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Friday, April 28, 2017

We really liked one of the homes and we want to make an offer. How does that work?

 Understanding the Real Estate Process from A – Z – A Buyer’s Guide to Real Estate – Part 7

This is the seventh post of a series in an FAQ format that I hope will help would be buyers better understand the real estate process that they are about to go through. There is a follow-on series to the posts for real estate sellers.

FAQ – We really liked one of the homes and we want to make an offer. How does that work?

Great, let your Realtor® know, so that he/she can do the preparation work for getting together to discuss an offer. Your Realtor will go get the Sellers’ Disclosure and the Lead-based Paint Disclosure and any other documents that may have been posted to the MLS that concern the property or might
be needed as a part of an offer. Depending upon what you may have already given him/her, your Realtor may also ask you to get an updated mortgage pre-approval letter from your mortgage person. That letter will normally accompany the offer.  Then, he/she will set up a time to meet with you to discuss the offer, especially if this is the first offer that you’ve made with this Realtor.

Your Realtor will have prepared a set of Purchase Offer documents prior to the meeting and will want to go through each one paragraph by paragraph, to make sure that you understand what you are signing. Remember that your Offer to Purchase (notice that it may be called different things depending upon the company) is a binding contract with terms and conditions that protect your interests and the interests of the seller. If you have made other offers with this Realtor, they may not go into such detail in later offers, but will focus instead on the specifics of the current offer.

If you are a first-time buyer and this is your first offer take the time with your Realtor to really understand all of the terms and conditions and the timelines of the various obligations that you are
assuming, if the seller accepts your offer. Make sure you also know what your “outs” are in the contract – the things that allow you to walk away and get your Earnest Money Deposit (EMD) back if you are not satisfied.  Don’t just assume that you can change your mind at any time or on a whim and get your EMD back. Understanding the timelines that are specified in the contract is very important. You can mess things up pretty bad for yourself if you miss the deadlines for accomplishing things that are specified in the contract. Most of those timelines have clauses that specify that, if do nothing by the deadline then you are accepting the whatever was specified by the clause “as is”. Some timeline clauses may even specify that, if you do not accomplish certain things by the specified deadline, the Seller may declare the agreement to be null and void.

The Purchase Agreement (PA) timelines might include things like getting the home inspection done within a certain number of days and informing the seller of any unsatisfactory items from that inspection within a set period of time. The PA will usually include a deadline for actually applying for the mortgage and getting a mortgage commitment within the specified time frame. Other things like applying for flood plain insurance may also be specified. The buyer also has the obligation of lodging any objections to the results of the title search or lodging any objection to the property’s flood plain designation. You may also have some specified amount of time to read through the Master Deed and Home Owners Association (HOA) By-Laws and lodge any complaints after the seller delivers them to you. You should make a list of the various deadlines that you have to meet as you go through the Purchase Agreement with your Realtor.

The Realtor will go over all of those things with you, to make sure that you understand and agree with them, prior to having you sign the offer. He/she will also have you read over and understand the Sellers’ Disclosure and the Lead-based Paint Disclosure, prior to letting you sign the Purchase Offer. It is important that you understand what, if any, issues that Sellers are disclosing about the condition of the property. IF you see things in those disclosures that alarm you or that you don’t understand, now is the time to raise those issues with the Seller.

So, now you are at the moment of truth – the offer price. As preparation of your meeting, your
Realtor will probably search for similar or comparable homes that have sold within the last 3-6 months and within 3 miles of the house that you like.  If it is in a sub, he/she will try to find all of the recent sales in that sub. He/she may do a Comparative Market Analysis (CMA) of those sales to help establish a possible value baseline for the house that you like. Since no two homes are exactly alike and the condition of the sold homes may vary widely, the CMA just helps the Realtor establish a “ballpark” within which to evaluate the home that you like. If all of the comparable homes that have sold in the sub (or area) were within a range of $175,000 to $220,000, it would make little sense to bid full price, if this seller is asking $250,000. Perhaps, as the seller may believe, he has the best house in the sub; however, it is unlikely that he has a house worth $30,000 more than any other house that has sold in the sub. In the same vein, if the house is in decent condition, it would make no sense to “lowball” the Seller with an offer that might just offend him. Listen to your Realtors advice on the pricing issue.

Your Realtor will give you their opinion of what a fair offer price might be, based upon their assessment of the house and their evaluation of the market that you are competing in at the moment. Listen to their advice. Now is not the time to decide to see if you can toss in a “low-ball” offer to see if they’ll take it and a good Realtor will not let that happen. The house may be overpriced, but let your Realtor make the call about how far it is overpriced and recommend a reasonable offer price. You want to make sure that you do not tick off the seller so much with your initial offer that he rejects it out of hand and won’t deal with you anymore. You also need to have a firm “stop” price in mind, which is as far as you are willing to go for this house. Don’t get caught up in the negotiation back and forth and end up bidding more that you are willing to pay.

If it is a good house in a tight market, the Realtor may even advise bidding above the asking price.
Bidding wars are not uncommon in hot markets with tight inventory and you may be one of several offers that the sellers will have to evaluate. Your Realtor will work to position your offer as strong as possible. He/she may advise increasing your down payment amount or maybe even using a conventional mortgage rather that the FHA mortgage that you had in mind. Why? Because a larger down payment make it look like you have the wherewithal to get to the closing table and a conventional mortgage is less potential hassle for the seller than an FHA mortgage. That might give you an edge in the sellers’ evaluation of the offers in hand. 

Sometimes there are bargaining points in the deal that are almost as important to the sellers as the price, such as possession. The sellers may have advertised the possession as “negotiable”. You may wish to start with an offer of possession at closing and see what they come back with or your Realtor may have discussed that point with the sellers’ agent and have some idea what they need. Staying as flexible as possible on that issue may give you another edge in the deal.

Seller’s Concessions are almost always a sore point for sellers. They don’t understand why you are asking them to pay part of your closing costs. It looks weak and makes it appear like you might not really be able to afford the place. If you are in a hot market, not asking for Sellers’ Concessions is another edge for you. If you must ask for them in order to be able to do the deal, make it the least that you can get by with and still close the deal. You may also have to offer a higher sale price to get them to agree to cover your closing costs with a Sellers’ Concession. Ask your mortgage person how that might work.

If you understand everything and have agreed upon an offer price, go ahead get everything signed.
Remember that you will have to write an EMD check and give that to your Realtor for deposit in the real estate company’s escrow account. In Michigan that check cannot be held until the seller agrees to the offer, it must be deposited within 48 hours of being given to the Realtor.

Congratulations! You made an offer. Now you wait. It is customary to give the sellers 24-48 hours to respond to any offer. If it is a hot market, don’t be surprised to receive notification that “multiple offer situation” exists and instructions on how to submit your “best and final” offer. You can sit tight with the offer that you made or modify your offer to be more competitive. That’s up to you. 

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