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The Anatomy of an Offer – Part 1

You’ve been looking for months. You’re already pre-approved for a mortgage. You FINALLY found the right home. Now what? Well it’s time to put your money where your pen is and write up an offer!

The offer tells the Seller the terms under which you would like to purchase his home. The key elements to an offer are price, dates, and contingencies. We’ll take a look at each separately in this 3-part blog series!

The Offer Price

The offer price tells the Seller how much you are willing to pay for his house. Unless you are deeply confident in your own knowledge and instincts, your Realtor should help you understand the market value of the home by providing you with sale prices of similar, nearby homes for comparative purposes. For example, let’s say the home is priced at $549K. Your Realtor may tell you that similar homes in the neighborhood have sold in the past six months within the range of $475K to $525K. Armed with this knowledge and an understanding of how your target home compares to the others, you may decide that this particular house seems to be worth around $515K. A Buyer typically makes an initial offer that is lower than what she is willing to pay, but there are times when that is not advisable, such as during a strong seller’s market (when inventory is low and buyer activity is high), or when the home appears to be priced right from the start.

After confirming the offer price, you will fill in amounts for the first and second deposits. The first deposit, frequently called the “good faith” deposit, is a small deposit used to “bind” the offer and tells the Seller that you are serious. This check is generally a personal check, frequently for $1000, and is not deposited until your offer is actually accepted. If that never happens, the check is returned to you.

The second deposit will be paid when you sign the Purchase and Sale Agreement, which is typically after you have had a professional home inspection and confirmed that you definitely want this house. The second deposit can be any amount you want, but is typically between 5 and 10% of the offer price. The Seller will take note of your second deposit amount when considering your overall offer. A strong second deposit tells the Seller you are very serious about this home, since you are willing to tie up a fair amount of cash while waiting for it. The Seller may consider this when evaluating multiple offers. The second deposit can also be a personal check, although many Seller’s Agents will insist that it is in the form of a cashier’s check – particularly if there is very little time between the second deposit and the closing.

The final amount is the balance, and that is the offer price less the deposits. It is what you will owe to the Seller at the closing in order to complete the purchase of the house. Some or all of the balance may actually be covered by the mortgage – depending on how much you are financing and how much you are paying out of your own pocket.

In the event that you back out of the deal after the home inspection, your first deposit will be returned to you, provided you comply with the inspection response date specified in the offer. If you move forward with the deal after the inspection and proceed to signing a P&S and paying a second deposit, the P&S will specify under what conditions you can still legally terminate the deal and receive all of your deposits back. The most common one is the mortgage contingency, which you would invoke if your lender turned you down for a mortgage.

You need to keep a very sharp eye on all the dates and contingencies laid out in your offer so that you don’t put your deposit monies at risk in the event you are unable or unwilling to complete the transaction. These will be discussed in subsequent blog posts.