Making an Offer

What happens when you make an offer?

STEP 1

You and your agent fill out a purchase agreement. This form includes:

• Property address and description
• Your name and seller’s name
• Your offer price
• Your down payment amount
• Your earnest money amount
• Financing information
• Escrow period
• Contingencies
• Provisions
  • Desired close date
  • Who pays closing and title insurance
  • Deed requests
• Disclosure requests

Earnest Money Amount – Earnest money is a good faith deposit that you specify you will pay upfront to show the seller you’re serious about buying. The purpose of the deposit is to lock in both parties to the contract. Once the seller accepts the deposit, they cannot accept someone else’s offer. And once the seller accepts the deposit, you will have to go forward with the transaction unless one or more of the contingencies fail. It can range from $1,000 to 10 percent of the price depending on the market and the price of the property, although some states have regulations about these deposits. Be sure to double check with your agent.

With your offer, you submit the amount you will put down as earnest money. Once the offer is accepted, you usually have three days to pay the deposit to the title company, escrow company, or your agent or the selling agent’s brokerage (this can vary by state, so check with your agent). They will hold it in a closing escrow account for safekeeping until you close. If the offer isn’t accepted, you won’t have to pay earnest money. If the offer is accepted, but then one or more contingencies fail, your deposit will be returned unless the failure was your fault (see the Your Pre-closing Responsibilities section).

Escrow Period – The amount of time (usually a few weeks) between when the contract is finalized and signed and when the closing will take place. This is the amount of time both you and the seller have to meet the contingencies set forth. When you and the seller finalize the purchase agreement, you will “go into escrow,” when means you’ll enter into this escrow period. When the escrow period elapses and you and the seller formally close, that will be the “close of escrow” and the funds and documents that were held in escrow will be disbursed.

Contingencies – These are the conditions that must be met before the purchase goes through. You set your conditions to protect yourself as a buyer and ensure that you’re not driving away in a lemon. Most contingencies are designed to protect buyers, but the seller, too, can set contingencies to protect their interests. You will get your earnest money deposit back if the deal falls through because the contingencies aren’t met, unless it was your fault. Examples of contingencies:

• Inspection and cost of repair contingency – The offer is void if the home fails an inspection or the inspection turns up issues that cost more than a specified amount.
• Financing contingency – The offer is subject to you securing financing within a set amount of time. These contingencies generally require good faith efforts on the part of the buyer. So, if you submit all your financial information and answer all the lender’s questions, and still don’t get approved for a loan, the financing contingency will fail and you will get your deposit back. If you don’t get approved for a loan because you never got around to submitting your information to the lender, you may not get your deposit back. Financing contingency deadlines are often very tight because of the lengthy process the lender goes through even after approving your loan. For example, the lender will need to investigate and confirm that the information you provided was accurate and they will order an appraisal of the property. It’s important not to delay and get your information to the lender that pre-approved you as soon as possible after your offer is accepted.
• Appraisal contingency – The lender’s appraisal only protects the lender. If you are making a straight cash offer with no lender or you just want an appraisal confirming the purchase price that you can rely on, you can have your own appraisal contingency and hire your own appraiser. The offer will be subject to an appraiser valuing the house at the offer amount. There’s an option to allow the seller to lower the price to the appraised amount.
• Insurance contingency – The offer is subject to you securing insurance on the home.
• Miscellaneous contingencies – You and the seller can set transaction specific contingencies. You or the seller can request a delayed close or the seller can request that you don’t close until they purchase a replacement home. If you’re in a rush, you can reject this or set a deadline for them to find something new.

Provisions – Provisions are similar to contingencies, but more straightforward requests. Some examples of provisions to list:

• Desired closing date
• Who will pay closing costs and transfer taxes
• Who will pay title insurance
• Who will pay for appraisal
• Who will pay for inspections
• Who will pay for HOA transfer and document preparation fees
• Who will pay for the home warranty

Disclosure Requests – A formal request that the seller provide their disclosure form. This is a list the seller makes of all potential issues they know about the property. Note that certain states have stricter laws about what needs to be disclosed than others.

You can always ask the seller any question you may have about the property, even if it is not listed on the standard disclosure form. If they know the answer, and it’s material to the desirability or value of the property, they usually have to tell you.

Disclosure issues are often the subject of lawsuits. Generally speaking, you can sue the seller for the failure to disclose issues that they knew about or should have known about. But the parties will always disagree on what someone should have known or what is material. The best way to protect yourself is to ask lots of questions in writing, so if a dispute happens later, you have proof that the issue was important to you and you were diligent in asking about it.

STEP 2

Your agent will give your purchase offer form and deposit to the seller’s agent, and they will review it and either A) return it with a counter offer for you to review and sign, B) accept your offer and sign, or C) reject it outright.

If they return it with a counteroffer, you move on to step 3.

If they accept it, you skip to step 4.

If they reject it, you have to continue your search.

STEP 3

The seller’s agent will come back to you and your agent with an amended contract. They might come back with a different purchase price or new contingencies, such as a delayed close date, requirement to purchase the home as is, or refusal to pay closing costs. You’ll have to review the new contract with your agent and lawyer and decide whether or not you want to accept. Here, you have three options as well. Either A) return it with another counteroffer and repeat the process, B) accept the offer, initial the changed clauses, and sign, or C) reject it outright and move on.

STEP 4

Once you’ve both agreed to an offer and signed, you will have to pay your earnest money deposit (usually due within three days). Most earnest money deposits are now a wire transfer directly to either the escrow company, title company, or the buying or selling agent’s brokerage company, depending on your state. This will be specified on your contract, so be sure to double check with your agent. It will be held in an escrow account where it will collect interest until close to the closing date, when the funds are released and applied to your down payment.

Your earnest money is tied to the contingencies you specified in your purchase contract, so there are ways to get a refund if the deal falls through. However, if the deal falls through due to an error on your part, you could lose your deposit, so it’s essential that your lawyer and agent carefully review your contract before you sign.

STEP 5

In most states, the seller will have already provided you with disclosures, either upfront or upon request. If the disclosures have not been provided by this point, then the seller will provide them now. The seller will submit a complete disclosure to you that includes everything they know to be wrong with the property.

State to state, the requirements for these disclosures vary, but they are legally obligated to inform you about any issues ranging from water damage and a spotty furnace to a murder on the property. The general rule is that all matters which are material to the value or desirability of the property must be disclosed. If your contract contains a disclosure contingency, then once you’ve reviewed this disclosure, you will have a set amount of time to review it and change or rescind your offer.

What if I change my mind?

If you change your mind before you and the seller have agreed and signed, you can pull your offer at any time without losing your earnest money. However, once the offer is accepted, the purchase agreement has been signed, and all contingencies have been met, backing out means forfeiting your earnest money.