you found a place

#disclosureSo you found a place and are ready to make an offer.  In addition to excitement, you are probably also feeling some nervousness. In fact, your nervousness may make you drag your feet, after all, you want to be sure.  You might be thinking that you should keep looking, maybe you will find something you like better, or less expensive.  You want to show it to your friend or family before you make an offer. You want to think about it some more and crunch the numbers one last time.  I have heard lots of reasons for wanting to wait and they are good, valid reasons, BUT it is important to keep a few things in mind while you are debating. Others who are looking at homes in your price range have probably looked at that home too. If you thought it was the nicest one or the best deal, they probably did as well. While you are debating they may be making an offer.  I have seen offers accepted and homes go off the market while my clients were still trying to decide.  I am not suggesting anyone jump into a purchase without giving it a lot of thought and careful consideration, but I am suggesting you do as much of the work as possible beforehand so you are prepared to make an offer when you find that ‘perfect home’. The Search and Visit section can assist you with narrowing down your search before you actually go out to look at homes.

How Much Should I Offer?

Once you have found a home that you want, the next big decision, and a question I am frequently asked is, “How much should I offer?” No one wants to pay more than they have to, nor do they want their offer to be rejected and see ‘their’ home to be sold to someone else. Unfortunately, there isn’t any magic number or right answer, and as an agent I cannot give you an offer amount. It is YOUR offer, your money and your decision.  You will be making the monthly mortgage payments, and you will be the one living in the home. Even if I gave you an exact number based on the value of the home, it would not take into account emotional factors that often have a huge impact on the price one is willing to pay. Being across the street from your grandchildren, being in a community where you feel safe, living near your children or friends, finding the perfect home to raise your family after looking for months, being in the community you love, having your commute time cut in half… these are factors that are ‘priceless’ and only you can determine how they should impact your offer.

What an agent can provide is market info, direction and guidance. To that end, I have prepared a list of things to consider when trying to determine how much to offer. Keep in mind that there are lots of ways to interpret the information. As a buyer it is natural to want to interpret it in a way to justify a lower offer, but remember the seller may be looking at the same facts and coming up with reasons to justify their asking price. Try looking at your offer as the seller would see it. This might put you in a better position to make a successful offer.  The questions below will provide you a framework to think about your offer.

Is the asking price reasonable?

 Your real estate agent can provide you with information about comparable homes in the area which have recently sold. If the asking price on the home in which you are interested is in line with those, there may not be a lot of room to negotiate. If it is lower, they may have already reduced the price for a quick sale and may not be willing to go much lower. If it is significantly higher, try to determine why. They may be willing to go lower. They may also need to get a certain amount out of the sale to satisfy a mortgage, for example, and might want to hold out for that number. That can explain why some homes have been on the market for a long time.

How long has the home been on the market?

Some buyers think that if a home has been on the market for a long time the sellers will jump at any offer. They are surprised when their low-ball offer it is not accepted.  Sometimes the very reason that a home is on the market for a long time is because the sellers are not willing to go much lower, even if their home is overpriced. Conversely, if a home just went on the market the sellers may not be ready to accept a low offer, as they may want to wait to see if something better comes in.

What contingencies accompany your offer?

If you are getting a loan, your offer is most likely contingent upon final loan approval. It may also be contingent upon inspections, or maybe the sale of your current home or other factors. Every time you add a contingency you are lessening your chances of getting an accepted offer. This is an example of how you really have to look at your offer as a seller would see it. Sellers see contingencies as weak links in the chin. Each contingency represents an area where the deal can fall apart. The more contingencies, the greater the risk. Most sellers will not even accept an offer that is contingent upon the sale of another home. They are essentially taking their house off the market once they sign a contract. If the other home does not sell, nor does theirs. It’s too risky. By agreeing to such a contingency they will lose the opportunity to show their home to other potential buyers and may miss a sale! All that being said, contingencies are important and do accompany most offers. What is important to keep in mind is that a low offer with contingencies is less likely to be accepted. If you have contingencies your offer price should reflect it. For example, let’s say the sellers have their home listed for $300,000. They get two offers; a cash offer of $275,000 with no contingencies, and a full price offer of $300,000 with contingencies, including that they have to sell their home in Florida in order to buy the new home. The sellers may accept the lower offer, as it is has a better chance of closing and will more than likely close much quicker.  A bird in the hand is worth two in the bush.

What is the market like?

The market will greatly affect the price of the homes you are looking at, as well as the seller’s willingness to negotiate. In a buyer’s market the inventory is greater than the number of buyers.  Sellers know that there is lots of competition and if they want to sell they will have to offer a better product at a better price and be willing to negotiate. Conversely, when the number of homes on the market is low, the seller can hold out until they get the price they want.  It is a simple supply and demand situation.

How much money can you actually spend on the home?

This is a different question than, “How much money do you have to spend?” In addition to the cost of the home, there are closing costs. Your real estate agent can provide you with an estimate of these costs. They can be significant and can impact how much money you can actually pay for the home. Other costs can affect your bottom line as well. Will you have moving expenses?  How much do you estimate your ‘move in’ costs will be for things like utility and internet hook up? Are you planning to have any work done to the home before you move in?  Are you going to need new appliances, furniture, carpet or flooring? All of these costs can add up and impact how much you can offer. I have known people who put every last penny they had into purchasing the home, and then had no money to furnish it. Being house poor is probably not what you were hoping for when you decided to purchase a home.

Is the seller motivated?

The more motivated the seller, the more willing to negotiate. If the seller has already moved, for example and is paying for two places, or has to move quickly because of a job or lifestyle change, your chances of negotiating are greater. If the seller is in no rush to sell or move, it is likely there will not be a lot of wiggle room in the price. The question is how will you know? The seller’s agent may not be willing to share this information and your agent may have no way of finding out. Sometimes, however this information is right in the listing information, “motivated seller, make an offer.”  This isn’t an invitation to take advantage of the situation, but rather to let you know they are ready and willing to work with you.

How much did the seller pay?

Finding out how much the seller paid for the home may be an indicator of how open he or she may be to negotiating or accepting a low offer. If the home was purchased when the market was strong, it is very possible the seller paid more for the home than it is currently listed.  If for example, they paid $400,000 in the height of the market, and now have it listed for $299,000, making a low-ball offer or expecting a lot of negotiating may be unrealistic. On the other hand, if they purchased when the market was weak and got it for a steal compared to the current prices, don’t expect them to drop the price when the market picks up.  

Finally, how much do you want this home?

Some things are priceless and your reasons for wanting a particular home may fall in this category. As mentioned above, being across the street from your grandchildren, being in a community where you feel safe, living near your children or friends, finding the perfect home to raise your family, being in the community you love, having your commute time cut in half may be among or similar to the factors which have impacted you decision to want a particular home. These factors should impact your offer as well.  You may want to pay a bit more for things that are important to you and give you happiness and peace of mind.

Signed Seller Disclosure

Pennsylvania law requires that sellers must disclose to potential buyers any known material defects, including those which are not readily observable, about the home which they are selling. This is typically done on a form known as a Seller’s Property Disclosure Statement, which is completed by the seller when the home is listed. It is designed to assist the buyer in evaluating the condition of the home before making an offer. Buyers must review and sign this document, which is submitted to the seller with the rest of the offer paperwork.  The accuracy of the information disclosed on this form hinges on the knowledge and forthrightness of the seller. For example, if the home is 40 years old and the seller has only lived there for the past 3 years, they can only provide information for that period. Any information from the first 37 years will probably not be included. Similarly, the owner may be unaware of certain problems. Radon, for example, cannot be detected unless a test is done.  If the home was never tested, there may be a problem about which the owner has no idea. So, while it is important to review this document, it is also important to remember that it is not designed to take the place of inspections by a certified home inspector.

If the seller has not lived in the home, they are unable to complete a disclosure form. Foreclosures which are bank owned or homes which are part of an estate, are examples of homes for which a disclosure may not be available. These homes are often “sold as is,” a term means that the buyer assumes the risk that a product may fail to meet expectations or have defects. This is similar to the Latin term Caveat emptor  that means “let the buyer beware.”

Agreement of Sale (AOS)

The Agreement of Sale (AOS) is the contract which will define the terms and conditions by which real estate will be transferred form the seller to the buyer. To be fully executed and binding, it will need to be initialed as needed and signed by all involved buyers and sellers.  This is  an important document and the details contained within are what you are are going to have to live by.  If there is a question about something the answer will be determined by what is in the contract, not what may have been said in the listing agreement or verbally promised. For example, if the contract does not say the say the stove and refrigerator are included with the sale the seller can remove it, even if the listing paperwork says that it is included, or if the buyer told you they would leave it. Another example, and one which could have a more profound outcome, would be contingencies. If your ability to purchase the new home is dependent upon the sale of your current home, the contract must include that contingency. If it does not, you would still be obligated to purchase the new home even if the sale of your home falls through. Other contingencies such as inspections and mortgage approval are also outlined in the AOS. It is therefore important to carefully read and understand this document. This PDF to is a comprehensive guide to understanding this the AOS and should review before making your offer.

This PDF is a comprehensive consumer guide to understanding the AOS.  It should be reviewed before making an offer.  If you have any legal questions, or want legal advise, you should contact an attorney. 

Earnest Money Deposit

Earnest money deposit is given as evidence that you are a committed buyer. It helps to ensure that you are really serious about purchasing that particular home. Sometimes, two deposits required, one when you make your initial offer or shortly after your offer is accepted, and a second deposit in a few weeks, usually following the inspection. Your Agreement of Sale will detail how many deposits you will have to make, the amount(s) and when it(they) are due. The earnest deposit check is usually made out to the listing broker who holds it in escrow. You will be required to sign a Deposit Money Notice form, which will detail exactly who will be holding your escrow money.  If your offer is not accepted, this money is returned to you.  If your offer is accepted, this money will be held in Escrow until your closing and will be counted towards your deposit or closing costs. 

Proof of Funds

When  you make your offer you will have to include documentation showing that you have the money to purchase the home. This is known as ‘Proof of Funds’.  The seller is not going to take their home off the market and risk loosing other good offers, unless they are confident you are able to pay the offered price and fulfill the commitments detailed in the Agreement of Sale.  

If you are getting a loan, your prequalification or preapproval letter can serve as your Proof of Funds.  This  is one of the reasons it is important to get a letter BEFORE you start your search. Not only will it determine your budget, but it will also prepare you to make an offer.  On more than one occasion I have sat with people who were wanting to make an offer after having come from seeing the ‘perfect home,’ only to find their offer could not be submitted because they did not have Proof of Funds.  The fear that another offer will come in and be accepted while you are running around getting your finances in order is a valid. It is best to be prepared and have everything you will need in place before you find the perfect home.

If you are paying cash, a bank statement, 401K statement or any other official documentation showing that you have cash can serve as your Proof of Funds.  Make sure it is a current statement, includes all the pages and that it has the name of the bank etc. appears on it.

Closing Costs

In addition to the price of the home, you will also have to pay closing costs.  These costs can vary from a few to several thousand dollars depending upon a number of factors. The price of the home typically has the greatest impact. The more expensive the home, the higher the closing costs.  Closing costs include such things as title insurance, transfer tax, prorated school, county and municipal taxes, document preparation and legal fees.  If you are not  paying cash, there will be additional fees from your lender, and if the home is in a community there will be prorated dues and most likely a capital improvement fee.  Your realtor will prepare an estimate of closing costs for you to review before you submit your offer.  By signing this you are acknowledging that in addition to the price of the home you you are aware that you will also have pay additional closing fees.  

If you are getting a loan, by law, your lender is required to send you a Closing Disclosure at lease three days before your closing. This document will provide information about your loan and detail your closing costs.