When you are ready to make an offer, there are several things you need to decide before the offer can be written up and presented to the seller. Here’s a list of 15 questions you’ll be asked about your offer.
- Offer Price – the price you are willing to pay for the property
- Escalation clause – whether or not you want to include an escalation clause, and the maximum amount you’re willing to pay. An escalation clause simply states that you’ll be willing to pay $1,000 (or any amount) above the highest offer they receive, up to a maximum price you’re willing to pay. Not all sellers look favorably on an escalation clause so you’ll want your agent to reach out to the listing agent to see if the seller would be willing to consider an escalation clause.
- Appraisal gap – when the market is out of balance, and there are more buyers than there are sellers, we have a sellers market. Often listing agents will want to know how much of the appraisal gap the buyer is willing to pay. Lenders order an appraisal before closing. In a sellers market, the appraised value can easily be less than the contract price. When this happens, the lender uses the appraised value (not the contract price) to calculate the down payment percentage and loan percentage. If the buyer really wants a property, and is still willing to pay the contract price, even if it is more than the appraised value, the buyer has to pay the difference between the contract price and the appraised value (appraisal gap) in addition to the down payment and closing costs.
- Earnest Money – the amount of money you want send with your offer to show the seller you are a serious buyer. Typically, buyers include 1% of the sales price as the down payment. Some buyers only provide $500 or $1,000 as earnest money. Other buyers provide $5,000 or even more as their earnest money. The amount of earnest money shows the seller that you are a serious buyer. The full amount of the earnest money will be credited to the buyer at closing. In that sense, it doesn’t cost anything to offer a larger down payment. However, the more earnest money the buyer provides, the more risks the buyer is assuming since unforeseen circumstances could cause the buyer to change their mind, and end up losing their earnest money. Typical contracts have contingencies to get a full earnest money refund in the event financing falls through, or if the house does not pass inspection. But if the buyer just gets cold feet, they could lose their earnest money deposit.
- Closing Date – the date in the contract which specifies when the closing will take place. This is typically 4-5 weeks after the offer. However, it could be longer or shorter. Most loans can be closed within 4-5 weeks. Cash buyers can offer to close quicker – sometimes within a week or 10 days. If you are flexible, considering your current living situation, it could be wise to ask your agent to ask the selling agent if the seller has a preference for when they’d like to close.
- Home Inspection – do you want to get a home inspection? Will you want to make your contract contingent upon a home inspection? Home inspections cost about $350 or more, depending upon the size of the home, and the buyer pays the cost of the home inspection when it is done. Real estate agents strongly recommend buyers get a home inspection so that it can be determined exactly what is wrong with the home before closing.
- Survey – do you want to get a survey of the property lines? Surveys cost about $450 for a typical half acre neighborhood lot, but can cost much more for larger parcels and especially parcels with odd dimensions. The survey insures that the buyer knows exactly where their property lines are located, and it helps to avoid disputes with neighbors should structures or fences be located over the property line. Real estate agents strongly recommend buyers get a survey, but some buyers do not want the added expense in circumstances where lot lines are obvious in a neighborhoods with many adjoining rectangular parcels with fences in place. Not getting a survey can be risky as you may later learn that your driveway or fence is over the line on a neighbor’s property.
- Termite Contract – do you want a termite contract and and wood infestation report? Lenders often require a termite contract to insure that the house does not have hidden termite damage. Government backed loans such as VA, FHA, and USDA will often require a wood infestation report in addition to a termite contract. Sellers often have a current termite contract that can be transferred to the buyer for about $150. New contracts can cost $500 or more. Adding a wood infestation report can add $150 or more to the cost of a termite contract.
- Septic Inspection – if the home is not connected to a sewer system, it will likely have a septic tank instead. This will save significantly on the monthly water bill in Jefferson County since the sewer system charges are based on the amount of water used – can run 2-3 times the water charge. However, septic tanks should be cleaned out every few years and can have expensive repairs when roots grow into septic field lines. Also, septic tanks can crack and need replacing. Therefore, if the home is on a septic tank, it is recommended that the buyer get a septic inspection which costs $450 or more. This costs is paid by the buyer.
- Home Warranty – do you want a home warranty to cover major systems in the home? They typically cover plumbing, electrical, HVAC, etc. Home warranties help home buyers avoid large unexpected expenses when things break on the home. Home warranty coverages vary by company and coverage – costing $650 or more depending upon the coverage. Home warranty companies usually charge a trip fee of $75-$125 or more each time the homeowner calls to get a covered repair. Some warranties have other charges in addition, such as charging for each pound of freon added to an air conditioner system.
- Down Payment/Loan Type – how much are you planning to put down on your mortgage? Paying all cash? Paying 3.5% down on FHA loan? Paying 0% down on USDA or VA loan? Paying 20% down on a conventional loan? Your lender has probably discussed these options with you based on your credit score and available funds you have for closing. Private Mortgage Insurance is usually required for loans with less than 20% down. PMI is a monthly insurance premium buyers pay to insure the lender that the loan gets paid. Should default occur, the insurance makes the lender whole. PMI can run as little as $75 a month, and often as much as $200 a month, and even more. It all depends upon the loan type and down payment.
- Closing Costs – do you want to ask the seller to pay a portion of your closing costs and prepaid expenses? In balanced markets, sellers often agree to pay up to $3,000 (sometimes even more) of the buyer’s closing costs and prepaid expenses. However, in sellers markets, sellers rarely agree to pay closing costs unless the buyer offers to pay more than the asking price to cover the amount of closing costs they ask the seller to pay. By raising the price by the amount of closing costs requested, assuming the property will appraise for the higher price, the buyer is able to finance that portion of the closing costs and prepaid expenses in to their mortgage.
- Title – how do you want to hold title? Exact legal names the buyer wants to appear on the deed. JTWROS (Joint Tenants With Rights Of Survivorship) means that both husband and wife buyers will hold title together, and if either one dies, the other automatically owns the property.
- Share Closing Attorney Charge – are you willing to split the cost of the closing attorney with the seller? The closing attorney does not represent the buyer or the seller. They represent the lender at closing. It is common for both buyer and seller to share this cost equally. However, it can be create a conflict of interest. Both the buyer and the seller have the right to bring their own attorney to the closing table to represent them in the transaction. However, since the attorney represents the lender, most buyers do not bring their own attorney since if the lender is satisfied, many feel their interests are covered.