Making an Offer on Real Estate
Filed under: Home Buying, Real Estate Investing
In less active real estate markets, there was plenty of time to reconsider the price and other aspects of making a purchase offer for a property. In today’s real estate boom, you must make an offer on a desirable property as quickly as you can. If you hesitate or take time to reconsider your bid, someone else will step in to take advantage of a good deal. In fact, if there seems to be no hurry, perhaps you should wonder why. Why aren’t other buyers interested in this property? Why is the seller being so considerate? Why should you be the fortunate one?
Have your real estate agent work with you on making a bid on a property. Your offer should consist of the following:
- Price you want to pay
- Survey and legal description of the property you expect to receive
- Down payment amount
- Mortgage amount, with interest rate
- Earnest money amount
- Closing date
- Occupancy date
- Furniture, fixtures, or other items to be included with the property
- Contingencies, which may include financing, repairs, home inspections, appraisal, environmental concerns and clear title
- Offer expiration date
- Type of financing you are seeking
We will now look briefly at some of the components that make up an offer.
Down Payment
Traditionally the down payment on a building was twenty percent of the total price. Mortgages available today permit you to pay as little as three to five percent of the purchase price. Your down payment requirement will vary according to your credit rating, income, the purchase price, and the kind of mortgage you select. You may not have to make a down payment at all. For many mortgages, you have to save at least two months of mortgage payments, called reserves. Most lenders will want to know where you found your down payment. Gifts from relatives or friends may be restricted and need to be recorded as such.
Earnest Money
To show good faith, that is, serious intentions, you generally include with your offer a cash deposit known as earnest money. The earnest money is deposited in an escrow account. If your deal goes through, the earnest money will go toward paying your closing costs. If you are responsible for the deal not being completed, you must expect to lose your earnest money.
Closing Date
The sales contract generally has an estimated closing or commitment date. After your loan application is accepted and you have signed the commitment letter, a closing date will be fixed. Your real estate agent, lender and closing agent may be the ones who fix this date. Be sure that the closing date occurs before your commitment letter expires, and while you still have an interest rate locked in.
The commitment letter gives the mortgage amount, terms of the loan, loan origination fee, discount points, annual percentage rate and monthly payments. The letter states a date by which you must accept and formally apply for the loan.
The closing agent should give you the closing date in writing, with the time and place of the closing meeting and a list of what to bring with you.
Occupancy Date
Making a fixed occupancy date part of your purchase offer helps guarantee that you will take possession of the property in a timely manner after it has been bought. You might also include a provision that the seller has to pay you rent on the property if he or she has not vacated the premises by the occupancy date.
Contingencies
A contingency is a condition that must be fulfilled before a contract can be regarded as legally binding. Both the buyer and seller can have contingencies, and the opposite party often adds the condition that a good faith effort must be made. A loan contingency means that you don’t have to buy unless you qualify for a loan. Qualifying for a loan does not always mean that you will get one. An offer may be contingent on the property passing a building inspection or upon specified repairs being completed.
With an appraisal contingency, if the building’s appraised value does not reach a certain level, you get your money back. The appraised value is its fair market value as estimated by a qualified appraiser. Often the seller will just drop the difference in value. In reality, appraisals are so subjective that they are almost worthless. Contingencies protect you. Once you send an approval letter, you remove your contingency.
