How Do I Make An Offer On a Home?
June 18, 2015 | Ryan Gibbons
How Do I Make An Offer On a Home?
Making an offer on a home is a big step for any potential homebuyer. It is the result of much research, discussion, and possibly compromise. But don’t be daunted by it is the initial offer and not a binding contract. It is the first step in negotiating a deal to purchase a home.
In New Jersey real estate agents use a form contract that is about 14 pages long that outlines the offer, buyer’s and seller’s rights, the relationship of the agents, and much more. You can download a blank contract here to see for yourself what is involved. Most buyers and sellers get caught up on what the actual dollar amount of the offer is but there is much more to it. To really understand the offer you must examine the entire document. Important questions to ask yourself before making an offer are:
How much money can I put down on the property?
This is important because if you are putting down 10% and someone else is putting 20% you are may be at a competitive disadvantage. The amount you are willing to put down may vary from one property to the next based on the condition of the home, how much money you need to put into the home to make it work for you, and the competition. Typically a portion of your down payment will be due within about 2 weeks of an agreement while the remainder is due at closing. The down payment remains in the trust account of the seller’s attorney until closing. This money is usually refunded if the deal does not close but be sure to clarify this prior to signing the contract. Obviously the amount of your down payment will also affect your monthly mortgage payment as well.
When do you want to close on the home?
This may seem like a simple question but it can mean the difference between acceptance and rejection. When signing a listing agreement, sellers will tell their agent their ideal timeframe for closing. In a normal sale where the buyer is getting a mortgage a home will close in about 60 days. A seller may be looking for more or less time depending on their circumstances. They may be buying another home or relocating to a new area, or selling the home of a deceased family member. You should be aware of the seller’s timeline and try to align with it to give yourself the best chance of acceptance.
Are their any contingencies in your offer?
A contingency is something that the buyer stipulates upfront as part of the sale. It could be that they need to sell their current home to purchase the new one or that they want the sellers to pay closing costs. This is an important part of the offer that many times can greatly change a deal. If you have to sell your home first that could mean the closing may not happen for many months depending on the status of your home. Asking for closing costs essentially raises your offer, which may sound nice but can result in issues with appraisals.
Let’s take an example. A buyer wants to offer $350,000 for a home but does not have enough money for down payment, closing costs, and renovation costs so they ask the seller to pay the closing costs, let’s say $10,000. Now they have to increase their offer to $360,000 and essentially finance the closing costs over 30 years. The issue for the seller becomes will the home appraise for $360,000? If the answer is no then you may not get the house at that price with the contingency in place. If the answer is yes than you can save some money upfront for renovations or simply keep it in reserves.
Other contingencies that are typically part of an offer are:
- Mortgage – Buyer must be able to obtain a mortgage or they will be unable to purchase. So the offer becomes contingent on that mortgage commitment form a lender.
- Inspection – The home inspection should not uncover any structural or other issues that adversely affect the value of the home. If major issues arise the buyer may renegotiate or back out of the deal. Unfortunately this does result in much renegotiating and even cancellations due to unforeseen issues with the home.
- Appraisal – A major part of the mortgage process is the appraisal. The lender wants to be sure the purchase price is fair market value so they will get a return on their investment. If the home does not appraise for the accepted price the buyer may not be able to get a mortgage without renegotiating. This also could be affected by the amount of the down payment. The more you put down the more likely you will still be able to purchase if the house does not appraise. Before making an offer you should review comparable sales in the area with your real estate agent to determine the fair market value of the home.
As you can see there should be a good deal of thought that goes into an offer, especially if there are other offers. Before signing an anything you should discuss the details, contingencies, financials, dates, and other details to be sure you understand what you are signing. As mentioned these details can mean the difference between acceptance and rejection.
In New Jersey the listing agent must present your offer within 24 hours to the seller. It is then up to the seller to accept or reject your offer. If they accept your offer they will sign and initial the document and you will enter Attorney Review. If they decide to reject your offer they can simply reject or they can counter your offer. This is usually done verbally between the listing and selling agents but can be done in written form. We will discuss the negotiating process in another post.
What else is included in the contract?
The Legal description – This is typically noted by the lot and block the property is located at. Every municipality is broken up into blocks that are numbered along with the number of the lot the house is located on. So instead of being 123 Main St the property is located on Block 20 and Lot 13. The zoning of the property should also be noted as it may be a single family home, multi family, or mixed use. If there is a question you should consult the town’s building department.
Mortgage Commitment Date – This is when the buyer is expected to have secured their mortgage. The mortgage process should take about 30 days to complete as long as there are no issues or delays. This is an important date because if missed the closing date could be delayed. Buyers must be diligent with their paperwork to ensure they have their commitment in time. The commitment is the result of the submission of financial documents like tax returns, bank statements, pay stubs, etc and resulting in underwriting being completed by the lender. You can find a list of do’s and don’ts for your lender here.
Lead based paint acknowledgment – Any home built before 1978 likely had lead paint at some point. Lead paint can be harmful and even deadly if ingested so it is required to disclose any knowledge of lead paint in the home to a prospective buyer. A supplemental form must be signed by all parties. acknowledging reports or general knowledge of exposed lead paint. The buyers have the right to have the home inspected for lead paint if they feel there is a risk to their family.
Flood hazard area disclosure – As we have seen more and more some areas are prone to flooding. FEMA maintains maps that designate 500 year floodplain, 100 year floodplain, and non floodplain areas. It is important to understand where the home lies as it could lead to high insurance premiums for homes that are in flood zones. There are services that will certify the flood area status of the home for a nominal fee. It is recommended to do your due diligence on this prior to making any offer.
There are many other sections of the contract so I suggest you look it over before you find the right home and fully understand it before signing one. If you have any questions about the contract you should consult your real estate agent or real estate attorney to clarify anything for you.