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Home Buyer's Tips
Making an offer on a property.
What is a Good Offer?
After you settle on the home you wish to buy, you are ready for the next action step in the negotiating process: making an offer to purchase. No standard, universally accepted real estate purchase contract is used throughout the country. On the contrary, purchase (or Earnest Money Contracts) contracts vary in length and terms for state to state and, within a state, from one locality to another.
A carelessly worded, poorly thought out offer can turn what should be a productive negotiation into an adversarial struggle between you and the sellers. Instead of working together to solve your common problem (that is, "you want to buy, and they want to sell, how can you each get what you want?"), you get sidetracked by issues that can’t be resolved so early in the negotiating process.
Although buying a home can be a highly emotional experience, good offers defuse this potentially explosive situation by replacing emotion with facts. Buyers and sellers have feelings that can be hurt. Facts don’t. That’s why facts are the basis of successful negotiations.
All good offers have three characteristics in common: Good offers are based upon the sellers’ most important concern a realistic offering price. You shouldn’t pull the offering price out of thin air. Instead, base your offering price on housed (comparable to the seller’s house in age, size, condition, and location) that have sold with in past six months. Sellers’ asking prices are often fantasy, where as, the amounts that comparable houses in the area have sold for are facts. Focus on facts.
Good offers have realistic financing terms. Your mortgage’s interest rate, loan-origination fee, and time allowed to obtain financing must be based upon current lending conditions. Some offers get blown out of the water because a buyer’s loan terms are unrealistic If you’re been pre-qualified or pre-approved for a loan, you should stress that advantage when you present your offer. This proves to the sellers that you’re a creditworthy buyer who’s ready, willing, and financially able to purchase their home. Focus on facts.
Good offers don’t ask the sellers for a blank check. Unless property defects are glaringly obvious, neither you nor the sellers will know if any corrective work is needed at the time that your offer is initially submitted. Under these circumstances, it’s smart to use property inspection clauses that enable you to reopen negotiations regarding any necessary corrective work after you’ve received the inspection reports.
When making an offer include the following points:
The address and legal description of the property (lot, block, and square recorded in government records).
The names of the parties involved (brokers where applicable).
The price, down payment, loan amount, type of loan, and the amount of the deposit.
A time limit for the response to the offer, for getting financing and closing on the house, and for moving in.
Certain conditions, or contingencies (financing and property inspections), that must be met.
Other provisions, such as what personal proper is included; whether certain payments are prorated; how assumption, damages, and other special circumstances are handled; and so on.
Remember that negotiation is an ongoing process. After the action of having your offer accepted, your property inspectors gather information. After they’ve determined what is actually required in the way of corrective work, your and the sellers can renew your negotiations armed with hard facts. This sequence beats wasting time and energy by arguing with the sellers about the cost to complete corrective work before either of you know the precise number of dollars needed to do the repairs. Again, focus on facts.
If the sellers agree with the price and terms contained in your offer, they’ll sign it. At that point, you have what’s call a ratified offer (that is, a signed or accepted offer). This doesn’t mean that you own the house. Thanks to contingencies, most ratified offers are only agreements to agree initially.
Getting the Down Payment
In the ideal situation, you should purchase a home and have enough accumulated for a down payment so that your down payment represent 20 % of the purchase price of the property. Twenty percent down is the magic number because it’s a big enough cushion to protest lenders from default.
If like most people, you plan to borrow money from a bank or mortgage company or through a mortgage broker, be aware that almost all require you to obtain private mortgage insurance (PMI) if your down payment is less the 20% of the purchase price of the property. PMI is not a permanent cost. Your need for PMI vanishes when you can prove that you have at least 20% equity in the property. The 20% can come from loan pay down, appreciation, improvements, or any combination thereof. Note also that, to remove PMI, most mortgage lenders require that an appraisal be done at your expense.
Especially if you’re just starting to save or are still paying off student loans or worse digging out from consumer debt saving 20% of a property’s purchase price as a down payment plus closing cost can seem like a financial mountain. Don’t panic and don’t give up. Here’s a grab bag filled with time-tested ways to overcome this seemingly gargantuan obstacle:
Boost your saving rate. Being efficient with your spending is always a good financial habit, but efficient saving is a necessity for nearly all prospective homebuyers. Most people have fat in their budgets. Assess your current spending trends and boost your savings.
Set your sights lower. Twenty percent of a big number is a big number, so it stands to reason that 20% of a smaller number is a smaller number. If the down payment and closing costs needed to purchase a $ 150,000 home are stretching you, scale back to a $ 120,000 or $ 100,000 home, which should slash your required cash for the home purchase by about 20 to 33 percent.
Check out low-money-down loan programs. Some lenders offer low-down-payment mortgage programs where you can put down as little as 3 to 10 percent of the purchase price. To qualify for such programs, you generally must have excellent credit and purchase PMI. In addition to the extra expense of PMI, expect to get worse loan terms higher interest rates and more up-front fees with such low- money-down loans.
Access retirement accounts. Some employers allow you to borrow against your retirement saving plan. Just be sure that you understand the repayment rules so that you don’t get tripped up and forced to treat the withdrawal as a taxable distribution. And, thanks to the 1997 tax law changes, you are now allowed to make penalty-free withdrawals for IRA’s for a first time home purchase.
Get family help. Your folks or grandparents may like, perhaps even love, to help you with the down payment and closing costs for your dream home. Why would they do that? Well, perhaps they had financial assistance from family when they bought a home, way back when. Another possibility is that they have more money accumulated for their future and retirement that they may need. If they have substantial assets, holding onto all these assets until their death could trigger unnecessary estate taxes.
Look into seller financing. Some home sellers don’t need all the cash immediately form the sale of their property. Such sellers may be willing to entertain the idea of offering you a loan, either partial or full. Although some sellers advertise that they are willing to help finance, others must be asked. From a lender’s perspective, an 80-10-10 loan is as good as 20 percent down. An 80-10-10 loan is one in which the buyer puts 10 percent down and the seller extends a 10 percent second mortgage usually for at least five years, so buyers have time to build up equity or save enough and refinance into a new, larger, 80-percent conventional mortgage.
Get partners. With many things in life, there is strength in numbers. You may be able to get more home for your money and may need to come up with less up-front cash if you find partners for a multi-unit real estate purchase. For example, you could find one or two other partners and go in together to purchase a duplex or triplex together to purchase a duplex or triplex.
