| 5. Making An Offer Introduction
Contract Contingencies
Minimizing Closing Costs
Making the Offer
The Counter Offer Process
Disclosures
Condos & Townhouses: Points to Consider
Tenants in the Property Introduction
Before you even get to the point of making an offer ask for and read a purchase contract to get familiar with the various clauses and paragraphs. Below are the points to be aware and the steps in the offer process. Contract Contingencies
A purchase contract contains many contingencies that protect a buyer. A contingency is an event that must transpire in order for the purchase contract to stay in full force. In other words, if A, B and C do not take place then the buyer may walk away from the contract and get a refund of all deposits made to that point. For example, most contracts have a loan contingency that says the buyer must get the loan approved within the terms agreed to in the contract. As an example other contingencies may include approval of the Home Inspection Report, sale of your present home, approval of the Condo Documents (condo purchase only) or anything else that both parties agree too. These contingencies help protect buyers. In the past, there were fewer contingencies and disclosures. It was a "buyer beware" atmosphere. This is no longer the case, but that doesn't mean you should not be diligent in protecting your interests. Minimizing Closing Costs
A technique to reduce the cash out of pocket to purchase your new home is to ask the seller to pay some or all of your closing costs. Basically what you’re doing is financing your closing costs. What happens is that once you’ve agreed upon a price for the home you then add your closing costs on top of the sales price and the seller agrees to pay for your closing costs. This is written into your purchase contract. The increase in your monthly payment is minimal and you save thousands in out of pocket expenses. Be aware that the home must appraise for the sales price including the closing costs. Keep in mind a few simple rules. On conventional loans you can only ask the seller to pay non-recurring costs, not pre-paids or items to be paid in advance. If you are putting ten percent down or more, the most the seller can contribute is six percent of the purchase price. If you are putting less down, the most the seller can contribute is three percent. On VA loans, you can ask the seller to pay everything. VA loans do not require the buyer to make a down payment or to pay any closing costs. On FHA loans, it is backwards. You can ask the seller to pay your pre-paids and impounds, but it doesn't normally make sense to ask the seller to pay your non-recurring costs. The exception is that there are some fees a seller has to pay on a FHA loan, so you won't be paying those anyway. Also, if the seller wants to pay discount points (not your loan origination fee) or pay for a buy down, that is allowed. The reason it does not make sense for the seller to pay your normal buyer's costs on an FHA loan has to do with how the FHA loan amount is calculated. Instead of just using a percentage of the purchase price like everyone else, FHA calculates your loan amount based on the purchase price plus your closing costs (most people think the down payment on an FHA loan is 3%, which is not true). If the seller pays your closing costs, your loan amount is calculated from a smaller number, resulting in a smaller loan amount and a larger down payment. So the seller pays your closing costs, but your down payment is larger. The end result is that your out-of-pocket expenses to close are about the same. Making the Offer
You’ve looked over the sales comps and other information provided by your agent and considered the sellers motivation. After talking it over with your agent you have your agent write up a purchase offer at what you think is a fair price. The key word is fair price. Everyone has a different perception of what is a fair price. Some buyers like to make a low ball offer to get things started and then bargain up to the price they are actually willing to pay. Low ball offers can back fire and they often do. Many sellers take such an offer as an insult and will not even make a counter offer and even worse they may become more inflexible in negotiations. Along with the offer the buyer must put up a small initial good faith deposit which is held in escrow by the buyers agent or in some cases by the title company. After acceptance of the offer it is customary to make a more sizable additional escrow deposit. In my opinion it is very important to include a pre-qualification or better yet pre-approval letter from your lender with the offer. Your offer will carry more weight if the seller knows you are a legitimate well-qualified buyer. I want to present my buyers and their offer in the best possible light. I want the agent and the seller to completely understand the offer and what we are trying to accomplish. I want to make it easy for the other party to say, "Yes. We will accept your offer". The Counter Offer Process
After I submit your offer the listing agent and the seller will discuss the your offer. If the offer is not acceptable at face value, generally the agent and seller will make a counter offer and submit it to the buyer's agent. We will then discuss the terms of the seller's counter offer. At this point the buyer can accept the counter offer, counter the counter, or of course simply walk away. Counter offers can go back and forth several times. Listen your agent's advice during this process. Agents talk, and the selling agent will usually tip off your agent as to what it's going to take to get the deal done. Remember common sense and a little flexibility go a long way in getting the deal done. Disclosures In addition to the purchase contract and any counter offer forms, there maybe numerous other disclosure forms that must be filled out by the agents, sellers, and buyers. Some of the more important forms are the Seller’s Disclosure, The Homeowner’s or Condo Association Disclosures and the Lead-Based Paint Disclosure. These forms are used to disclose material facts about the property so that the buyer is aware of known defects, expenses or issues impacting the property. There are various time periods in which a buyer is to receive these disclosures. The Seller’s Disclosure
This is a disclosure form that is filled out by the seller and the listing agent and is signed by the buyer and the seller. This form discloses all known material defects in the property. In general your agent should request a copy of this form from the listing agent before making an offer. Lead-Based Paint Disclosure (Property built prior to 1978)
This form discloses to the buyer if the seller has any knowledge of lead-based paint in the property. The seller is also obligated to provide the buyer (usually via one of the agents) with a booklet that explains the hazards of lead-based paint. Homeowner’s or Condo Association Disclosures
These disclosures inform you about the cost of your association dues and any special assessments that you may be liable to pay for. In an older condo especially it is important that your agent inquire about any existing or planned assessments that may impact your pocket book. In the case of a condo resale you are entitled to receive a copy of the condo documents to review and approve. You have the right to cancel a purchase contract if you do not agree to the terms and conditions within these documents. Read on below for more information on purchasing a condo and/or townhouse. Condos & Townhouses: Points to Consider
Owning a condo or townhouse is different than owning a single-family residence (SFR). There's less maintenance, less privacy, and less responsibility. Owners pay monthly homeowners fees to maintain the property. There may be restrictions such as the number of pets you can have or what you can put on your balcony. Many condominium projects are managed by professional Condo Associations. Buying a condo is also different. There are a number of condo documents that must be read and approved. Approval of these docs is a contingency of the sale so you have to approve them in order to complete the sale of the unit. Below is a partial list of some of the documents that a buyer receives when purchasing a condo or townhouse. Conditions, Covenants, and Restrictions (CC&R's)
The condominiums CC&R's details how maintenance and repairs are handled, what physical changes you can and can’t make to your unit, whether or not you can rent the unit, or any restrictions on pets to name a few. Be sure to read the entire CC&R's carefully. There may be what you’d consider strange restrictions on what you can or can’t do in your unit. Articles of Incorporation
These are the legal documents that were recorded when the project was incorporated. Operating Budget
This is simply the budget for running the building. Of course there is maintenance, roof repairs, pest control, and other costs. You want to make sure the budget is sound and that the building has enough money to cover these expenses. Reserves
This is simply the cash available in the account to cover emergencies. A building with little or no reserves usually has to assess the owners if there is ever a major emergency such as a roof or plumbing leak. An older building with deferred maintenance and poor cash reserves can be a money pit for a new owner. Be careful in this situation and be sure to consult your agent for advice. Pending or Contemplated Assessments
This isn't part of the condo documents but make sure to inquire if there are any pending or contemplated assessments. For example, let's say that the HOA wants to replace the roof but there are not sufficient funds in reserves to pay for it. What usually happens is that the HOA will notify the owners that they will be assessed a certain amount for the roof repairs. As a buyer you want to know about any contemplated or pending assessments because you could end up owing money within a short time of purchasing your new condo. Tenants in the Property
If you are purchasing a property that is tenant occupied, be sure your agent includes a clause that says the tenants are to be out by the closing date. You don't want to be stuck having to evict the tenants.
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