How to Buy A House - Part 4 - Writing the Offer
If you've been following along in parts 1, 2, and 3, this next post will make a lot of sense as it is a continuation of the explanations started in the parts before this. If you didn't catch those, that's ok! You can click the numbers above and it will take you right to whichever part you've missed. If you just want to focus the facts around writing an offer on a piece of real estate in Texas, you can keep right on reading because you're in the right place.
In the last post, we were discussing the importance of knowing "the numbers," around your specific situation and the specific house that you've chosen and what you determine from that analysis is how you'll move forward here.
"Ok, Emerald, I get it, look at the numbers, now what? When do I get to move in?"
Once you've determined the price you're going to offer, now it's time to write the offer.
**Every state's real estate sales contracts and practices are different, so if you're reading this and you're not in Texas, this next part is a crash course in how we do it down here. If you don't have a local expert in your state, call me, I know great people all over and I can get you hooked up.**
When writing an offer for the first time, I usually take about an hour or so to go through the contract with my clients because it is INCREDIBLY important to me that you understand what you are signing. I go paragraph by paragraph and give you real world examples of what each means and answer ALL of your questions. If an agent doesn't take the time to make sure you understand what you are signing, you may want to reconsider the agent because this is not the time to rush through the terms and conditions. Additionally, if you have the time and resources, you can hire a real estate attorney to explain it to you. Though that's not common practice in Texas, I mention it because it's important you know your choices. I know you're completely capable of making the right ones, so I'll not harp on it further.
Let's get into it. There are 9 pages in the primary contract and that number only goes up as you add the various applicable addenda. While the paperwork can seem daunting, this is the time to pay attention to the details of the document and not stress about the outcome. You craft the offer in a way that makes the most sense for your particular situation, the property specifics, and overall set of circumstances. This part is just the beginning of the dance and just like in actual dancing, you have zero control over the other party's skill level or actions, so try not to worry about them too much. Do the best you can, put your best foot forward, and then rely on good counsel to help you navigate through this part of the process.
What to Expect
Your initial offer on the property is written up and then presented to the listing agent who in turn presents it to the seller for consideration. There are more individual negotiation points within the contract than there are numbered sections so it's possible that while the offer maybe acceptable to the seller overall, there may be a few points of fine tuning that get countered. If that happens, then the listing agent presents the counter to the original offer which includes the seller's new requests and further negotiations are needed before you are officially under contract. Because of this process, it's not unusual to go back and forth over those finer points a few times before a contract is fully executed by both parties.
In the beginning...
Perhaps it would be beneficial to walk you through an actual offer scenario to give you a better idea of what we're discussing. Suppose we have a buyer writing an offer with the initial parameters set like this:
Asking Price: $400,000
Comparable Sales in the Area: $375,000
Offer Price: $375,000
Down Payment: $11,250 (3% of sales price)
Loan Type: Conventional 30 year Fixed
Loan Amount: $363,750 (97% of sales price)
Earnest Money: $3,750
Option Money: $375
Option Period Term: 7 days
Title Paid By: Seller
Survey: Seller Furnished
Seller Concessions: $10,000
Closing: 30 days
Possession: 1 Week Leaseback
Competition: No other offers have been submitted for the property
You might look at this and think, "WOAH, what does all that mean?" Have no fear, I'm going to walk you through it.
Break It Down
The asking price is the advertise price the seller is seeking for the property. Most of the time that number is settled upon by the listing agent and seller through solid research and deliberation. Sometimes that number is what the seller wanted exclusively and may not have any bearing in reality. If the latter is true and you still want the house, it's going to behoove you to write the offer that will meet appraised value, at least initially. In the example above, the asking price is higher than both the comparable sales in the area and the offer price and we can deduce that perhaps this seller's asking price was about $25,000 high for the area.
In the example above, the comparable sales in the area section refers to the average sales prices in the area based on the homes that are similar to the subject property, it's also the price most likely to be settled upon by an appraiser. This research is done by the buyer's agent ahead of time as part of the preparations for writing the offer. We discuss this in a bit more detail in part 3 of this series and a sample of the analysis report can be found there.
The offer price is the price you've decided to you want to offer on the property. There are many ways to come up with this number and many factors that can go into it. In this example, the buyer is wanting to put their best foot forward while still meeting the estimated appraised value of the property. We also see that they are also going to be seeking some concessions from the seller and that should also impact their initial offer price. We might infer that they are offering the most they can without risking being under appraised value in the future.
A buyer's down payment amount is the amount of money they are contributing out of pocket to the overall sales price. If there is financing involved, as is the case in the example, the down payment will usually be some predetermined portion of the total sales price that was established by the buyer and their lender prior to the initial offer. The lender sets the terms of the loan and the buyer makes decisions based on their personal finances about to how much to contribute. While part of the total closing costs for the property, the down payment is only a portion of those costs and the total closing cost estimates should be evaluated prior to writing the offer so that you know what to expect at closing.
The loan type refers to the type of financing a buyer is planning to utilize for the purchase of the property. This is also established ahead of time through talks with the buyer and the lender.
The loan amount is the amount to be financed minus the down payment.
Earnest money is the consideration promised to establish a binding contract. Basically, it's defined as "putting your money where your mouth is." In Texas, this amount is traditionally at least 1% of the total sales price of the property and it is paid to the title company within 3 days of the contract being executed. It's held by the title company or "in escrow" for the duration of the contract as collateral in the event that the contract doesn't close, or as the initial deposit for the buyer's closing costs if it does close. The "deep dive" explanation of earnest money is fascinating and important but not necessarily needed for the purposes of our story today.
An option period is best explained as the buyer's time for due diligence. This can be accomplished with inspections, and/or having various experts come and review the property. The option period is also the perfect time for close friends and family to come by to take a look and offer advice. This option period is established through paying the seller option money, or consideration given to the seller to remove their property from the active market while the buyer conducts more in depth assessments. Traditionally, the option money is about 10% of the earnest money amount, though that amount has been less depending on market demand, or more if the option period term is lengthy. The option period term is the number of days the buyer is requesting to be able to conduct their assessments and negotiate any subsequent terms that may arise from further evaluations. For example, if termites are found during the inspection the buyer may want to negotiate the treatment of that condition as part of the terms of purchase. That negotiation would take place during the option period.
A title policy, also called title insurance, is the guarantee issued by the title company that there are no additional claims on the title of the property upon sale. This is a requirement that must be satisfied in order for a mortgage company to issue a loan for the property, and something you would want as a buyer because it's an extra protection from losing your property after the sale. In the example above, the buyer is requesting the seller pay for and furnish the title policy and that's not an uncommon request for offers in Texas.
Another requirement that mortgage companies have for financing the loan on your property is a survey. The survey is the map of your property that lays out it's orientation on the lot including things like property lines, utility easements, fences and other improvements in addition to the house itself. Not only does the title company and mortgage company require this, but you will want a copy too so that you can plan future projects or at least know where not to dig. In the example, the buyer is requesting to use the existing survey currently owned by the seller and if that survey is available and acceptable by the powers that be, it's a great way for both the buyer and seller to save some money.
Speaking of saving money, the example above has the buyer requesting seller concessions, or a dollar amount to be credited to the buyer by the seller to be used to toward the buyer's closing costs. Basically, the buyer is asking the seller to pay their closings costs. Now this money can be used for things like surveys, title policies, lender fees, prepaid taxes or insurance, but it can also be used to reduce the buyer's interest rate which could save thousands over the life of the loan and make the monthly payment more affordable. Seller concessions can also be a great tool for buyers to free up the cash that would have normally been used for closing costs but instead can now be used for renovations projects after closing. There is a lot that can be done with numbers on an offer outside of just the sales price and seller concessions are one of the best examples of this in action.
You've come this far, and I appreciate you hanging in there, we've come to the fun part of this and that's closing day. Closing refers to the day the seller sells the house to the buyer and the buyer legally becomes owner of the property. You'll note I didn't say it was the day the buyer moves in because that day is determined by possession, also known as the day the buyer takes possession of the property. What's the difference? Often times possession of the property is conveyed the same day that the property is fully funded and that's usually the same day as closing. However, if the closing is late in the day and isn't funded until the following day, then legally the buyer cannot take possession of the property until the following day. In the example, the buyer is not taking possession until 1 week after closing, this can mean the seller has requested to lease the property from the buyer for a short time after the buyer is the legal owner of the property. This arrangement is known as a seller's leaseback and it's accomplished through an additional addendum to the contract.
Overall, the buyer in the example is pretty fortunate that they don't seem to have any competition, meaning there aren't any other offers on the table so they can, in theory, go into the negotiation without worry of their position being usurped by another offer. This knowledge will and should always play a role in how you craft your initial offer. If there's no competition, you can afford to be more conservative with your funds and negotiations and may wind up with a better deal than you if you had to get more competitive.
These are just the basics, there is definitely more that goes into writing the offer but this should set up the foundation for negotiation. Each offer situation is as unique as the properties and people that are a part of them so it's important to be thorough and keep your end goals in mind. You want the right home at the right price in the right condition and if you keep your head in the game you can have just that. You may have noted that the term "appraised value" was referenced frequently and it's very important but we'll be highlighting that in a later post. I'll back link it once it's published.
The Takeaway:
This can be the boring part of the process but easily the most important. Tough it out and pay close attention to every part of the contract. Ask as many questions as you need to in order to secure full understanding of the offer BEFORE YOU SIGN IT. Don't worry about "taking up the agent's time," it's their job, and one the most important parts of it. So get all the information you need to feel that you have a solid understanding of the contract, how it applies to you and your money! And, as always, I LOVE what I do and I LOVE talking about real estate, so if you have questions, please ask. Questions give me purpose, and they give me more blog topics too!
Happy Hunting!
Emerald Scott-Farmer, Agent/Owner of
The EMERA Group of Keller Williams
Emerald@emeraldsellshomes.com 214-533-8191
** I am not an attorney and cannot give legal advice. **
(But I know some good ones if you want recommendations)