You've Found Your New Home! Now What?

You've found it! After driving around to maybe countless showings, you have found the home you've been dreaming of! Now it's onto the next step... the offer.  Your Agent will review the potential contract with you.  Here are some important items listed in the Offer to Purchase (the Purchase Contract) that you should be familiar with. (Click on topic)  

Writing an Offer                                                                       

Negotiating Best Interest   

Contingencies              

Home  Inspections

Insurance

Earnest Money

Home Warranty   

Wood Destroying Insects/Gas Line Warranties

Appraisals  

Possession                                                                                                 

The Closing        

      

  Writing an Offer   

When you have found the house, you need to think about the offer you want to send over:

• Ignore the asking price, at least for now.  Since most Sellers will price their house according to the market, the asking price is a good gauge of relative value.  But when you are going to determine the actual offer, don't focus on how much lower your offer is compared to the asking price.
• Determine the fair market price.  Think about what you would like to pay and what would be the most you would pay.  Your motivation will determine if this is the same as the fair market value, or a lower or higher amount.
• Agree on a strategy.  Compare the value you determined with the asking price. If the home is priced well, it may be very close or at the fair market value.  If the market is strong, you may not get much off the asking price.  Don't focus on how much off the asking price but how much lower than the fair market value you can get.  There are many strategies you can take.  Some people like to start low and go back and forth.  Some want to get it over with very quickly.  Have your Agent review different approaches and determine which one works best for you.  Remember, If you choose to play the game, you must be willing to lose the game.  If you want to take a long time to negotiate and whittle the Seller down, you may open yourself up for other people to make offers and buy the house out from under you.
• Determine the Seller's weakness, if any.  The key to getting a bargain is finding out what is most important to the Seller.  See if there is a weakness; then take advantage of it.  If they have to sell and move quickly, than a quick closing may allow you to get a better price.  For some Sellers, at a certain point other issues become more important than price.
• Beware of low-ball offers.  A low-ball offer is not judged by how much under the asking price but how much under the fair market value it is.  If you think the home is worth $100,000 and they are asking $125,000, then an offer of $100,000 is valid.  But if they were asking $102,000, an offer of $80,000 would be a low-ball offer.  You probably should offer closer to the fair market value, leaving room for negotiating to the $100,000 or lower.  The final price can also be affected by how long the property has been on the market and whether other deals have fallen through.  Low-ball offers not only take the pressure off the Seller, but they do not cultivate a healthy environment to negotiate since the chances are the Seller is now insulted.  You most likely will have to make another offer, and then you are negotiating with yourself.  Find the price that will keep the pressure on the Seller and most of the time you will ultimately get a better price.
• Review list price to sales price and number of days on market (DOM) to determine strength of the market. When you analyze the comparable sales, also look at the difference between the asking price and selling price.  If this spread is small it may indicate a tight market.  If homes are selling quickly (30 days or less is quick, under 60 days is quick), then it may be very difficult to purchase the home for a bargain.

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 Negotiating Best Interest

When negotiating, there are three goals in mind:

• Comparable sales.  Reviewing recent sales of comparable properties, how long they took to sell, and comparing the areas selling price to list price will give you a good sense of relative value.  This is one of the more important valuation techniques used by appraisers. Your Agent will look up these properties and figures for you to give you a sense compares in value to the market.
• Motivation of the Buyer and Seller.  The price can be greatly affected by how much the Buyer wants the home and how much the Seller needs to sell it.  The ability to get a below-market price on a home will depend on the Agent's ability to determine the motivation of the Seller and devise a strategy to take advantage of any Seller weakness.
• Supply and demand of available properties.  Simple economic principles provide that strong demand and low supply will increase the price and, the reverse hold true for high supply and low demand.  In real estate jargon, they are called the Buyer's Market and the Seller's Market. 

Before you start negotiations, determine the following:

• What do you believe to be the fair market value for the property?
• What price would you like to pay?
• What is the most you would pay?

This evaluation needs to be made free of your emotions to help you focus on your goal:

Keep in mind that:

• The best price possible is obtained when the Seller is willing to stretch to a lower price.  If the stretch is too far then the negotiations will not be completed.  You want the Seller to be saying "the price is lower than I would have liked, but..."
• When you play the game you have to be willing to lose the game.  If you are approaching the negotiations as a game and are going to make offers that are not likely to be agreed upon, you will be keeping the door open for someone else to make an offer on the property.  This is especially true for a good house in a great location in a Sellers market.
• Devise a strategy with your Agent that will achieve your goals and minimize the opportunity for someone else to make a competitive offer.

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  Contingencies 

A contingency is best thought of as a way out of the contract, or a hurdle you must clear to remain in contract.  The contract is contingent on something occurring and usually by a certain date.

• Contingent on financing:  If you enter into a contract and you have the proper language that makes the contract contingent upon financing, than you can cancel the contract, without further liability, if you can not obtain financing.  The Seller may limit your contingency to a certain time frame. If you go past that time, then you can not cancel the contract due to inability to obtain financing.
• Inspection Contingency: The inspection must take place within the time period specified in the contract.  Usually you not only have to complete the inspection but also finalize the negotiations for the repairs within the time allotted.  If the contract allotted five days to have the inspection and you wait until the sixth day, you have waived your contingency.  No matter what you find during the inspection now, you cannot cancel the contract.  Not performing within the time specified can open you to great risks since you have lost the protection of the contingency.
• Contingent on Sale of Home: If you have to sell a home to buy a new one, you would make the offer contingent on selling and closing of the existing house.  If a Seller accepts this, they will usually still market the home and can accept back-up offers. If the Sale of Home Contingency has an escape clause attached, than although you have an accepted contract to purchase the home, the Seller may accept alternate offers and give you, the Buyer a certain time frame to remove the Sale of Home contingency (usually 24, 48 or 72 hours). If you  do not or cannot remove the contingency than the Seller is allowed to accept the new offer from the new Buyer and your contract is canceled. If you decide to go ahead and remove the Contingency, you may end up owning two homes at the same time if your does not sale quickly.
• Contingent on Wood-Destroying Insects: An inspector will look at the house to determine if there are wood-destroying insects.  The contract will state that it is contingent upon a "clean" inspection.  If wood-destroying insects are found, then you will have to negotiate with the Seller, unless the contract already dictates how this situation will be resolved.
• Other Contingencies: Contingent upon Spouse Seeing House, Contingent upon Buyers Acceptable Review of Property Disclosure and Contingent upon Attorney Review.

If you fail to satisfy or waive a contingency, you may lose that right or the contract could be voided, depending on how it is worded.

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Home Inspections

www.inspect-myhome.com

Home inspections are extremely common and important.  A professional spending 2 or 3 hours going through the house will go a long way to not only protect the Buyer, but also to educate them about the house, how to maintain it, and what to expect in the foreseeable future.  This inspection is not a requirement and therefore it is an option and the Buyers responsibility to pay for this service, usually at the time of the inspection.

• Have proper expectations before you start.  The inspector will point out everything they find that is wrong with the house.  All houses have things that are wrong, so it is important to have a realistic expectations about the process and what can be done.  The contract may not require the Seller to fix a thing.  In that case, it all has to be negotiated.
• Major problems:  If they find a major defect, you normally can decide to cancel the contract with no liability to you-as long as you do it within the time period allowed and your contract allows for it.  Or you can negotiate for the Seller to remedy the defect.
• A big problem: These are usually easier to have the Seller fix than small problems.  If the inspector uncovers a defect and the Seller does not want to fix it, then they would have to disclose it to any future Buyers.  Otherwise, they could be liable for fraud.  Consequently, the Seller usually fixes defects.
• Minor problems:  These may be hard to get the Seller to fix, especially if they are related to quality or are cosmetic.  If the inspector does not like the way the plumbing was completed under the sink but there is not a leak then it may be harder to get the Seller to repair it.  Items which are usually fixed are defects that are damaging to the property, such as plumbing or roof leaks, or a safety hazard such as gas leaks.
• Nothing is wrong:  If you determine that nothing needs to be fixed, then no Request to Remedy is made and now you have at least learned about your house. You may formally waive the contingency in writing, depending on how it was worded.

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Earnest Money

What is it? It is a sum of money deposited by the Buyer, to show good faith, held in the Broker's non-interest bearing escrow account as a form of security for the Seller.  If the Buyer fails to perform on the contract, the money would likely go to the Seller (although there may be additional liability to the Buyer).  If the Buyer performs according to the terms of the contract, one or two things will occur:

• If a closing occurs, then the money will be returned to the Buyer at the closing.  Some Title Agencies will allow this money to go towards the Buyers costs.
• If the Buyer has a contingency that allows them to void the contract, then the money should also be returned, unless the Seller disputes the Buyer's actions.

Remember:

• Earnest money is not mandatory.  You need not have it for a valid contract. A contract is valid with no earnest money, as long as both sides agree.  The Buyer wants the amount to be as small as possible.  The size of the deposit is somewhat proportionate to the purchase price. The larger the price, the larger you can expect the deposit to be.  In any case, the Buyer would want the deposit to be as small as possible.
• The Seller wants the earnest deposit to be as large as possible.  When a home goes into contract, the Seller has effectively taken the house off of the market.  The Seller would want a sufficient sum of money deposited to compensate them if the Buyer cannot perform.  If the closing is delayed for a longer period than normal, then the Seller would want a larger deposit than normal.
• Amounts to expect: The amount is a negotiable item.  Each market will have a different attitude to the amount usually expected.

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Home Warranty

www.firstam.com/warranty

What is a home warranty? The home warranty is an insurance policy to pay for the repair or replacement of a covered item, less the deductible, during the coverage period (usually one year from closing).  The warranty may cover items such as the furnace, plumbing, and appliances.  It usually does not cover structural items such as the roof, decking, walls, etc.  Extra coverage can be purchased to cover the refrigerator, well pumps, pools and spas, etc.  Some Sellers will activate the coverage prior to putting their house on the market so that they are covered as well for a period of time. If it is not being offered, then it is negotiated to determine who will pay for it.  It is normally a good idea, especially if the house has older mechanicals.

If there is already a policy in place but you want a different one, you can ask for the one you want to be enforced. The Seller's Agent will simply call the Warranty company and cancel their policy so that your choice can be in place.  This has to be agreed upon and stated in the contract. Typically the Seller will pay for the warranty, but the Buyer gets to choose the company since you will be using the policy in the future.

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Wood Destroying Insects/Gas Line Warranties

www.inspect-myhome.com

The wood-destroying insect inspection may be required as a contingency in your contract or by the lender.  It is only a statement that at the given moment, wood-destroying insects were not detected.  However, if they are found, then they must be treated before the property can close.  The purchase contract will spell out the steps for dealing with this problem.  It may have to be negotiated once they are found, though if the Seller does not fix the problem then you may be able to void the contract, as long as you have complied with the terms of the wood-destroying insect contingency.  The report is not a warranty; if you want a warranty you will have to purchase one.  Some Home inspectors will also do wood-destroying insect inspections. This is typically a Buyer's cost, however this can be paid at the time of closing.

www.inspect-myhome.com

A gas warranty will cover the replacement or repair of any gas lines to the house or in the house, less a deductible.  Repairs can range from several hundred to several thousand of dollars.

The cost for this warranty is usually $60-$95 and is usually paid for by the Seller.

http://www.abcgas.com/pricing.htm      

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Possession specifies when you are allowed to move into the house. The contract will determine this, as it should be clearly stated. It is a negotiable item.

What the Buyer wants and why:  The Buyer would always want to have possession at closing.  When you close and pay for it, it is your's to move into.  This reduces the risk and expense.  Everyday the Seller stays in the house after closing they are living there at the Buyer's expense.  Possession issues are as follows:

• Resolving (or avoiding) damage to the property: If the Seller damages something and you have not closed yet, it gives you the ability to control what happens.  Your ability to negotiate an effective remedy is much stronger if the Seller does not have your money yet.
• Controlling the removal of items: If you close and the Seller moves out later and takes something that should have stayed, then it is much harder to resolve.  If you have possession at closing, you will probably have a walk-through within 48 hours prior to closing (if written in the contract), and if they have taken something that should have stayed, you still have all the money, which gives you greater leverage in resolving the problem.  After all, you have something they want - your check!
• Avoid the Seller living there for free.  The longer the wait for possession after closing, the longer the Seller gets to live there for free.  You may not mind a few days possession with no charge to the Seller, but if it is going to be for an extended period you may want to charge rent to the Seller.  Collect the whole amount upfront at closing.  You don't want to have to chase them around later to collect.  You can pro-rate by days to motivate them to leave sooner.  Remember statutory landlord-tenant laws apply since you have no written lease.

What the Seller wants and why:  Unless the house is already empty or if the Seller is moving prior to closing, they will likely not want to give possession at closing because:

• Risk of Buyer not closing.  If for some reason the Buyer does not show up at the closing, then the Seller is already out of the house but has no buyer.
• Being temporarily homeless.  The Seller may not have any place to move into if they give possession at closing, especially if they have given possession to the Seller of the house they are Buying.

What usually happens? Due to these reasons, it is common for the Seller to get some possession after closing.  A good Agent will try to minimize the time period, reduce your added expense and risk.  Some states actually prohibit the Seller from having possession after closing.

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The Closing

Tradition Title Agency- Patrice@TradTitle.com

www.talongroup.com  

Information and tips on closing.

• Walk through the property before closing, especially if you are getting possession at closing.  This way you can determine if the Seller has breached the contract prior to giving them your money.  This is only possible if your contract permits it.
• Review the HUD 1 settlement statement.  This document details all the cash flow in the transaction, and the bottom line figure will tell you the amount that you need to bring to closing.  It must be either a cashier's check or certified funds bank check. Some Title Agencies will allow you to write a personal check if the amount is under a specified amount such as $500. It is always a good idea to bring your checkbook with you just in case.
• Have an attorney review the legal documents such as the deed, title insurance commitment, loan agreement, and mortgage.

Checks a Buyer will need to write:

• Loan application: $50 for credit check and $250 for appraisal (before Offer is accepted)
• Earnest money: varies (When submitting an Offer)
• Home inspection:$250 +/- (Once in Contract)
• Home owner's insurance: $300 +/- (Before Closing, Once in Contract)
• Down Payment.
• Closing Costs not yet paid for along with any escrow and interest through the end of the month.

These amounts can vary depending on the size, age and location for the house.  Since interest is paid through the end of the month at closing, the cash outlay needed will be lower if closing is closer to the end of the month.  The Closing location is chosen by the Seller.

www.talongroup.com

Tradition Title Agency- Patrice@TradTitle.com

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