Writing An Offer To Purchase Real Estate
Once you find the home you want to buy, the next step is to write an offer – which is not as easy as it sounds. Your offer is the first step toward negotiating a sales contract with the seller. Since this is just the beginning of negotiations, you should put yourself in the seller’s shoes and imagine his or her reaction to everything you include. Your goal is to get what you want, and imagining the seller’s reactions will help you attain that goal. The offer is much more complicated than simply coming up with a price and saying, “This is what I’ll pay.” Because of the large dollar amounts involved, especially in today’s litigious society, both you and the seller want to build in protections and contingencies to protect your investment and limit your risk. In an offer to purchase real estate, you include not only the price you are willing to pay, but other details of the purchase as well. This includes how you intend to finance the home, your down payment, who pays what closing costs, what inspections are performed, timetables, whether personal property is included in the purchase, terms of cancellation, any repairs you want performed, which professional services will be used, when you get physical possession of the property, and how to settle disputes should they occur. It is certainly more involved than buying a car and more important. Buying a home is a major event for both the buyer and seller. It will affect your finances more than any other previous purchase or investment. The seller makes plans based on your offer that affect his finances, too. However, it is more important than just money. In the half-hour it takes to write an offer you are making decisions that affect how you live for the next several years, if not the rest of your life. The seller is going to review your offer carefully, because it also effects how he or she lives the rest of their life. That sounds dramatic. It sounds like a cliché. Every real estate book or article you read says the same thing. They all say it because it is true and this is why we take our job so seriously.
Determining Your Offer Price
When I prepare your offer to purchase a home, I already know the seller’s asking price. But what we have to figure out is what price you are going to offer and how we come up with that figure. Determining your offer price is not a guess but rather a calculated step by step process. First, I look at recent sales of similar properties, research the county property appraiser’s value, and check with valuation companies such as Core Logic to find out their opinion. I then analyze additional data, such as the condition of the home, improvements made to the property, the asking price per sq foot of homes nearby, days on market, and the circumstances of the seller. This will all help settle on a price you think would be fair to pay for the home. Finally, depending on what we can negotiate, we adjust the “fair” price and come up with what you want to put in your offer.
The first step in determining the price you are willing to offer is to look at the recent sales of similar homes. These are called “comparable sales.” Comparable sales are recent sales of homes that compare closely to the one you are looking to purchase. Specifically, we want to compare prices of homes that are similar in square footage, number of bedrooms and bathrooms, garage space, lot size, and type of construction. If the home you are interested in is part of a tract of homes, then we will most likely find some exact model matches to compare against one another. There are three main sources of information on comparable sales, all of which are easily accessed by us. It is somewhat more difficult for the general public to access this data, and in some cases impossible. Two of the most obvious information sources are the public record and the Multiple Listing Service.
Comparable Sales in the Public Record: The most accessible source of information on comparable sales is the public record. When someone buys a home the property is deeded from the seller to the buyer. In most circumstances, this deed is recorded at the local county recorder’s office. They combine sales data with information already known about the property so they can assess property taxes correctly. Provided there have been no additions to the property, the information available from the public record is usually correct regarding sales price, square footage, and numbers of rooms. This makes it easy to use the public record as a source of data for comparable sale information. Accessing the data is another matter, at least for the general public. Real Estate professionals can generally look up this information through title insurance companies. The title companies either compile the data directly from the county recorder’s office or purchase it from other companies. One problem with the public record is that it tends to run at least six to eight weeks behind. Add another four to six weeks for the typical escrow period and you can see the data is not current. The most current information is the most valuable.
Comparable Sales in the Multiple Listing Service: Most of the public is aware that the Multiple Listing Service is a private resource where real estate agents list properties available for sale. Recently, the public has been able to access some of that information on such sites as Realtor.com, Zillow, and others. Once a property is sold and the transaction has closed, the selling price is posted to the listing in the Multiple Listing Service. Over time, it has become a huge database on past sales, containing much more information on individual homes than can be gleaned from the public record. This information is only available to real estate agents who are members of the local Multiple Listing Service. We will provide you with this data to help determine your offer price.
Comparable Sales – Pending Transactions: The most valuable information would be the most current, of course. A sale last week has more validity in helping you determine a purchase price than a sale from six months ago. The problem is that there is no actual record of the sales price until the transaction is completed. The information is not available in the public record because no deed has yet been recorded. Neither is the information available in the Multiple Listing Service. Once a property is sold, it becomes a “pending sale” and all pricing information is removed from the listing. Prices are not posted until it becomes a “closed sale.” This protects the seller in case the transaction falls apart and the property is placed back on the market. It would give an unfair advantage to future potential buyers if they already knew what price the seller had been willing to accept in the past. However, if a real estate agent notices that the time frame between a home being listed and going to “pending” is relatively long in certain areas of town we can assume there is room to negotiate the price down in a similarly priced home that just came on the market.
Other Factors Influencing Your Offer Price
Gathering and analyzing information from comparable sales helps us to establish the range of prices we should consider when making an offer to buy a home. More weight should be given to the most recent sales, but even so, we need to do a bit more analysis before settling upon the price you will offer. That is because we also need to consider the condition of the property, improvements, the current market, and the circumstances behind the seller’s decision to sell.
How Property Condition Affects Your Offer
Since we have toured the property you are interested in, we know how it compares to the general neighborhood. All we have to do is put the home in one of three categories – average, above average, or below average. When evaluating a home’s condition using my experience in home rehabilitation combined with the opinions of the professional home inspector, there are a number of things we consider. Structural condition is most important – items such as walls, ceilings, floors, doors and windows. Then paint, carpets, and floor coverings. We pay special attention to bathrooms and bedrooms and whether the plumbing and electricity work efficiently. We look at the fixtures, such as light switches, doorknobs, and drawer handles. The front and back yards should be in reasonably good shape. The only missing ingredient not readily available will be information on the condition of the homes from the comparable sales list. Provided you chose agents like us who specialize in buyers, to represent you, we will have actually visited most of those homes and be able to provide key insights.
How Home Improvements Affect Your Offer Price
Even when comparing exact model matches within a tract of homes, you should note whether the previous owners have made any substantial improvements. Cosmetic changes should be largely ignored, but major improvements should be taken into account. Most important would be room additions, especially bedrooms and bathrooms. Other items, like expensive floor tile or swimming pools should be taken into account, too, but should be discounted. A pool that costs $20,000 to install does not normally add $20,000 in value to the home. We will give you guidance in this area.
How Our Current Market Conditions Affect Your Offer Price
Recently the Sarasota market as well as many others around the country began to pick back up and turn from a “buyer’s market” to a “seller’s market.” During a seller’s market, the best properties that are priced correctly can sell within a few days of being listed and there are often multiple offers. Sometimes homes even sell above the asking price. Though most buyers want to get a “deal” on a home, reducing your offer by even a few thousand dollars could mean that someone else will get the home you desire. A slow market which is what we were seeing during 2007 – 2012 is a “buyer’s market”. During a buyer’s market properties may languish for some time and offers may be few and far between. Prices may even decline temporarily. Such a market would allow you to be more flexible in offering a lower price for the home. Even if your offered price is too low, the seller is likely to make some sort of counter-offer and you can begin negotiations in earnest. More often than not, the market is simply “steady,” or in transition. When a market is steady, no real rules apply on whether you should make an offer on the high end of your range or the low end. You could find yourself in a situation with multiple offers on your desired house, or where no one has made an offer in weeks
How Seller Motivation Affects Your Offer Price
The most common types of “motivated sellers” in Sarasota are folks who have already bought their next home and can’t sell their current one as fast as they thought or those that had invested in two or three homes while the market was hot and now find that the rent received does not cover their payments. They will be under the gun to sell the home quickly or face the prospect of making two mortgage payments at the same time. Many times you also find motivated sellers in a listing that involves an estate due to the fact that the sellers know little about the property and are not here to maintain it. There are also family crises that can motivate a seller to make a quick deal. However, when you see a real estate ad that mentions “divorce,” “motivated seller,” “relocation,” or something to that affect, beware. Although the facts may be true, that does not necessarily mean the seller is motivated to make a quick and costly sale. Most likely, the ad is more designed to generate phone calls and leads rather than sell the home. However, there are times when a seller is truly distressed, willing to make a quick sale and sacrifice thousands of dollars. With the seller’s permission, the listing agent will post this information along with the listing in the Multiple Listing Service. Again with the seller’s permission they may also inform other agents during office and association marketing sessions or by flyers sent to our real estate office. Provided this information has been made generally available to us we usually know when a seller is truly motivated and when it is just “puff” designed to elicit interest in a property.
When we call in the experts to advice on price
As real estate agents we wear many hats. A really good agent however knows what his or her limitations are and should not exceed them without advice from an outside counsel. Sarasota has many, many types of homes in many different locations and some of them are very unique. For example there is a house directly on the Gulf that all the components were brought here on a ship from Italy. Even though I have sold waterfront homes in the past I would not begin advising you on what to offer without consulting an appraiser that specializes in these types of residences. Along with the specialty lawyers, mortgage companies and home inspectors that make up our team to deal with these high end homes we have a totally different team for ordinary homes on the mainland due to differences in the individuals expertise and knowledge.
The Final Decision on Your Offer Price
Comparable sales information helps me to determine a base price range for a particular home. Adding in the various factors like property condition, improvements, market conditions, and seller motivation help determine whether a “fair” price would be at the upper limit of that range or the lower limit. Perhaps you will feel a fair price is outside of that price range. The “fair” price should be approximately what you are willing to agree on at the end of negotiations with the seller. The price you put in your offer to begin negotiations is totally up to you. Most buyers start off somewhat lower than the price they eventually want to pay. Although we will provide advice and guidance, you are the one who makes the decision. The price you put in the offer is totally up to you
Contingencies in a Purchase Offer
In most purchase transactions there may be a slight challenge or two, but most things will go quite smoothly. However, you want to anticipate potential problems so that if something does go wrong, you can cancel the contract without penalty. These are called “contingencies” and we must be sure to include them when you offer to buy a home. For example, since you probably need a mortgage to buy the home, a condition of your offer should be that you successfully obtain suitable financing. Another condition should be that the property appraises for at least what you agreed to pay for it. During the escrow period you are likely to require certain inspections, and another contingency should be that the seller should pay an agreed upon percentage of repairs or you have a right to cancel the contract. Basically, contingencies protect you in case you cannot perform or choose not to perform on a promise to buy a home. If you cancel a contract without having built-in conditions and contingencies, you could find yourself forfeiting your earnest money deposit or worse.
Earnest Money Deposit
After we have come up with an offer price, the next step is to determine how large a deposit you want to make with your offer. You want the “earnest money deposit” to be large enough to show the seller you are serious, but not so large you are placing significant funds at risk. An average deposit in Sarasota is 5% however depending on price and circumstance I have made offers for clients for as little as $1000.00 down. The reason for this is that if your deposit is larger than that, the lender will pay particular attention to how you came up with the funds. You might have to provide a copy of a canceled check along with a bank statement showing you had the money to begin with. Normally, this is not a problem, but if you have a short escrow period or are barely coming up with your down payment, it could pose an inconvenience. Another reason to limit your deposit is “just in case.” Although significant problems are the exception and not the rule, they do occur. “Just in case” there are circumstances that change your mind along the way or a problem comes up during the selling process. As with practically everything in real estate, there are exceptions to this rule, too. During a hot market there may be multiple offers on the property that interests you. A large deposit may impress a seller enough so they will accept your offer instead of someone else’s, even when your unknown competitor is offering the same price or slightly higher. Since large deposits do impress sellers, you may also find that by making a large deposit you can convince the seller to accept a lower offer. More money up front may save you money later. There are also times when closing can be delayed by weeks, through no fault of your own. Have back-up plans prepared for such a contingency.
How Financing Details Affect Your Offer
Most buyers do not have enough cash available to buy a home, so they need to obtain a mortgage to finance the purchase. Since you will probably make your purchase contingent upon obtaining a mortgage, the seller has the right to be informed of your financing plans in order to evaluate them. That is one of the major reasons that financing details are included in your offer.
Down Payment As part of your offer, you will need to disclose the size of your down payment. Once again, this allows the seller to evaluate your likelihood of obtaining a home loan. It is easier to get approved for a mortgage when you make a larger down payment. The underwriting guidelines are less strict.
Another reason for including financing information in your offer is to protect yourself. If interest rates suddenly become volatile and rise quickly, as sometimes happens, you may looking at a mortgage payment much higher than you anticipated. By putting a maximum acceptable interest rate in the offer, you are protecting yourself from such an occurrence. At the same time, the seller will probably want to see that you have some flexibility in the financing terms you are willing to accept. If interest rates are currently at six percent and you indicate this is the highest rate you will accept, you would be able to cancel the contract without penalty if interest rates rose past that point. The seller would suffer because they have lost valuable marketing time and may have made their own plans based on successfully closing the transaction.
Closing Costs and Financing Incentives
There may be times when, as part of your offer, you request the seller to pay all or a portion of your closing costs, or provide some other financial incentive. Such incentives can be especially effective if a buyer is tight on money or pushing their qualifying ratios to the limit. Whenever you ask for incentives such as these, you will probably find the seller less willing to negotiate on price. After all, what you are really asking for is to have the seller to give you some money to help you buy their house. The end result is that, for a little relief in the beginning, you are willing to pay a little more in the long run.
Other Financing Details in Your Offer
Your offer should also contain information on whether you are obtaining a fixed rate or an adjustable rate mortgage. It should also state whether you are obtaining conventional financing or obtaining a VA or FHA loan.
The Closing Date
It is absolutely essential that we include a closing date as part of your offer. This way both you and the seller can make plans for moving, and the seller can make plans for buying his or her next home. Though most transactions actually do close on the right date, do not be so inflexible that a delay creates insurmountable problems. For example, if you are renting and need to give the landlord notice that you are moving out, you may want to allow a little flexibility. Otherwise, if your purchase closes a few days late you could find yourself staying in a motel with your belongings packed in a moving van somewhere while you pay storage costs. Though I have never experienced it with my clients it is not beyond the realm of possibility that a closing can be delayed by weeks, through no fault of your own. Have back-up plans prepared for such a contingency.
Inspections You Should Require
Besides appraisal and the termite inspection, you should also have a professional home inspector go through the house and seek out potential problems. Of course, you will have inspected the home, but you are not used to looking at some things that a professional will find. Even if they are not things the seller is expected to repair, at least you will have foreknowledge of any potential problems. The seller will want this inspection performed quickly (you have 15 days from date of contract acceptance), so that you can approve the results and move forward with the purchase. Once you receive the inspection, you will want to allow yourself sufficient time to review and approve the report. If you do not approve the report, we will submit a list to the sellers agent requesting repairs be made up to the percentage indicated in the contract. Otherwise, you can cancel the purchase without penalty, provided you have included timetables in your offer. Allow a maximum of ten to fifteen days to receive the report and five days to review it.
Condition of the Property
The contract includes a provision that states “Between the effective date and the closing date, the property, improvements and any personal property shall be maintained by the seller in the same condition as existed as of the effective date, ordinary wear and tear excepted. You may hire a home inspector, or make an appointment to preview the home yourself just before the closing to be sure everything is in order and to check that any required repairs have been performed.
Transfer of Possession
A transaction is considered “closed” once the deed has been delivered and the money exchanged. Then you own the home. In Florida you take possession immediately