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. 

I’ve found a house that I really like and I’d like to make an offer. What do I need to know?

Part 4 of a ten part series of post on the real estate process.  I’m ready to make an offer. What happens now?

Answer - If you have settled upon a house that you think you would like to make an offer upon, inform your doesn’t quite happen the way it portrayed on television on shows like House Hunters and The Property Brothers. There’s a little more to it that you see on TV. It also takes a little more time than they portray.

agent. This is where your Realtor does some of his/her most critical work. It

It might be a mistake to eagerly head back to the Realtor’s office after seeing the house that you want and trying to do all of the necessary work on the fly, so that you can make an immediate offer. It can be (and has been) done, but doing so in such haste can also lead to mistakes or costly errors. If you try to do that, figure on a good hour or two at the office.  After the showing of the house that you want to bid upon have a good discussion with your Realtor at the house or back at the office; so that he/she can go over all of the things that you can accomplish at that point and help you make a list of things that may need to be quickly done by you or by him.

If he/she hasn’t already done so, they will do a quick Comparative Market Analysis (CMA) on the property and come up with a fair offer price. The agent will also procure the Seller’s Disclosure Statement for you to review, if you have not already seen it, and let you look at the disclosures that the seller is making about the house. Sellers are required to truthfully list disclosure about anything that might materially affect the value of the house, such as known water damage or flooding, any known insect infestation that required remediation, any mold problems that required remediation and information in many other categories. There is also a section in the Sellers Disclosure that asks him/her to state the condition of the house and the major systems in the house, such as the furnace and water heater. The Seller's Disclosure is a legal document, which provides the buyer legal remedies (including a complete refund on the deal) if it is proven later that the seller made false statements on the Seller’s Disclosures document.

Your Realtor will also check to see if there is a Home Owner Association (HOA) and ask to see the Master Deed and By-Laws. For information on what to look for in the HOA By-Laws, check out this Realty Times article on HOA CC & R’s. Don’t worry if you can’t get this done before making the offer. You will usually be given time after the offer is accepted to review the Master Deed and By-Laws in detail. Ask your agent to make sure that there are provisions for that review in the offer and for you to back out if they turn out to be onerous.

Hopefully by now both you and your Realtor know how you are planning to finance the purchase – Conventional, FHA, VA, USDA or other. That will influence which Addendums might need to be added to the Purchase Agreement (PA). The agent will also need a copy of the Mortgage Pre-Approval letter that you

have from your mortgage person, if you haven’t already given them one. If you didn’t do so already, go over with your agent all of the things  on the MLS sheet while at the showing; so that you and the agent will know what appliances are offered with the property, in case you want to ask for others that might not be offered , That will need to be on the PA, too. The agent will know from the MLS sheet whether the property is on a well and septic system (possibly another Addendum covering well and septic inspections); whether the seller has offered a Home Warranty or not (something else that needs to be specified on the PA); whether the seller has asked for occupancy after closing or not; and other factors that he will need to know, in order to properly fill out the Purchase Agreement. He/she may ask you about those issues, explain the options that are available to you and ask how you want them handled. The agent will also need to know how quickly you would like to try to get into the property, although the process timeline is dictated as much by the mortgage process as anything these days. He will also ask you want kind of deadline for a response you wish to put in the PA.

If you haven't already done so, you should think about or research the other neighborhood factors that may still influence you - location of nearest shopping and eating facilities, location (and reputation) of the nearest schools, location of churches, and any other factors that could cause you to reconsider the area. This homework should be done with all possible haste, since you don't want to lose the house that you want just because you took too long to make up your mind(s). Use Goggle Local to help find most of this information.

That all sounds like a lot of things that need to get done; but, you and your agent should be able to get all of those things done at the showing, at the meeting right after the showing, or easily within a day.

Next your Realtor should sit with you and go over the Purchase Agreement form with you. He may have it on paper or just use the electronic documents that he intends to send you for your electronic signatures.  He/she should explain all of the paragraphs on the form and get the necessary information from you in order to fill out your offer for the property. He/she will also go over any Addendums that will accompany the Offer and suggested wording on them. He will need your input on choices that might be on the Addendums.

There will come a moment during this process of filling out the Purchase Agreement when you will need to make a final decision on an offer price. Obviously you will have discussed this with your Realtor and with your mortgage agent. Your Realtor will tell you what his/her research says the current market value is for the property. Your mortgage agent will tell you what you can afford and what help you might need in the form of Seller Concessions to help pay for your closing costs.

In pre-Recession days well-priced homes would sell on average for 97% of asking price. That went out the window during the Great recession and buyers started low-baling and offering only around 90% of asking price and asking for Seller Concessions on every deal. Those days are over, too. In the current tight-inventory market (a Seller’s Market) offers are again at or sometimes above asking and bidding wars between buyers for good houses are not uncommon. Certainly, it is not the time to low-ball; especially if you will need a Seller’s Concessions to help with closing costs. In the current market environment, asking for Seller’s Concessions can be a deal killer, especially iof you’ve also discounted the asking price a little. My best advice here is to listen to your Realtor’s advice.

Your Realtor will make sure that all the proper fields are filled in correctly on the Purchase Agreement and any Addendum and have you sign and initial the forms in the proper places or mark them for later electronic

signatures. He/she will also make sure that you have signed and dated the Real Estate Agency form, the Seller's Disclosure form, the seller's Lead-Based Paint form and any other forms that need to accompany the Offer. If you’re using paper copies, he will and make a copy of all of the documents that you have signed. In most cases these days the Realtor will either use an electronically signed document for you and the seller(s) to sign or scan in the paper document and use email to transmit it. The old days of hand delivering paper document or even using FAXs is pretty much over. Apps like DocuSign and other electronic signature apps are making the process largely paperless.

Whether it’s on paper or electronic, it is still your responsibility to read through the Purchase Agreement (or Offer to Purchase Real Esate) thoroughly and ask questions about anything that you don’t understand. THIS IS A CONTRACT! It is a contract between you and the seller. The agents involved in the sale are not parties to the contract nor are they liable for the provisions of the contract. Read it carefully before you sign. Your agent should point out that you have the right of the contract to a review by a lawyer.

Your agent will also have you make out a check for what is called "Earnest Money Deposit (EMD)"; which will be held in the buyer agent’s company escrow account and applied against the sale at the time of closing. The earnest money is also what you are putting at risk to get the seller to accept your offer and take his/her house off the market. If you change your mind about buying the house after the seller has accepted your offer, you could lose the earnest money to the seller depending upon the circumstances that lead you to make that mind change. In the time before the great real estate bubble burst and before the Great Recession an EMD of 3% was normal; then it dropped down to $500 or $1,000 during the time of high distressed property sales. It is headed back to the traditional 3% level; so don’t be surprised if the Realtor asks for a check for 3% of the sale price. In Michigan the brokers are required to deposit that check within 48 hours of receipt, so make sure that the money is in the account.

There are still several things to come in the process that could impact the sale price and drive it down some – the appraisal and the home inspection. Your goal at this point should be to get a signed agreement with the seller and then go from there. That will be the next installment in this series – OK, I signed the contract and gave my EMD; what comes next?