Part 5: Making an offer
You’ve found the home you want and now it’s time to put pen to paper. Hopefully your Realtor is speaking to the seller’s agent by now to get a good idea of what the sellers really want. This is important because sometimes, the seller is has other things on her mind than price. It could be that they need to stay another month after the deal closes (this also known as a rent back), or they want to take all the appliances. You can structure the offer so they get what they want, and you get a lower price.
The contract that you submit is actually called a residential purchase agreement. There a few items of business that you need to think about:
- Down payment. On a conventional loan, this is usually 20% of the purchase price. Obviously, the more you put down, the less your mortgage payment is going to be. Just make sure you can cover all the other expenses, like closing costs, which we’ll get to in a minute.
- Earnest money deposit. People sometimes get this confused with the down payment. This is a check up front that gets cashed as soon as your offer is accepted. In most cases, the deposit is 1-3% of the purchase price. A larger deposit looks better on any offer because it lets the seller know you’re serious. You’ll get this money back if the deal falls through no fault of your own.
- Closing costs - The topic of closing costs is an entire post unto its self. But our discussion here is how much, if any, to ask for in the agreement. Closing costs are generally around three to five percent of the purchase price. Many times, these are split between the buyer and seller. The seller may also credit a few thousand bucks to the buyer when the deal closes. Here’s a tip: Ask for at least some closing costs, but at the same time, raise your offer. So say you’re willing to pay $400,000 for a house, consider raising your offer to $405,000 and asking for a credit of $5000 in closing costs. This way, the seller sees a higher number for their home and you don’t have to front as much cash.
- Close of Escrow – this is when you actually get the keys. The standard is thirty days, but it can be longer or shorter. If you know what the seller’s situation is, you might think about making it a quicker close or a longer one. How fast you can close on a home depends on a lot of things, like getting your loan funded. So make sure your bank and your agent have all their ducks in a row before you go asking for a two-week close of escrow.
- Inspections / Disclosures / Contingencies – here is something that I think a lot of people overlook. When you buy a home, it’s subject to any inspections that you want to do. Most contracts give you about two weeks to get all the inspections you want. If you find something you don’t like, you can ask the seller to fix it, re-negotiate or walk away. A contract is also subject to your loan. Say you lose your job and you suddenly can’t get a loan, that doesn’t mean your still on the hook to buy the house.
- Expiration of offer – the boilerplate on most contracts give the seller three days to accept, counter offer or reject an offer. But this is far too long. As the buyer, you want to create a sense of urgency. Plus, you don’t want the seller’s agent shopping your offer around for a better one. So it’s best to give the sellers maybe a day at most to think about it.
