You’ve found a property either on your own or through a realtor, you’ve run your numbers, you’ve got a lender and now you are ready to make an offer. What’s next?
In this post I want to discuss a few items:
- Key components of a real estate contract
- How do you make a compelling offer to ensure you get the property you want
- The main contract contingencies and how they work
- Communicating with your realtor
In this blog, I am also assuming that you are working with a realtor. In a later post, I can discuss off-market deals.
The Real Estate Contract
It is important to understand the basics of the real estate contract before making an offer. Even when working with a realtor, you will have to let them know what terms you want to offer. It is important to note that every state has different contract requirements, especially California and New York, so please consult with your local team. You might even want to ask your agent for a blank template before making offers so that you have an idea of what the contract in your state looks like. I should also say that I am not a lawyer and this should not be taken as legal advice.
Alrighty! Now that disclaimers are out of the way, let’s continue!
Names of the Party to the Contract
One of the first decisions that you have to make is, who will be the purchaser. Is it just you, you and your partner, or your company? Sometimes you might have to change this after signing the initial contract. In the state of GA and FL, our realtors have been able to draft an amendment to change the purchase name. It might be good to confirm with your realtor the requirements for your state.
Description of the Property
In addition to the street address, properties usually have a legal description. These are generally found on the property tax appraisers’ website. Your realtor would populate this in your contract for you. The title company will verify this as well. In the past, we’ve had to make amendments to our contracts because the street address was not correctly stated and the lender wouldn’t accept it. For example, the address per the property tax appraiser’s website was 1709-1711 NW and the contract stated 1709 NW. Good practice would be to search for the property to verify (if available).
This is probably THE most important item. Make sure it has the right offer price!
Generally, the standard is 30-45 days from the contract date. Ask the realtor what they recommend, and verify with your lender (if using one) and title company to make sure that their timeline agrees with your closing date. If we are doing financing and it’s a new lender, we usually aim for 45 days. Usually, this is one of those items in the contract that will play into making a winning offer. The quicker the closing date, the more compelling your offer is. If I’m in a competitive market and I have a great lender or paying with cash/lines of credit, then I usually drop the closing date to 15 or 20 days. In GA, the contract has an automatic 8-day extension, so that gives us some leeway.
The earnest money is a deposit towards your purchase price. Generally, refundable until the contingencies expire (explained below). It serves to provide the seller with proof of the buyer’s good faith to purchase the property. If the contract is canceled before contingencies expire, the buyer gets the earnest money back. However, if the contract is canceled after contingencies expire, your earnest money goes “hard” meaning non-refundable and if you cancel the contract, generally the money goes to the seller. This may vary by state. This is another place where buyers have room to make a winning offer. Generally, realtors recommend putting 1% of the purchase price. If we want a property, we would generally put more. I think we’ve done like 10% for a few. A seller will take your offer more seriously when you have more skin in the game.
The contracts generally state who pays for closing costs. Confirm with your realtor who generally pays for what. For example, in Florida, who pays for closing costs varies by county. This is something you may be able to negotiate. Discuss with your realtor if perhaps, you can give the seller the asking price, but get a concession/credit for closing costs. Maybe you make an offer for the asking price with credit for closing costs. This could be advantageous if you want to bring less money to the closing table. Your mortgage will be based on the purchase price (without credits), so would essentially borrow the money that would have otherwise been for the closing costs. Generally, this does not make your offer competitive, but it is a good option when in a buyer’s market or when you need to lower the amount of money needed for closing. Brainstorm with your realtor.
A contingency is a clause in the contract that allows you to renegotiate or back out of the contract if certain expectations are not met. The main three contingencies that you will see are inspection, financing, and appraisal.
Inspection/Due Diligence Contingency
This is one that you want to discuss with your realtor. Depending on your state, you may have a Due Diligence Period, Right to Inspect Contingency, Right to Request Repairs, and some others. Generally, this contingency lets you back out for any reason or if the inspection is not favorable. The period would depend on your market, but generally can be 7-15 days. I always thought that inspection contingency and due diligence contingency were the same. In Georgia, you could waive the due diligence without waiving your right to inspect. This is why having a great realtor comes in handy. We bought our cabin in Blue Ridge, GA right when the market was at its peak, so we had to be really competitive. Our realtor suggested waiving our due diligence and adding a right to inspect and request repairs for major components like the roof, plumbing, septic, foundation, etc. If there was an issue with any of those items, we had the right to request repairs or cancel the contract. If the seller has nothing to worry about those items, they’ll likely see it as a competitive offer. Luckily, we got the offer accepted and thanks to the inspection clause, a minor issue with the septic was covered by the seller. We have yet to waive inspection altogether because we usually buy ugly, old houses and it would be too much of a risk for us. However, that’s another option.
I highly recommend talking to your lender before defining this one. This contingency lets you back out if you are unable to get financing for the property. You would want to know how long it takes your lender to give you approval. I have seen this contingency be 20-30 days. The fewer days, the more competitive. Personally, we have waived this contingency even when planning to get a loan. We usually do this when we have a backup plan for financing or are willing to risk losing our earnest money.
Case in Point
For our Quadplex, the BlueJays, we had planned to obtain financing, but we waived financing and appraisal contingency. We felt comfortable doing this because the purchase price was $100,000 and we had potential private lenders that would give us that much money. The lender required an appraisal, but appraisers in our market were taking forever. In the end, we ended up having to close with the private lender money. Good thing we had a backup plan! If you are wondering about the other terms, we did not waive the inspection period, we had 7 days and we had a $10,000 earnest money deposit.
This contingency usually lets you renegotiate the purchase price or back out of the contract if the appraised value of the property is less than the purchase price and the seller is not willing to lower the price. You would want to discuss this with your lender as well as your realtor. You need to know how long appraisals take in your area and how fast your lender can order an appraisal. Generally, I’ve seen the sweet spot be 20 days. We’ve waved appraisal contingency for most of our properties because we purchased them in 2021 and the market was really competitive.
Case in Point
For our cabin in Blue Ridge, GA, we had a 16-day contingency period with an appraisal gap of $5,000. Meaning that if the appraised value was lower than the purchase price of $5,000 or less, we would remain under contract. We would have to pay for the $5,000 out of pocket because the loan is for the lower of the purchase price or appraisal value. The initial contract price was $365,000, the appraisal came in at $356,000. After adding the appraisal gap of $5,000, we agreed to a final purchase price of $361,000 ($356,000+$5,000). The loan was based on the $356,000 and we had to add $5,000 to our cash needed to close.
Generally, when the market conditions allow and we are in a financial position to do so, we use aggressive terms to get properties at a discount. Quick close, no financing, and appraisal contingency are good ones to work with if the seller is motivated.
Communicating Offers to Your Realtor
As with any relationship, communication is key. Before you start making offers, have a conversation with your realtor so that you can have realistic expectations. Ask them, What kind of contract terms are getting accepted with the current market conditions?
You need to set a process in place with your realtor.
- How would offers be communicated? I highly recommend this is done in written form whether that is email or text. This will avoid any misunderstandings.
- What information do they need from you each time?
- How quickly will they be able to draft an offer after you send it?
- Are they able to draft contracts after hours?
You also need to continue having conversations with them to check on any changes in market conditions. As the market shifts, the terms required to get an offer accepted will likely change.
The current market conditions will determine what is required for a “winning” offer in your particular market. If in a seller’s market, then you are likely going to have to be more aggressive with your terms and give in to the seller’s requests. If it’s a buyer’s market, then you have the power, and sellers need to be more flexible with your terms. Your realtor can be your best resource when it comes to making offers that get accepted in the markets you are. Each market is different, even within the same state. For example, in Georgia, Macon, and Atlanta are completely different markets.
Finally, I want to note that it may take several attempts before you get an offer accepted, especially when entering a new market. Don’t get discouraged. Also, if you see a good property that seems overpriced, don’t be afraid to send an offer at the number that works. Some sellers just have unrealistic expectations. You never know. You might catch them at a desperate time.
If you haven’t read the other blogs in the Getting Started in Real Estate Series, here a few recommended readings from the blog:
- How to Prepare to Buy Your First Rental Investment Property
- Our Real Estate Buying Criteria and Why it is Important to Set Your Own
- Best Real Estate Analysis Hack – The DealCheck App
If you are looking to join a community and meet like-minded investors and/or aspiring investors, I wanted to invite you to our FREE REI Coffee Chat Community.
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