How to make an offer the right way.
February 05,2020 | Posted By Flavia Brown in Real Estate
Steps for making an offer on a residential or income property
Before presenting the offer:
1. Have two items ready to accompany the offer: a pre-approval letter from the buyer’s lender and proof of funds that will cover the down payment and closing costs. The proof of funds can be a bank statement or a letter from a bank officer. Some sellers and listing agents ask for fico scores. To read reasons to provide these two items with the offer rather than waiting for the contract's defaulted three days deadline, see the second to the last section of this letter (How to make a strong offer).
2. Have two money items ready to enter in the offer form (contract, or purchase agreement): The earnest money deposit (EMD) and the down payment. The EMD can be any amount up to 3% of the offered amount (the limit set by state law (liquidated damages). The EMD isn't due until three days after the offer is accepted and ratified. However, most buyers offer 3% to make the offer stronger. The EMD is usually wired to the escrow company and put in the buyer's escrow account. The EMD becomes part of the down payment, which isn't due until a day or two before close of escrow. The down payment for residential property is usually 3.5%-20% of the offered amount, and for income property, 20%-25% is usually required by the lender. The more down payment the stronger the offer.
3. Buyer and agent go over the contract so the buyer will understand the terms and the most important of the 108 paragraphs and sub-paragraphs.
4. Buyer’s agent (called a selling agent) studies and analyzes the comps (nearby recently sold properties and active listings). The analysis will determine the true and fair market value of the property and will reveal if the list price is accurate. It will also determine what price to offer. Buyer and agent discuss the offered amount. Only the buyer can establish the offered price. The agent can only provide information and make suggestions.
Presenting the offer:
1. Buyer and agent complete the contract form.
2. The contract is usually emailed to the listing agent, who presents it to the seller. The seller has three choices: accept, counter, or reject. The deadline for the seller to respond is three days. That’s the default in the contract. The buyer can enter in the contract more or less time for the seller to respond.
After the offer is accepted and ratified:
1. The buyer’s bank wires the EMD to the escrow company within three days after the offer is accepted (called Acceptance date). The escrow company gives wiring instructions to the buyer, who relays the instructions to the buyer’s bank. The funds are placed in the buyer’s escrow account.
2, During the next 17 calendar days after Acceptance the buyer investigates the property. First thing is to order a professional property inspection. Next, the buyer reviews the seller’s required disclosures (several are state-mandated), the property inspection report, and any other reports. By the end of the 17 days the buyer negotiates with the seller any repairs, and either reach an agreement, accepts the condition of the property, or cancels the contract. If the contract is canceled the entire EMD is returned to the buyer.
3. If the buyer and seller reach an agreement the seller removes three contingencies and proceeds with the transaction. If there is no mutual agreement the buyer either moves toward close of escrow or cancels the contract. The three contingencies are property condition, loan, and appraisal.
How to make a strong offer:
In addition to making an offer at or higher than the list price (which in most cases won’t be necessary, but depending mostly on whether we are in buyer’s or seller’s market), include three items with the offer: the EMD (preferably 3%), pre-approval letter, and proof of funds. Reasons for including these items when presenting an offer: 1) the seller will see you as a serious buyer; 2) you might be competing with one or more other buyers, and they will probably include these items with their offers; 3) and it will make your offer stronger, especially important if your offer is lower than the list price.
When and how to make a LOW OFFER:
In a strong buyer’s market (more sellers than buyers, greater supply than demand, high inventory, prices stable or declining) it will be the best time to make a low offer. Even in an equilibrium market or sometimes in a seller’s market, a low offer can still be made. Here is the way to do it: Present an embarrassingly low offer. If the seller flat-out rejects the offer, wait for a day or two and make another offer a bit higher. (several times I have done this up to four increments until the offer is accepted). That way no money is left on the table, and you will get a good deal. However, this may or may not work if you are competing with another buyer. But since that buyer will probably also make a low offer, it may be best to stay on the low side.
In a strong seller’s market (more buyers than sellers, greater demand than supply, low inventory, prices increasing) it may be a good time to buy, although there will be fewer choices, and probably or possibly there will be multiple offers. In a multiple offer arena it might be best to include in the offer an escalation clause. It is quite uncommon, but it works if executed correctly. Here’s a basic example: The list price is $860,000 and the buyer makes an offer of $870,000. The buyer’s escalation clause in the purchase agreement states that she/he offers $2,000 more than the highest offer, with a cap of $900,000.The highest offer was $890,000. We would have to get a copy of the highest offer for verification. However, there are often two potential problems: 1) some listing agents and sellers don’t like escalation clauses, and 2) the appraisal could be lower, which would affect the buyer’s loan limit.
Flavia Brown, Realtor® -- Cal DRE #01729313
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