The most important factor to getting what you want
… is to know what you want
… and to prioritize if you have a list of wants.
Arizona home buying offer … a few home sale/purchase deals are rather simple transactions requiring only the most basic agent knowledge to establish and manage to closing. Another few require genuine “artist-type” Realtors® on both sides of the deal to establish, and then the patience of a saint to get closed.
By the way, the more difficult “deals” are not possible with adversarial agents. In fact, there is never a need for adversarial agents. A client’s best interests are far better served when agents are entirely constructive and seeking the best possible win-win situation. If you have an agent who seems always “at war” with the other side, you need a different agent.
Your “offer” to purchase residential real estate will be a complete purchase contract. Anything else is just “talk”.
The seller could simply “accept” your offer, but in the bulk of cases that will not happen. The offer will be just the first step in negotiations. Below is a list of just a few of the issues that may be subject to “negotiation” and discussed in detail below.
Condition & Features
Earnest Money Deposit
| Financing Impacts
In addition to price, the Purchase-Contract-0217t includes details for how you intend to finance the home, your down payment amount, who pays what closing costs, inspection provisions and time limits, personal property to be included, terms of cancellation, the date for “closing”, when you get physical possession, and how disputes are to be resolved should they occur, just to list a few of the issues.
The AAR Purchase Contract is designed to be fair and neutral to both sides, but how the “blanks” are filled in can result in a contract that is definitely not neutral.
If the real estate is to be your home and is now the seller’s home, the transaction is a major life event for you both. Even if it is investment property for one or the other of you, the value of the asset means neither will take any part of the transaction lightly.
For best effectiveness, you should put yourself in the seller’s shoes and consider his/her reaction to every aspect of the contract. The discussions herein are largely about anticipating that reaction and “crafting” a contract that gets the results that both you and the seller respectively want.
So, a very important issue … What does the seller want?
The price, or close, of course, but there are always other factors. Below is a list of near-universal seller wants, but the best approach is to ask the listing agent about the seller’s priorities right at the start. For negotiating reasons, the list agent might not be entirely candid, but at least you might get some hints.
Contract Contingencies – Basic What if some aspect does not go as anticipated? Of course, you would want to cancel the transaction without penalty. Provisions within the contract allowing for this are called “contingencies”, which protect you in case you cannot, or choose not, to complete purchase of the property. If you cancel a contract without having an applicable contingency, you could find yourself forfeiting your earnest money deposit, or worse.
There are several “basic” contingencies written into the AAR contract, such as for financing, physical condition of the property, restrictions on use or appearance, and title/ownership issues. For example, if during escrow you learn that you cannot get acceptable financing, or the property is not in good condition, or there are restrictions prohibiting the changes you want to make to the property, you could cancel the sale and not lose your earnest deposit.
Contract Contingencies – Unique Unique contingencies can be written into the contract. For a common example, you may be relocating and want to set up the purchase the next home before completing the sale of your current home, so as not to be “homeless” but you definitely do not want two homes and two mortgage payments. You would make closing of your current home sale a condition to completion of your purchase offer. Unless your current home is a “pending” sale and well into the escrow process, the seller is not likely to accept your offer with this contingency. In fact, most “unique” contingencies are likely to not be received well.
Earnest Money Deposit The money the buyer has “at risk” during the escrow process … but how much risk is there, really? Not much! The numerous contingencies provide buyer penalty-free exits for nearly the entire length of a normal escrow. The amount of the earnest money deposit is more for perceptions than for actual commitment, but sellers are usually favorably impressed by a greater amount here.
Eventually, when the transaction closes, the earnest deposit becomes part of the down payment for a purchase with financing. The larger the down payment, the larger the earnest deposit might be. During a hot market there may be multiple offers on the property that interests you. A large deposit may impress a seller enough so they will accept your offer instead of someone else’s. With a cash offer, 5% of the price is about the minimum, and 10% is more common.
Although significant problems are the exception and not the rule, they do occur. “Just in case” there is a nasty or prolonged dispute between you and the seller, the less money you have tied up in a deposit, the fewer funds you have at risk.
Since the circumstances of the transaction and the other aspects of your offer have such an important bearing here, let your buyer’s agent be your guide for what your earnest deposit should be.
Closing Date – Close of Escrow – COE For many possible reasons, it is not true that sellers always want to close ASAP. This is one of the most important questions your buyer’s agent should ask of the listing agent prior to writing the offer. If possible and convenient, specify for COE the exact date the seller wants. This is often an easy and effective way to get the seller headed toward the “yes” that you want.
But let’s back up … what is COE? As specified in the AAR purchase contract, “… COE shall occur when the deed is recorded at the appropriate county recorder’s office.” … not when docs are signed, not when money is delivered … both of which must have occurred prior to the recording event, which is done electronically by the escrow service. At the instant the deed is recorded, the buyer “owns” the property. In most cases, the buyer gets possession of the property at COE, and this is, by far, best, as discussed below regarding “Possession”.
But there may be good reasons to try to get a specific COE. For example, if you are renting and need to give the landlord notice that you are moving out, you may want to own the home prior to your rental move-out date to allow some flexibility to ensure you are not homeless and to allow for a more casual move.
There are also times when closing can be delayed by weeks, through no fault of your own. Have back-up plans prepared for such a contingency. A worst-case scenario would be to have your moving van parked in front of the home and not be able to move in. Solutions to those problems are typically rather expensive.
Possession The seller has “possession” essentially as long as the seller has unimpeded access. You get “possession” when you have exclusive access. It is far best if the seller is moved out and the buyer has yet to move in as of COE, so that “possession” is effectively simultaneous to the COE event. There are some reasons why a seller may want post-COE-possession, or you may want pre-COE-possession. Both of these are very bad situations. As stated in the AAR contract, “Brokers recommend that the parties seek counsel from insurance, legal, tax and accounting professionals regarding the risks of pre-possession and post-possession …”.
Financing Impacts There are many “types” of financing … conventional, FHA, VA, and seller carryback just to name a few. Within the AAR contract, you specify the type of financing you intend to acquire for the purchase.
A “conventional” loan is one for which the first-lien amount is 80% or less of the purchase price. This type of loan with this amount of down payment usually involves less strenuous requirements, so is usually better received by a seller.
VA and FHA loans impose greater financial and performance obligations on the seller and are not so well received by a seller. For VA loans buyers are prohibited from paying certain types of fees that are often charged by lenders, escrow companies, settlement agents, and title companies. They are called “non-allowable” fees. They get charged anyway, but as the buyer, you are “not allowed” to pay them. The result is that the seller usually ends up paying them instead of you.
Most of these “non-allowable” fees come from your lender. By the time you are making an offer you should have already been pre-qualified by a loan officer, so you should know what the lender’s non-allowable fees will be. Your buyer’s agents can also get the info for the amounts of non-allowable fees to be charged by the escrow/title insurance company.
Also, appraisals for FHA and VA loans are a more detailed than on conventional loans. The appraisers are required to perform a minimum sort of inspection, as well as evaluate the market value of the property, and sometimes specify that repairs are required prior to COE and funding of the loan. Such repair items are very likely to be also reported by a professional inspection, but these reports are usually not provided to the lender and are the repairs are subject to negotiation between you and the seller.
Because of the additional fees and appraisal issues, if you specify a VA or FHA loan as the type of financing, the seller will likely be less willing to negotiate on the price.
If you are limited on cash or beyond the limits for qualifying ratios, you could specify that the seller is to pay all or a portion of your closing costs, or buy down your interest rate for the first year or two, or even that the seller “carry back” as a second mortgage part of the cost of the home. In cases where the seller does not need all the proceeds from the sale, this is a possibility. The advantage of a carry-back to you is not only less cash for the purchase, but you may also be able to avoid paying mortgage insurance.
Whenever you ask for incentives such as these, you will probably find the seller less willing to negotiate on price. After all, what you are really asking for is to have the seller to give you some money to help you buy their house. You get the benefit of paying less cash in the beginning by paying a bit more in the long run.
Financing Terms Impacts Since your offer is contingent on you obtaining a loan to finance the purchase, the seller is going to carefully consider the details you specify for that loan. A greater down payment percentage usually means the loan is more likely to be approved. A higher interest rate limit relative to current prevailing rates means there is less probability that rates will increase beyond that limit. An adjustable rate loan is usually has more flexibility for a change in conditions that a fixed rate loan.
Condition & Features Sellers universally want to sell the property “as-is”. You want the property to be perfect. Usually, neither of these conditions apply, especially the “perfect” part. Even if the seller is willing to make “repairs”, these are usually just to make the structure, systems and/or equipment properly functional. A property that is generally in poor condition is not going to be much improved during escrow. The other extreme is a property in exceptionally good condition. Your offer price should reflect the condition of the property relative to other properties in the area.
Homes directly next door, having exactly the floor plan, being exactly the same age, in comparable condition and having exactly the same “location” factors (neither being a corner lot, for example) can easily have a true market value different by 25%. A pool, tile roof, upgraded systems, granite counters, upgraded flooring, and larger lot size are just some of the features that would produce a very significant difference in value to otherwise near-identical properties. You offer should reflect the presence or absence of such features relative to the “typical” home in the community.
Inspections You may be tempted to forgo inspections to make your offer more attractive … a very bad idea. Even if you have specified in the contract that you are willing to purchase the property as-is, you should still have a professional physical inspection performed, and you should inspect HOA and title commitment documents, and any other inspections that appear warranted … to find out if the “as-is” condition is acceptable to you. If not, cancel the transaction.
Pre-Qualification For a financed purchase, most sellers will require that you submit an AAR Pre-Qualification form prepared by the lender of your choice to indicate the type of loan that you have applied for and, most important, the steps the lender has taken to determine that you are qualified to make the purchase. The boxes checked on this form can reflect minimum investigation by the lender – not good. Even if the “Pre-qual” reflects extensive investigation, a good listing agent is going to call that lender and ask some questions to get a “feel” for the true quality and extensiveness of that work. A weak “pre-qual” almost assures a declined offer. Have your lender do the work and be prepared to give you a solid, honest report.
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