You have seen the house you want and you are also prequalified for a housing loan. You have checked out the property in detail as well as the neighbourhood and your real estate agent has also agreed that this house is the best one for you and also makes economic sense.
Now as a buyer it is time for you to make an offer and lock the deal. In this article I will discuss what your purchase offer should consist of and how to move through the closing procedures prior to occupying the property. And even though this article is written more for first-time buyers much of what I write applies to investment-grade properties as well. Financing choices may differ for investors but settlement is usually pretty much the same between home buyers and investors.
Its also important for you the buyer to remember that with an expensive item like a house the buyer and the seller need to protect themselves. Rather than viewing the many often cumbersome procedures involved in buying a house as bureaucratic details it is better if you simply view them as protective mechanisms. When put to use in your favour any one of these procedures can save you from making a costly error.
Making an Offer
You should always make a purchase offer for any property you buy through your real estate agent. If the seller accepts your offer both parties can then move towards closing. Ownership of the property actually changes hands at the closing or “settlement” meeting.
In the earlier times when life was comparatively slow and and when real estate markets in India were not so active there was plenty of time to mull over things such as pricing and terms when making a purchase offer on a property. That has all changed today. In today’s real estate market if you like a desirable apartment or villa you must quickly make an offer. I can guarantee you that if you hesitate or delay over your bid, someone else will step in and take away your hard-found deal.
Ideally, your offer should not just be a verbal thing but it should resemble a contract. And once the offer is accepted and signed by both you and the seller it become binding. An offer usually includes the following items:
- Price you want to pay
- Survey and legal description of the property you expect to receive
- Amount of your earnest money (a deposit to show you are serious)
- Type of financing you are seeking
- Mortgage amount, with interest rate
- Expected closing date
- Expected occupancy date
- Furniture, fixtures, or other items to be included with the property
- Contingencies, which may include financing, repairs, home inspections, appraisal, environmental concerns, inspections, and ability of the seller to provide you with a clear title. (Clarify up front who pays for the title search. In some areas, this is negotiable.)
- Offer expiration date
Some of the items such as furniture and other contingencies are usually negotiable. Should any of your contingencies not be met you should include in your offer a time frame to correct any shortcomings. If there is a deal-killer make sure that it is mentioned in the offer and which frees you from any consequences. Your agent will know how to do this.
An Offer Dissected
Lets have a look at the components that make up an offer:
The Down Payment
Down payment on a house earlier was 20 % of the total price. Mortgages available now in some cases permit you to pay just 3 – 5 % of the purchase price. The down payment you put down will depend on your credit score, the purchase price and the kind of mortgage plan that you select.
To show that you are really serious about buying the chosen property you generally include with your offer a cash deposit known as earnest money. The earnest money is usually deposited in an escrow account. If your deal goes through, the earnest money will go toward paying your closing costs. If you are responsible for backing off from a signed deal you will probably lose your earnest money to the seller.
The sales contract should also include an estimated closing or commitment date. After your housing loan is passed and you have signed the commitment letter, a closing date will be fixed. You real estate agent along with the housing finance company may be the ones who fix the date.
The commitment letter includes description of the total mortgage amount, terms of the loan, loan origination fee, discounts, annual percentage rate and monthly EMI payments. The letter states a date by which you must accept and formally apply for the loan.
You should also get in writing the time and place of the closing meeting and a list of the records to bring with you.
The occupancy date is mentioned as part of your purchase offer letter and guarantees that you will take possession of the property in a timely manner post purchase. You should also include a provision that the seller has to pay rent on the property if he / she has not vacated the premises by the occupancy date.
A contingency is a condition that must be fulfilled before a contract can be considered as legally binding. Both the buyer and the seller can have contingencies and both parties can add a “good faith” effort must be made to meet their conditions. Here are some of the common ones:
- A loan contingency means that you don’t have to buy unless you qualify for a loan. Qualifying for a loan does not always mean that you will get a loan.
- An offer may be contingent on the property passing a building inspection or with the condition that the seller has to make specific repairs.
- An appraisal contingency is also a very important clause. With an appraisal contingency if the house’s appraised value does not reach a certain mark you get your earnest money back. The appraised value is the fair market value as estimated by a qualified appraiser. If this happens then you wont be able to get a loan though for no fault of yours. In some cases the seller may just drop the price to let the deal go through whereas other sellers may just drop the deal.
Actually appraisals are highly subjective. Bank A’s refusal to fund the deal does not mean that Bank B will not. The appraiser of Bank B might find more value in the property and grant you the mortgage. Any discrepancy in appraisal value should be treated as expert third party advice on your deal. Find out exactly what prompted the appraiser to value the property lower than earlier estimated and then proceed accordingly. Some appraisers are more pessimistic than others and some times the appraisers are also right on their viewpoint.
After you Make an Offer
After you make an offer for a property, your real estate agent will convey the offer to the seller. A seller may accept or reject your offer or make a counteroffer.
If the seller accepts the offer, you move toward closing or settlement. If the seller rejects your offer or your offer is topped by a competing offer from another party then ask your real estate agent if the bidding is still open. If it is then you must quickly decide about how much more to offer.
I assume that you are leaving enough room to move up in price if you must when you make an offer. I also assume that you have already got more than enough of a prequalified loan to cover any high price scenarios.
If you buying a high ticket property you may also wish to hire a real estate lawyer to go over the sales contract before you sign it especially if you are a first time buyer and this process is new for you. You can also ask your real estate lawyer to accompany you at the closing meeting. Some out-of-town investors are known to have their lawyers represent them during the closing process if they are out of town.