You`ve finally found a home you like, the price is in the neighborhood of what you expected to pay, and you`ve thought about it, fought about it, and lost sleep over it, but at last you`re sure this is the house for you. Now what?
Your next step is to let the buyer know that you`re interested in the property. You do this by making an offer to purchase it. That doesn`t necessarily mean offering to pay precisely what the seller is asking; you might decide, for example, that while the asking price is $225,000, you don`t want to pay more than $210,000.
Your reasons might be that the house has to be painted, that it has structural or design flaws that you believe reduce its value, that you think the asking price is greater than fair market value, or simply that the market is slow and you think you can get away with a lower bid. In a more active market, with several buyers vying for every house, you might be less comfortable with this last strategy.
I can`t teach advanced negotiation techniques in this book. All I can suggest is that you should do your homework, then let common sense be your guide. Be realistic about what the house is worth to you, what you can afford to pay for it and how appealing you think it`s likely to be to other buyers. If this is the only two-family home in the area in good condition to come on the market in the past year, you`re likely to have stiff competition. But don`t let yourself be stampeded. Not getting the house would be a bummer, but it`d be a worse bummer to wake up with a huge mortgage on a house you never really liked that much to begin with.
A trio of possibilities
Suppose you decide to make an offer close to the asking price but a little below it. One of three things will now happen: (1) the seller may accept your proposal, in which case you have an apgreement; (2) the seller may reject your offer outright, leaving it to you to decide whether to make another offer or walk away; or (3) the seller may reject your offer but make a counteroffer, which you then must decide whether to accept or reject or counter with yet another offer.
This process of negotiating the price begins with the buyer`s submission of a written ”offer to purchase” the property for a specified price, subject to any specified conditions or contingencies the buyer thinks are important. In many jurisdictions, the offer to purchase is a binding legal document. It commits the buyer to sign a more complete document, known as a purchase and sale agreement, sometimes called a contract for sale. In some areas it`s common to skip the offer to purchase and go directly to the P&S (as the trade calls it).
Whenever you`re aksed to sign a document, however, remember that there are generally legal implications. The time to consult your attorney is before you make a written commitment, no matter how straightforward and ”informal” it may seem. Trying to save money by waiting to see your attorney later is a false economy. In some areas it`s not at all common for buyers (or sellers) to be represented by an attorney in the home-purchase process, but I`m convinced that buyers are better off with an attorney on their side from the beginning of the negotiations. It`s easier and far less expensive for an attorney to help you avoid problems at the offer-to-purchase stage than to have to try to extract you from unwanted commitments later on.
Don`t regard the offer as ”just an offer,” reassuring yourself, or relying on the assurances of others, that any problems can be ”worked out in the P&S.” That may or may not be true. Your signature on the offer may bind you to sign a Purchase and Sale agreement, which in turn could obligate you to buy the property under terms you don`t like and without basic protections or
”contingencies” that you`ll want to have.
Also, don`t be misled by the fact that many real-estate contracts are entitled ”standard form,” as if they were drafted originally by Moses and haven`t been altered since first appearing in tablet form. Not so. These
”standard forms,” which tend to be weighted in favor of the seller and broker, can be, regularly are and usually should be altered to fit the individual situation and to represent the buyer`s interests more fairly.
Binders, deposits, interest
When you submit your offer, you`re required to provide ”binder” or
”earnest money” as evidence of your serious intent to purchase the property. The size of the binder varies but is generally not less than $500 or more than $1,000. Be reluctant to plunk down much more than that at the offer stage.
If your offer is accepted, you`ll proceed to the drafting of the more detailed purchase and sale contract-the P&S. When that agreement is signed, you`ll be required to place a deposit on the house in an escrow account; the deposit is usually between 5 and 10 percent of the purchase price. (Even if you plan to put 20 down, you shouldn`t tie up that amount in a deposit on a P& S.) Be sure that the P&S clearly states who will hold the deposit (it`s usually either the broker or the seller`s attorney), what conditions it will be held under and what will happen to the money if either the buyer or the seller defaults on his or her legal obligations under the agreement.
A question of interest
The P&S should also specify whether or not interest will be earned on the deposit. If it will be, the P&S must say who will get the interest that will accrue on the deposit while it`s being held.
Industry practices vary on all of these matters, but as a rule, the individual holding the deposit is not required to place it in an interest-bearing account (or to account for any interest earned) unless he or she is specifically instructed to do so. The buyer and seller must therefore decide whether they want an interest-earning arrangement. If they do, it should be specified in the agreement.
The next question is how to allocate the deposit`s earned interest. There is no absolute legal requirement in most cases, and industry practice varies according to locale. Sometimes it goes to the buyer and sometimes to the seller; sometimes the buyer and seller divide it. The interest can also
”follow the deposit,” meaning that it goes to whoever ends up with the money.
Pay careful attention to any language referring to the seller`s right to keep the deposit as liquidated damages ”unless he otherwise notifies you.”
It`s that ”unless” clause that can mean trouble. It does not mean, as you might assume, that if you renege on your offer to purchase, the seller will just keep your deposit and make an end of it. Rather, it means that the seller will keep your deposit and still be in a position to sue you for additional damages, or even to go through with the transaction under the terms you had previously accepted. Therefore, many buyers` attorneys will insert language in the P&S that specifically limits the seller`s default damages to the amount of the deposit.
