-boring inspection done to the property. This is typically a lender requirement; however, you should do insect inspection even if you are paying cash.
Paragraph #5 is a reiteration of the “Lead Paint” law which requires all sellers and buyers of property built prior to 1978 to sign a notification form, regardless of the presence of lead paint.
Paragraph #6 deals with when the P&S Agreement is to be signed. Note this is usually after the inspection is completed and you are reasonably certain the sale is moving forward.
Paragraph #7 is for other provisions where you might list an appliance not on listing sheet, such as window treatments, swing set in back yard, or, if appropriate, Title 5 inspection to buyer’s satisfaction, or other feature in which you wish seller to add to sale.
Paragraph #8 relates to length of time you wish to make this offer applicable (a few days generally); the second sentence, the date by which you and the seller may sign a Purchase & Sale Agreement.
Note this short-form agreement puts buyer and seller on notice that if they do not, for whatever reason, sign a P&S Agreement, this offer is a binding agreement.
At the bottom of the form is a place for your signature. Please PDF to my email address or fax to me at 413-341-0016, and any other Massachusetts-required forms, like the Mandatory Disclosure, and Lead paint that are necessary to be signed, back to me.
If any questions, please call/text/email me.