What is a Purchase Offer
A purchase offer is a detailed document written to make an offer to purchase a property. The document can be amended several times during the process of negotiations. Once signed by all the parties involved in the sale of the property, the purchase offer becomes a contract that is legally bound by the law.
Buyers and sellers generally do a preliminary negotiation before the purchase offer is drawn. Each negotiation involves different people who suggest various ideas on how the deal and purchase offer should proceed. While sometimes parties have direct contact with each other, other times all discussions take place between the real estate agents representing both parties. The housing market is a competitive space. Once the deal is agreed upon, it is advised that buyers have the purchase contract signed as quickly as possible. This is possible if the main parts of the contract are drawn up in advance. There are times during real estate dealings when one might encounter a few unscrupulous people. Hence, buyers and sellers are advised to hire experienced real estate agents who are well-aware of the ins and outs of the local market and can protect their client.
Negotiations of Property Sale
Professionally capable real estate agents can help filter potential buyers from the ones who are “just looking”. Initiating a conversation about the buyer’s mortgage pre-qualifications is a good way to find pre-qualified buyers.
In case the buyer negotiations are not going very successfully, the sellers or their agents must introduce an intermediary, also known as the advocate approach. A seller must consider bringing in an intermediary approach when a final price cannot be agreed upon, especially when the buyer’s offer is considerably lower than the seller’s asking price. An appraisal is a great way for seller to make the offer more attractive to a buyer during the process of negotiations. Appraisals make offers seem more attractive as no buyer wants to purchase a property that does not have a break-even resale price. Also, no buyer would want to make a purchase offer for a property that has no appraisal value or that will not appraise well.
Earnest Money or Token Amount
Once the purchase offer has been submitted, buyers must give “Earnest Money” or “token amount” to a assure a seller that their offer is genuine and sincere. The term “Earnest Money” refers to the money that is paid by the buyer to confirm the contract. Sellers must make sure to include a provision that the earnest money will be applied to the sale price in the purchase offer. Sometimes, new and inexperienced buyers find it difficult to take a call on how much earnest money should be offered. In such a case, an experienced real estate consultant can help guide them. Generally, the earnest money is in line with the total cost of the property. The amount of earnest money should be enough to block the deal but not so much that the buyer fails to make another purchase offer later on in case the current deal falls through.
Sometimes, sellers whose houses are valued higher than many others on the market request additional earnest money, before the closing of the deal but after the inspection of the property is completed. Houses tend to sell for less after being on the market for a month or so. These houses are generally known as “tainted” properties. In case of “spoilage” or tainted properties, buyers offer a lesser amount as they are aware of the seller’s desperation to sell. Sellers of luxury homes are looking for reassurance that the buyer will go ahead with the purchase as individuals with higher priced properties have more to lose should the buyer back out of the deal. Hence, they expect a higher amount of earnest money once the buyers have inspected the property to their heart’s content.
Creating A Purchase Offer
The Purchase Offer or the “contract of sale” indicates how the purchase will proceed. This means that a purchase agreement states the rights that each party will be granted during the transaction process. A purchase offer must have a valid consideration. It is the legal term given to earnest money which is money given by a buyer to the seller as an indication that the offer to purchase the property has been made in good faith. Earnest money cannot be revoked or reversed unless the buyer has a good reason for doing so. There are various conditions under which the money can be rescinded. One such example is:
If the property were found to be smaller than what was advertised when surveyed. In this case, the buyer would have to prove that the property had been misinterpreted in some way or that it holds lesser value due to certain bits of undisclosed information. The buyer will have to prove the property is not what they had originally agreed to purchase.
Once the earnest money has been received by the seller, a document known as the “receipt for deposit” is created. There must be a mutual agreement of the terms of contract on the part of both, the buyer and the seller. Mutual agreements establish the principles of the purchase.
• Attorney Review Clause
The Attorney Review Clause or the Attorney Contingency Clause states that the seller must give the buyer three days to review the purchase contract with their attorney. The contract is subject to cancellation if the attorney disapproves any part of the contract unless and until the seller agrees to change the terms or until both parties reach a mutually agreed upon compromise.
• Timing and Method of Payment
Financial Agreements or the timing and method of payment should state the full purchase price. Every term of the deal should be mentioned in the financial agreement Clause. If the earnest money is counted as payment towards the purchase price, it should be mentioned in the Clause. The buyer must be given a sufficient period of time to seek financial assistance and be approved for the same. The financial agreements clause protects buyers by defining the earnest money terms and allowing them ample time to secure financing. Generally, buyers are given a period of 30 days to secure their financing.
• Covenants, Conditions and Restrictions
Any limitations that might be placed on the property by the current owner, the government, or any other governing body that is licensed to lay restrictions on any title must be listed in the purchase contract. Sellers are legally obligated to disclose any known information.
• Mortgage Contingency Clause
The mortgage contingency clause releases buyers from the sale in-case financing cannot be obtained. Without the presence of this clause, the buyer would be obligated to purchase the property even if they are unable to obtain the financing for the property.
• Inspection Clause
The inspection clause gives buyers the right to have the property inspected by a licensed professional and to cancel the contract if the findings of the inspection are negative in anyway. This Clause protects the seller by limiting the time for the inspections and by placing criteria on the amount of defect that is needed to be discovered before voiding the contract.
• Fixtures, Personal Property and the Bill of Sale Clause
The Fixtures, Personal Property and the Bill of Sale Clause protects both, the buyers and sellers by stating the items the seller will leave in the property upon closing. This Clause covers items inside and outside the property building. Any and all items of significance should be stated in the Clause. Buyers tend to assume that anything they view during the tour of the property is included in the sale of the property. A few of these items might include appliances, light fixtures, and any furniture built into the walls.
• Post Closing Possession Agreement
This section of the purchase contract stated the date on which the buyer can take possession of the property and how the transfer will be done from the seller to the buyer. In some cases, if buyers and sellers are not able to agree upon the closing terms, they can draw up an “escrow agreement” which gives instructions for the parts of escrow that will be done after closing.
We hope that this article has given property buyers and sellers some deep insights into the considerations that must be given thought during the sale process and more importantly what must be included in the purchase agreement so as to prevent misunderstandings and loss of time and money.