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Decoding the Offer Process

Decoding the Offer Process Decoding the Offer Process

Offers can be confusing. There are a lot of moving parts beyond price, and how attractive an offer ultimately looks can be very different based on whether or not you are in a competitive situation, and there are a lot of competitive situations around these here parts! Anyway, I am going to attempt to break down the terms of an offer below without giving away any of my fellow Coleman Group members’ winning secrets. So, without further ado, here are the different moving parts of an offer in order of appearance on the offer form:

Price: This bad Larry is the most straight forward part of an offer. What are you, the buyer, willing to pay? The more competitive the situation, the higher this number will have to be. The longer a home has been on the market, the more negotiating room under the asking price you have! Before making a decision on your final number, your realtor should provide you with a comparative market analysis, so you have a good idea of the true value of the home.

Good Faith Offer Deposit: This is the money that you put down with the offer. You are able to get this back if, and only if, something happens with one of your contingencies, for example, if the inspection uncovers a ‘deal breaker.’ You cannot just change your mind about buying the home and expect this deposit to be returned. Typically this deposit is $1,000. But, since everything is in play when you are competing with another buyer for a home, you can strengthen your offer by making the good faith offer deposit higher in competitive situations. This deposit is credited toward your downpayment.

Deposit with Purchase and Sale’s Agreement: This is the deposit you put down with the more serious ‘Purchase and Sale’ contract. Massachusetts is an attorney state, so after you have an accepted offer you will hire a real estate attorney to draw up this document for you and ensure that your interests are protected. It outlines not only the terms of the offer, but what should happen if there are title issues or other extenuating circumstances. The standard deposit upon signing the P&S is 5% of the purchase price. This is not money you can get back unless you have a mortgage contingency and your mortgage falls through, or one of the other terms written into the agreement is not met. This deposit is also credited toward your down payment. In the case of multiple offers, a seller may look at the percentage you are putting down to assess how strong of a buyer you are.

Purchase and Sale Date: This date, specified in the offer, is the date by which the attorneys must have a mutually agreed upon purchase and sale document for the buyer and seller to sign. It is also the date when your 5% deposit is due. In a typical market, this date is 7-10 days from the offer acceptance date, but can be much shorter than that if you have a competitive situation.

Closing Date: The closing date is the day that you owe the rest of your deposit, and more excitingly, the day that the title and keys of the home you are purchasing are handed over to you. Generally speaking, this date is set within 30-60 days of an accepted offer. The benefit of closing within this time frame is your ability to lock in a mortgage rate. Banks typically will not allow you to hold an interest rate longer than 30-60 days without charging a fee for the lock.

If you are also selling your home, the closing date of your sale may be a determining factor in deciding when to close on your new home— Especially if you need to roll the cash from your sale over into your new purchase!

If it is a competitive bidding situation, and you have no strong preference or are flexible, the closing date can be used to strengthen your offer!

Mortgage Contingency: This part of the offer says that your purchase is contingent upon getting a bank loan and outlines the terms that you will need to meet in order for this contingency to protect you. It will specify the downpayment you are planning to put on the property, the date by which your have to apply for your mortgage, and the date by which the bank owes you a commitment letter. These are firm numbers and dates that you have to meet in order to protect that 5% deposit. Before deciding the dates and your downpayment, it is important to talk with your agent and mortgage broker. They should be able to help you determine feasible dates and numbers that keep you protected!

Note: Once you apply for a mortgage the bank will hire a third party appraiser to assess the value of the property. The appraisal is meant to ensure that the loan the bank is granting can be recouped by the bank in the case of foreclosure. If the appraisal comes back too low either the seller will have to adjust their price, or you will have to make up the difference in cash. In some cases, it is possible to get a second appraisal, in which the results may be more favorable, but it doesn’t happen often! Understanding appraisal risk is critical for any buyer that is planning to finance part of the home purchase.

Inspection Contingency: Requiring a home inspection is a common contingency, and is one that can be used to re-negotiate the terms of your offer should there be any unexpected findings. A home inspection, done by a licensed inspector, is a visual inspection and report on certain systems and components of a home. They are important to mitigate the risk of any large, unexpected expenses after your purchase.

If you have a home inspection contingency in your offer and issues are found, you can utilize the report to either (1) renegotiate your offer if the seller is willing, or (2) cancel your contract and get your offer deposit back. Other, more specific inspections can also be written into your offer including pest and radon.

A quick note about Radon for the uninitiated: Radon is a naturally occurring element that emits particles when it decays that have been linked to cancer. Radon is found in any home, old or new, but the government sets an action limit on concentrations of radon over 4pCil/Liter, which requires the installation of a radon mitigation system. Different mitigation systems carry different costs which can be easily found online, but they tend to be a less expensive line item.

Other Contingencies: There are a whole host of other contingencies that might be written into the offer based on the specific property you are buying. For example, if you are purchasing a condo, you may want to add language like “attorney review of association documents and budget.” No matter what you are buying, your agent will know exactly what needs to be added and will help guide you in writing up an offer that protects you!

Well, that about covers it – at least in general terms. Long and short is that all these terms work together to create a strong, weak or negotiable offer, and how to best structure your offer will be a function of the specific property and competitive landscape!

Kenda circle
Kenda Coleman

Kenda Coleman is a Broker Associate with the Coleman Group.