Submitting an offer for your next dream home can be overwhelming. That’s why we’ve broken down every step of the offer, paragraph by paragraph. Check out the video below, or skip ahead to the sections you need by clicking on the timestamps below. Scroll down to the bottom of this page to download a sample contract to follow along.
Bottom line: the offer protects you as a buyer more than anyone else.
1. Parties – 0:53
This is who is purchasing the property.
2. This property is – 0:57
Simply the address of the property.
3. Purchase price – 1:01
This describes both the price and the protection you have in submitting an offer. It states that the property must appraise for not less than the purchase price. So if the house is appraised for LESS than your offer price, you are not obligated to purchase this property and you can back out of the deal.
This also states what type of loan you have. If we skip to page 2, you’ll see that an FHA or VA loan must meet the certain guidelines of those loans. If you purchase it in cash, it would be for the exact sum. Remember, this is still contingent on an appraisal as well.
There is a box checked at the bottom of page 2 that states: “For your protection get a home inspection.” You already signed this! This is the one page document we sent to you explaining why it’s important for you to get a home inspection.
4. Agency – 2:15
This is an interesting section. It states who is representing who in the contract. “B” is the most common scenario stating that Keller Williams and our entire firm represents you as the buyer, while another firm within NWA represents the seller. In this case, clearly our fiduciary responsibility is to protect you in the negotiations, and the seller’s firm is responsible for protecting them.
However, sometimes this is not always the case. “C” is marked when Keller Williams represents both the buyer and the seller. This is called “dual agency.” If this happens with another Keller Williams agent who is not part of the Blackstone & Co. team, this actually works the same as if “B” were checked. Because we do not share information about you to other agents, we would continue to protect your information and negotiate hard on your behalf.
The only time this doesn’t work is when another agent within the Blackstone & Co. team is representing the seller. In this case, we will act as facilitators to the negotiation process, because we cannot disclose information to you or the seller that we might have learned earlier on in the process. Again, this is to protect both the buyer and the seller.
Lastly, “D” is marked only if we’re working with a for-sale-by-owner.
5. Loan and closing costs – 4:15
Closing costs typically average around 2.5 – 3% of the sell price. Typically (75-95% of the time), anything under the average sell price will have the closing costs paid by the seller. In this case, it will state: “Seller to pay up to, but not to exceed, XXX amount for buyers’ pre-paids, escrow items, and closing costs.” This covers you as a buyer so that you are only responsible for your downpayment, and the seller is covering the cash needed for your closing costs.
6. Application for Financing – 5:09
This is a protection for the seller stating that they need try to to apply for a loan.
7. Earnest Money / 8 Non-Refundable Deposit – 5:17
Earnest Money and Non-Refundable Deposits are best explained together. If you close on the house, it will work exactly the same if you decide to give either earnest money or a non-refundable deposit. In either case, the money gets credited back to you. For example, if you’re supposed to bring $10,000 during closing but already gave $1,000 in earnest money or a non-refundable deposit, you will only owe $9,000 on closing day.
However, there is a difference between earnest money and non-refundable deposits if the deal falls through and you do not close. If you paid in earnest money and the deal falls through, you should be able to get your money back. This is because the check is written to a third party company, typically a title company, which protects you either through the inspection or appraisal. If the property doesn’t appraise and the seller doesn’t drop the price to the new appraisal amount, then you would get your money back. The same goes for the inspection – if we as buyer can’t agree with the sellers as to what items need to be repaired, then typically you would be able to get your money back. However, you will not get your money back if you back out of the contract the day before we’re supposed to close for a reason that’s not listed within this contract. In that case, you risk losing your money.
With non-refundable deposits, the check is written out directly to the seller. In this case, if we terminate the deal we will lose the money because it’s already in the seller’s bank account. Typically, I don’t recommend this option unless it’s a new construction or we really want to put in a strong offer. For example, my investors will opt for non-refundable deposits with a contingency of completing repairs within 3 business days (“B: Buyer will pay to seller the deposit in the amount of $XXX… ii. Within 3 business days following agreement to repairs”). This way you have some protection based on the physical condition of the property.
9. Conveyance – 7:50
Conveyance describes what you own – the house, the land, etc.
10. Title Requirements – 7:57
Typically “C” is marked here where the buyer and seller agree to close with the same title company. This actually makes it cheaper by about $150 – $200 for both parties.
However, you have the option of choosing your own title company. While title companies are pretty much the same, they do differ in quality of customer service and communication. We will send you our recommended titles companies that we believe go above and beyond in delivering higher quality of service. If you choose this option, the contract reverts to “10b” which divides the responsibilities between the title companies. In this case, the seller will take care of the owner’s policy and title insurance, and you will take care of the mortgage policy.
11. Survey – 9:14
A survey protects you by confirming what property you would actually own. It will clarify exactly where your land begins and ends, and also notify you if someone is encroaching on your property.
Typically this is only important if you have a high level of risk, such as a large property of land. Depending on the size of the property, this could range from costing an additional $1,200 – $2,000. If we try to negotiate for the seller to cover this cost, they will most likely be less generous in other areas of the contract, so you need to weigh the cost/benefit of a survey.
However, if the property is in a subdivision you will most likely not need a survey because we can find the plot map at the county courthouse. If you’d still like to get a survey done, it will probably cost between $600 – $800.
12. Prorations – 11:21
In Arkansas, we pay taxes a year behind or “in the rears.” For example, this year in 2020, I will pay for my real estate taxes that were owed in 2019. So when you purchase a home in 2020, you will be paying for taxes for the entire year of 2020 in 2021. However, most likely you didn’t own the property for the entire year. In this case, during closing day the seller will give you their portion of what will be owed in taxes for owning the property from January 1 to closing day.
This also applies to your insurance. The seller is not technically paying your insurance but it will be prorated so that every month when you pay your monthly bill, it will include the amount the seller owed when they owned the property.
13. Fixtures and Attached Equipment 12:47
This shows an example list of various fixtures. This is also where we state anything that we want that is the seller’s personal property – usually the washer, dryer and fridge – at no additional cost. This protects you during the appraisal so that the appraiser doesn’t discount the cost based on the value of these fixtures.
14. Other Contingency – 13:35
This section is important only if purchasing this property is contingent on your selling your current property. In that scenario, this contract protects you by declaring that you must close on your other home in order to purchase this house. If you are a first-time home buyer or have enough money to purchase this house without selling your old one, then we would mark “no other contingency.”
If purchasing this house is contingent on the sell of another property, we can mark this in two ways: binding with escape or binding without escape.
Binding without escape states that the seller cannot list the property as “active” – they must list it as “pending.” This also means they can’t “escape” from the contract. So if they get another offer, they can’t back out of our deal until we completely exhaust our situation.
Binding with escape is more common since the seller is typically in control during an active listing. In this situation, the seller can still market the property. If they get another offer, then we have 24 – 48 hours to either move forward in purchasing the property, or terminate the deal.
15. Home-Warranty Plans 15:42
A home-warranty is a one year plan to cover all the items that your insurance doesn’t cover. If you choose a home-warranty, you should check with the company for a list of all the items that are protected.
We typically recommend getting a home-warranty if you expect the furnace or HVAC to break within the first year, since these are the two most expensive things to fix. This is rarely listed in the initial offer unless the seller already said explicitly that they’re providing it. It’s usually best to get a home warranty during the inspection. Say the furnace or HVAC is working, but it’s not working as well as it should – in this case, it’s harder for us to get the seller to replace an appliance that is currently functioning which costs around $2,500 – $7,000. However, we can negotiate the seller to pay for a home warranty which ranges from $500 – $700.
It’s important to remember that the home-warranty company is a for-profit company and so they will do everything they can to repair a broken system instead of replacing it. In the event it does break, you would be charged $75- $100 for a service call for their technician to assess the situation. The best case scenario is that they agree to completely replace it, in which case you get a huge repair for free, or at a very discounted rate.
However, it is rare for a home owner to have an easy experience working with a home warranty company. Keep this in mind that while a home-warranty can protect you, it also could be a hassle to get what you need.
16. Inspection and Repairs 18:27
This section gives you 10 business days to get an inspector out to the property to check its condition. Remember, an inspector compares the house to a brand new house and measures how it should be functioning. Following the inspection, we have 10 days to negotiate based on the condition of the house. The seller then has 5 business days to either accept our requested repairs, reduce the price due to repairs, or reject our desire to reduce price.
18. Seller and Property Disclosure – 19:29
A Seller and Property Disclosure is an 8 page document that asks a series of questions that the seller has to legally disclosure their knowledge of potential issues.
For example, a seller must disclose if there is any shared property such as a fence, if there was ever a water leak due to roof damage, or if there was ever a claim for insurance on the property. This is all informative for you to know upfront, and will also give you the companies you need to call to turn utilities on. In this case, “B” would be marked.
The only time “B” or “A” isn’t marked (“A” is if they have already disclosed this information) is if the seller doesn’t have this information, such as in the case of a foreclosure. Then “D” would be marked.
19. Termite Control Requirements – 20:29
A termite policy protects you for one year for if there are active termites during the first year that you own the property. If selected, the termite company will assess the house before we close and disclose if there are currently termites or if there ever has been termite damage. They will also treat the property 1-2 days after close. Most of the time – we’re talking 95% of the time – the seller will pay for termite control which typically costs $150-$300 depending on the size of the house.
20. Lead Based Paint Risk Assessment/Inspection – 21:43
This section seeks to protect you from lead-based paint if your home was built before 1978. Prior to 1968, homes were often built with lead-based paint which is linked to medical problems. This disclosure is based on 1978 just to give an additional 10 years of margin in case a homeowner had kept lead-based paint around the house for touch ups.
If your house was built prior to 1978, then the seller has to disclose whether they know of lead based paint. It doesn’t mean they can confirm if the house has it or not, it just states that should the seller know, they have to disclose the information.
If your house is built after 1978, this is not a problem.
21. Insurance – 22:51
This states you need to get insurance. This is great because for example if the roof is so bad and the insurance company won’t cover the roof, we can terminate the roof or the seller is going to have to fix it because everyone needs insurance on the property.
22. Closing – 23:11
This is simply the closing date. We typically date this to fall on a Tuesday or Wednesday because title companies are the busiest on Thursdays, Fridays or the end of the month.
Choosing the closing date strategically can be useful in a multiple offer situation. You can submit the best offer without compromising price by giving convenience to the seller for the closure date. Remember, convenience and security sometimes wins offers more than overall price.
My job is to find out what the seller needs in terms of setting a closing date, and helping you decide what works best for you as well. If you’re getting a loan, typically we have to do close somewhere between 35 and 45 days. If purchasing this home is contingent on selling your current home which hasn’t sold yet, then we’re going to need 60 days at least to close – and also to be more proactive in selling your current home.
23. Possession – 24:26
Normally, you will take ownership of the property when both you as the buyer and the seller sign, and the seller’s title company has all the money. However, there are some rare cases where you can choose early occupancy or delayed occupancy.
Early occupancy gives you ability to move into the property before closing day. For example, maybe you have a lease that ends prior to closing day and you need to move in right now. We could ask the seller to give us early occupancy and they would charge us a rent rate to give you that flexibility. This is obviously risky because if the deal falls through, you will have to move out immediately.
On the reverse side, delayed occupancy is where you close on a home but allow the seller more time to move out. This can be a negotiating tactic to offer more convenience. Say that seller is also buying a property and they’re closing on the same date as this deal. That’s hard to orchestrate moving all their stuff out of this house while not being able to move into their new place. If we’re in a multiple offer situation, we can give the seller a free week of rent so that they have the convenience to move out and move into their new place. This way, you might be able to win the deal without increasing your overall price.
25. Risk of loss – 26:38
This talks about who is responsible for what in the event of a natural disaster. For example, if a tornado completely destroys the property before signing on closing day, it will be on the seller’s insurance and therefore their responsibility. If the disaster happens after that time frame on closing day, then it’s your responsibility and on your insurance.
35. Licensee Disclosure – 27:21
This discloses if you, the seller, or someone in the seller’s organization has an active real estate license.
36. Expiration – 27:38
Finally, this entire document that we just went through is an offer indicated by your signature at the top of page 12. It will become a contract when the seller signs at the bottom of the page.
Each offer that is submitted has an expiration. This is not to push the seller into making a decision, but it does set expectations that we will continue to look for other properties if we do not hear back in a certain period of time. That expected response time is indicated here.
Conclusion
That’s it! You made it through your first offer. Remember to not get discouraged if your first, second, or even third offer does not close. That just means the deal was not going to be the best deal for you! We will find another property with better conditions to meet your goals.
Questions? Reach out to us below!
