What is an offer?
Once buyers find a home they love, they enter into negotiations which will ideally end in the sale of the home. Home buyers start with a million questions, then discover a million more questions along the way. That’s why we’re putting together a series of blogs that aim to demystify some of the essential aspects of real estate. Today, we’re diving into the Offer to Purchase.
An Offer to Purchase is a legally binding proposal to buy a home.
All offers must be done in writing. An offer details how much a buyer wishes to pay, lists any contingencies (I’ll get to those in a minute), and sets a deadline for the seller to accept, respond to, or reject the offer. Most offers expire within 24 hours, and sometimes "bidding wars" spring from competing buyers. It is often hard to sleep well the night after submitting an offer; new buyers find that it’s an exciting (yet nerve-wracking) process, waiting for the seller to respond.
The offer includes contingencies.
A contingency is a clause contained within the offer, and the finalized sale is contingent upon certain criteria that have to be met. Sometimes making an offer on a home is “contingent,” or dependent, on one or more conditions that must be fulfilled before the buyer is willing to proceed with the purchase.
Two common contingencies are:
Financing contingency—If the buyer is taking out a loan, a financing contingency is included in the home offer. The buyer is required to obtain financing within a certain time frame and with a specified interest rate. The bank also does an appraisal on the property (as a part of the mortgage). Because market conditions can change rapidly, a buyer may offer a sales price that is considerably higher than the actual market value in the eyes of the lender. To make sellers feel more comfortable, buyers will sometimes keep the financing (mortgage) contingency, yet waive the appraisal contingency.
Inspection contingency—Buyers include this clause to give themselves an “out” if a significant problem is encountered during the inspection. Alternatively, the buyer may request that the seller repair the problem, or the buyer may choose to accept the property “as is” if the problems discovered during the inspection are insignificant or not costly. Many times a buyer will include a limit of a specific cost, (many choose $20,000, but it's ultimately up to the buyer), before negotiating further.
All offers are shown to a seller. The seller reads them and responds.
A seller usually responds to the offer with one of three ways: The offer may be accepted as is, rejected in its entirety, or the seller may submit a counter-offer. For example, the seller may accept a financing contingency, but may propose that the buyer secure financing at an earlier date. Again, depending on the number of offers that a seller has, the buyer may have to jump through hoops and waive some of these contingencies just to stay in the game.
An accepted, signed offer is a legally binding document.
Because of the legal impacts of a signed offer, buyers need to hire an attorney as soon as they receive the accepted offer signed by the seller. Then the process moves forward, to the Purchase & Sale (more on that in the next blog).
Ready to start looking so you can make your own offer on the perfect home for you, or have a million questions? Contact us to get started. We're here to help.
Want to learn about all of the aspects of the buying process? Read on!