What makes up an “Offer to purchase.” 9 things to know about an offer made by the buyer.
If your selling your home yourself or with the help of a realtor you are going to get offers from buyers. Selecting an offer is not as simple as just accepting the highest amount. Someone may be willing to pay 3 times the amount of another person, but if they cannot get financing or have the cash to do so, that is not serious offer. Therefore it is important to understand the anatomy of an offer, and what parts are the most important to focus on. Your objective should not only to ger the highest price, but to accept an offer from a buyer or buyers that can close.
An “Offer” from a buyer should include the following:
- The buyer or buyers full names and their address.
- In states where it is common for a buyer to have an attorney it will include their attorney information.
- If the buyer is represented by a realtor, it will state the realtor’s full name and the firm they work for. As well as their contact information. As well as their commission.
- It will include the “Offer.” This is the amount the buyer wants to buy your home for.
- It will state how much the buyer plans to put down and the amount of the mortgage they are seeking, or if they are paying all cash.
Lets focus on this for a moment. There are two down payments you are concerned with. The first is the amount the buyer is putting down when they sign the contract of sale. This is important because you want the buyer to put enough down when signing the contract that they will not walk away.
Let me explain this by way of an example. If someone is putting down $500 when they sign the contract, if the deal does not work out what do they have to lose, $500. If someone puts $5000 down when signing contracts, they have a greater incentive to make sure the deal closes, because there is a greater amount of money at stake for them to lose. And that is what you want. Enough down from a buyer that if they don’t close, you have been adequately compensated for the time your home was off the market.
The second down payment you are concerned with is the total amount the buyer is putting down, which includes the amount down when signing a contract of sale and the amount remaining of their down payment that is given at closing.
Quick example, Sales Price $400,000. The buyer is going to put a total of 10% or $40,000 down. When signing contracts they will put down $10,000. The remaining amount, $30,000 will be given at the closing.
A word about down payments:
There are many different loan programs. The VA loan, one for veterans of the Armed Services of the United States, will allow 100% financing, meaning no down payment is needed. Others like the FHA loans will permit as little as 3.5% of the purchase price as a down payment. Both are excellent loan programs. So what do you do when you get an offer from a buyer whom is going to use these loan products to buy your home? It is ok to ask for a downpayment upon signing contracts that is large enough to keep the buyer from wasting your time. The amount they put down can be returned to them by you when they close.
- The offer will have the date the buyers want to close by. This all depends on when the buyers and sellers want to close. It also depends on the area you are in because in some areas the closings take place very quickly within 3 weeks or even less. And there are other areas that take a little longer like 30 to 60 days. But as the seller make sure you allot enough time for to move and get all of your things together. It is ok and even common to some degree for a seller to ask to close in 90 days. There is no hard fast rule here.
- The offer will also state what items in the home are expected to remain when you move out. A good example of this is a washing machine. Some sellers want to take their washing machine with them and others are leaving it behind. When a buyer sees a home and sees a washer they expect it to remain. So the buyers offer usually states “As is” to make sure they are including everything they see that appears to be normally left after a seller moves out.
It is very important to note that a seller should, when responding to an offer, specify what is going to be left when the seller moves out. You do not want to have a problem the day of the closing because you took your chandelier and the buyers thought it was going to be there. You want the offer to spell this out.
- All 50 states provide a buyer a time frame to hold a home inspection by a licensed home inspector. However it is becoming common place for buyers to waive this inspection in order for the buyers offer to stand out and be accepted. Lets remember that the buyer waiving their rights to a home inspection does not absolve the seller from being completely forth coming on the property condition disclosure provided to the buyer. Should the seller not be honest on the property condition disclosure the buyer waiving the home inspection can still sue the seller should something that was not in the property condition disclosure arise.
- The offer should also be accompanied with a pre approval letter if the buyer is getting a mortgage or proof of funds if the buyer is paying all cash.
It is important to carefully review the pre approval letter, paying attention to the following:
- When was the pre approval issued. It should be no less than 60 days old.
- Is the purchase price on the pre approval the same or lower than their offer? If higher than their offer the pre approval should be updated. Let me explain. When someone is pre approved the loan officer verifies how much money the buyer has for the transaction. So for example if the buyers qualify for a mortgage amount of $400,000, and they have a total of $50,000 for the down payment alone, NOT including the closing costs, the purchase price on the pre approval will show $450,000, and a loan amount of $400,000 indicating the $50,000 for the down payment. If the offer is higher than the purchase price on the pre approval where is this extra money coming from to make that purchase? Do you know the lending guidelines on what is a permissible money source for the buyer? Gifts from none family members for example are not allowed on conventional mortgages. Let the loan officer sort that out. Which is why you need the pre approval to be updated.
- Is the loan amount the same or lower in the offer than what is on the pre approval? Obviously if it is higher the buyers are not pre approved for that higher amount.
- For those savvy enough, I recommend reaching out to the loan officer. A loan officer can make all the difference on a deal. And although it is not required that the buyer use the lender that is on the pre approval, it is good to just have a conversation about the deal, the loan officer will not be able to tell you anything about the buyer. But can say whether or not they think the offer made fits in the parameters of the pre approval that was issued. Sometimes this phone call alone can uncover an issue. There are lenders that allow borrowers to enter their own information and generate an automated pre approval. In other words, the documents provided to issue the pre approval have not been looked at by a human, like the underwriting process. Therefore the pre approval is less reliable.
If an offer is all cash there is several acceptable forms to prove they have enough funds to close.
- The most obvious is a bank statement. But look it over carefully noticing the date, and if you have all the pages to the statement. It is normally for the account number to be blocked out but not the account holder. That should match the name of the person buying your home. If it does not, then I say it is not acceptable without some verifiable documentation that connects the buyer to the account holder.
- A contract of sale for a home the buyer is selling. Not being a legal professional it is hard to validate a contract of sale. However you can look up the home on the internet, if listed with a realtor an internet search should show the home is in contract or pending status. If not sold through a realtor, the parties must have used a title company to hold the downpayment. Get their information and verify the transaction is still ongoing.
- An MLS listing sheet or another form of indicating their home is on the market. This is truly the weakest form of having enough funds to close but is the most common. Many times sellers don’t want to accept an offer until they find a home. However if the home is located in an area you don’t know how do you know it is listed for a good price? Does it look as nice in person as it does in the photos? There are many unknowns.
Getting an offer to purchase your home is not a simple thing that can be done with just a handshake. There are a lot of components that must be considered for a seller to not be stuck in a contract of sale for months with a buyer that really wants to buy their home but simply is unable to.
