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An Offer They Can’t Refuse

Understanding the Purchase Contract


There are many factors that go into getting a great deal on a home, but it all starts with a strong offer to purchase. While offering a higher price is always an easy way to be sure you get the home you want, there are many other ways to make an offer attractive to a seller. It is crucial to understand all of the tools you have at your disposal so you can win the home (and get a great deal too!) Let’s explore some of the most important (and often misunderstood) levers in the California Association of Realtors Residential Purchase Agreement.



First and foremost, if you are new to real estate, your real estate agent should take the time to teach you the contract line by line, and when it is prepared, you (the buyer) should review it again very carefully before signing. An offer to purchase is a legal contract, and when the other party signs it you will have certain obligations that you must understand. This is why it is so important to have experienced representation on your side (a great real estate agent).


In the following paragraphs, I’ve attempted to boil down a very complicated discussion into something a bit easier to understand. To help, I am going to provide an analogy at the end of each section to put the concepts into the context of selling lemons at a farmer’s market. My hope is that these will make it easier to perceive the concept from the seller’s perspective, and therefore see how it affects the attractiveness of the offer.



The key points of leverage in the purchase offer:

  • Price

  • Initial Deposit

  • Down Payment

  • Proof of Funds / Finance Terms

  • Inspection Period / Other contingencies

  • Items Included in Sales

  • Close of Escrow

Let’s explore each of these points in more detail –


Price


This is the most obvious point of leverage in a real estate negotiation and needs little explanation. The higher the price, the more attractive the offer is to the seller and the less attractive the offer is to the purchaser. While price is a crucial part of any offer there are many ways to make your offer attractive to the seller besides raising the purchase price. In investing, it is very important to determine a price that makes sense for you and stick to it, as the higher the price paid for an investment, the lower potential returns it can offer. Today’s real estate market is very competitive, so some competitive listings will be sold over asking price, but a solid offer with a slightly lower price will beat a shaky offer at a higher price any day.


Ex: If you were selling lemons at a farmer’s market, who would you sell to: the person who offers you cash for the price you asked for the lemons, or someone who needs the lemons for a recipe tonight but will pay you a slightly higher price 30 days from now?


Initial Deposit


When making a purchase offer, the purchaser must put down an “initial deposit”. This is the money deposited immediately with escrow as a “good faith” deposit to show the seller that the offer is serious. This is money that the seller could keep IF the buyer fails to perform later on in the process. While this is customarily set at 3% of the purchase price, a larger deposit could show a seller that you are more invested in closing the deal.


Ex: Two separate customers need 100 lemons but they will need to pay you later today when they pick up their paycheck. Who do you sell to, the one who leaves her car keys as collateral for taking the lemons, or the one who does not?


Down Payment


Your down payment is the final cash that you must bring to the table to close the deal. The generally accepted amount is 20%, but some borrowers may be able to put down as little as 5% if they choose. The reason why this matters to the seller is that the more money the purchaser is willing to put down out of pocket, the less they will have to finance, meaning the loan will be much easier to close, and the deal is less likely to fall through due to financing. We will explore this more in the next section.


Ex: Two separate customers want to buy $500 worth of lemons today. One has $450 in his pocket, and just needs to get the other $50 at a later date from his father. The other has $100 and needs to get the other $400 from his father. Who do you sell to?


Proof of Funds / Finance Terms


Financing is one of the most important, if not the most important factor in the strength of a purchase offer. Put simply, this is the answer to the seller’s all important question “Where is my money coming from?”. A serious buyer must attach a proof of funds with every offer. A proof of funds may be a copy of a current bank statement showing that the purchaser has the money for the down payment and that they are generally in good financial health. Also commonly attached to purchase offers is a loan pre approval: a statement from a potential lender saying they are willing to make you an offer of X amount of money in order to purchase a home. A common point of confusion here is the concept of “All Cash”. One might ask: “If the seller is getting a check at the end of the deal, what does it matter if it comes from a lender or if it comes from the buyer directly?” This is a great question and one that gets to the heart of why the finance terms are important. An all cash offer means the deal is not contingent upon outside financing, which means that one of the major pressure points (“Will the bank lend me the money?”) has been removed. An all cash offer at asking price will beat a shaky offer above asking almost every time.


Ex: Two separate customers want to buy $500 of lemons exactly 30 days from today. One shows you a bank statement that says they have $1000 in a checking account and writes you a post dated personal check for 30 days from now. The other shows you a copy of their father’s bank statement that has $1000 in it and tells you he will pay in 30 days. Who do you sell to?


Inspection Period / Other Contingencies


When a purchaser makes an offer to purchase, that offer generally has various “Contingencies”. These contingencies are points in which the purchaser can legally exit the contract and receive his deposit back if the property is not what he thought it was when making the offer. Some of these contingencies include: Financing and finance terms, a review of various disclosures about the property, a physical inspection, and a review of the property title, to name a few. When making an offer a purchaser must decide how long they would like to take to review all of these points and remove their contingencies. Until all contingencies have been removed, the purchaser can still exit the contract and get their deposit back. For the seller on the other hand, the longer the contingency period, the longer the property must be off the market and therefore the more risk to the seller if the deal does not go through. Inspection periods are generally between 10 and 20 days, and a shorter one could make an offer significantly more attractive to a seller.


Ex: Two separate customers want to buy a sealed box of 500 lemons in 10 days. One says he will buy the lemons but he would like 3 days after the sale to look at each lemon and if it is not perfect they would like to ask you to replace that lemon. The other customer just wants the box of lemons. Who do you sell to?


Items Included in Sale


This is a relatively simple one, but in some cases may carry a lot of influence. For example, if a home has expensive custom furniture and appliances, these items may or may not be included in the sale. As such if these items are very valuable this can become an important factor in the negotiation.


Ex: One customer will buy your lemons at full price as long as you include the box you currently use for display. Another customer will pay you full price and take the lemons immediately without the box. Who do you sell to?


Close of Escrow


This is the period of time in which you believe you can have the deal done. This is a very important and powerful factor for both buyer and seller. The faster you can close the deal, the less time the seller has to wait until they get paid, and the more certain it is to close, because offers with quick escrow periods often don’t have to rely on financing to close. In addition, if the deal falls through, the seller will be able to put the property back on the market sooner, greatly decreasing the overall risk to the seller. In essence this sums up all of the other time related levers of the purchase agreement. The faster the total time to close, the less complicated the transaction will be and the fewer things that can go wrong. While a generally acceptable escrow period for an offer contingent on financing might be 45 days, 30 days may be possible even with a financing contingency. For offers that are all cash, it is not uncommon for a deal to close in as little as ten days.


Ex: One customer wants to buy a box of lemons but he needs 30 days to get the money together and secure a refrigerator to store them in. The other customer already has the money and refrigerator and will take them now. Who do you sell to?



In closing, while there are many factors that go into putting together a purchase offer, those discussed above are some of the most crucial to every transaction. Any financial agreement is all about the assumption of risk. The ideal situation for the seller is one that closes quickly with no contingencies and an all cash buyer. This type of offer presents very little risk for the seller and as such these terms may present an opportunity for the purchaser to pay a slightly lower overall price. The ideal situation for the buyer is one that has a multitude of contingencies and a longer escrow period, as these all present opportunities to further negotiate how much money they will end up paying for the property. As a result, this type of offer shifts more risk to the seller. It is balancing between these two extremes that will bring both the buyer and seller together in a fair deal for both parties.



 

Have you had any thoughts of buying or selling a home or investment property?  LA Creative Realty is a boutique real estate brokerage firm. We combine generations of real estate and investment experience with modern technology, exceptional client relationships and thoughtful investing to deliver the dream home for our Buyers, the best prices for our Sellers, and the best returns for our Investors.



 



 
 
 

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