Your home ownership journey officially starts with an offer to purchase. In Massachusetts, an offer letter is a legally binding document that communicates your intent to purchase a property from the seller. This is a document that you will prepare with your real estate agent. The offer letter outlines key parameters including price of your offer, terms, contingencies, and more. It’s a crucial step in the purchasing process and this article will address 5 key considerations you don’t want to miss in your offer.
Price: Show Me The Money!
One of the most stress-inducing aspects of purchasing a home is figuring out the right price. This is as much of an art form as it is a science. Offering too little, you risk losing the property. Offering too much, you risk leaving money on the table. An experienced real estate agent will be able to not only gather market data to support the purchase but ALSO put together a winning strategy.
Get The Comps Before You Make An Offer
If I try to sell you a pencil for a thousand dollars, you’ll think I’m crazy. This is because you know that similar pencils, of the same quality, condition and properties can be purchased for 1-2 dollars per box. The same framework can be applied to valuate a property. In other words, if you can find previously sold homes that are similar to the subject property, you can determine a fairly comparable sales price. Here we demonstrate the math. If three similar properties in your neighborhood sold for $350, $250, and $150 per square foot, that yields an average price per square foot of $250. Using this weighed average, you can determine the estimate total price by scaling it by the total livable area of your property. For a house of 2,000 square feet, you can comfortable estimate a market value of $500,000 (2,000 x $250 /sqft).
Size Up Your Competition
Naturally, the true value of the property lies in whatever the seller and buyer determine to be. In other words, it’s nearly impossible to determine the home value regardless of how much data you have obtained. Another tip to better gauge your offer price depends on its competitiveness. If you find 20 other buyers at the same open house, the seller is likely to receive multiple offers. Conversely, if a property sits on the market for many months, then you may be able to low ball the offer. A good agent should be able to take note of the situation and work with you to come up with the right offer strategy and the right price.
Property Details
The property details on the offer letter is important since it’s a legally binding agreement. This should at a minimum include details such as the property address, the number of bedrooms, bathrooms, the size of the property. This will also be where you’ll include any items you’d want to stay in the property such as a chandelier. Lastly, it’s good practice to also include the MLS listing number as a reference.
In some cases, a seller may provide a Seller Disclosure Statement. This is a punch list where the seller may disclose any information about the property to the buyer ahead of time. The buyer should sign the Seller Disclosure to acknowledge they know these problems ahead of inspection.
Lead Paint Disclosure
Finally, for properties built before 1978, there is a good chance that lead paint is present. The Lead Paint Disclosure allows the seller to disclose whether or not a lead paint report is available for the property. If no such test was performed, the disclosure also allows the buyer an opportunity to conduct a lead paint test as well. This form must be signed and included in the offer package as mandated by the federal government. For more information about lead paint and other things that could be lurking behind your walls, check out this article here.
Deposits: Your skin in the game
Your deposit is another lever that communicates the competitiveness of your offer package. By placing a portion of your money in escrow, you’re letting the seller know that you’re invested in this transaction.
In a standard home purchase in Massachusetts, there are two events that would trigger a deposit to be placed into escrow. The first deposit is submitted right after the offer is accepted by the seller. The standard deposit amount is ~ $1,000.00. As a buyer, you can raise your deposit to make your offer more attractive. The second form of deposit (Earnest Money Deposit) is submitted during the signing of the Purchase and Sales Agreement (P&S). A standard amount may be 5% but again, it may vary depending on the competitiveness of the listing.
Finally, the deposits should always be made out to either the listing agent’s office or the seller’s attorney office. It’s generally bad practice to have the seller directly hold the deposit as it’s not technically a closed transaction yet.
Contingencies
In the context of an offer package, your contingency is a contractual instrument that allows you to exit the agreement without any penalties or losing your deposits. You can think of this as a get out of jail free card but only if certain conditions are met. The two main forms of contingencies are based on your property inspection and financing.
Inspection Contingency
Your inspection contingency gives you the option to exit the contract in the event that you discover any material damages during the inspection. Depending on the extent of the damage, you may choose to renegotiate with the seller to lower the price, complete the repair, or both. This aspect of the home purchasing process requires extensive research and due diligence on the part of the buyer. It’s important to leverage the network and expertise of your real estate agent on pricing and connecting with contractors. For most first time home buyers in Massachusetts, we highly recommend that you include an inspection contingency.
Financing Contingency
Much like your inspection contingency, your financing contingency allows you to renegotiate or exit the contract in the event that your lender denies you the loan to purchase the property. While this is unlikely to happen when a lender has pre-approved your application, there are circumstances we cannot control. If you unexpectedly lose your job or have an emergency medical expense, your lender may not be able to finance your purchase anymore. In these situations, the financing contingency allows a buyer to either renegotiate or exit the contract without incurring any penalties or loss of earnest money deposits.
Timeline
An accepted offer kicks off a courtship between you (the buyer), the seller, and the bank. The process is designed so that the parties can gradually learn more about each other and the properties. There are 3 key milestones in this journey:
One: The Accepted Offer
When you make an offer to the seller, you’re communicating to the seller your interest in purchasing the property. The offer, as we’re describing here, will include all the terms and conditions for you to purchase the property. Typically, an offer is made valid for 24 hours to allow sellers to review the terms with her agent. It also allows additional time for negotiation. Finally, if seller is happy with the presented terms, an accepted offer officially initiates the home purchasing process. Note that once the seller has accepted your office, they cannot in good faith entertain any other offers unless the offer is retracted or nullify.
Two: The Purchase and Sales
The offer includes conditions that allows buyers to inspect the property before signing a purchase contract. You’re allowed to bring a licensed inspectors to evaluate the physical condition of the property among other potential issues. Here are 5 things you may find in an old house in Massachusetts that you want to pay attention to.
If inspection goes well, then you and the seller will move forward to complete the Purchase and Sales agreement (PSA). The PSA is a legally binding purchase contract prepared by attorneys. When PSA is signed, additional Earnest Money Deposits are placed into escrow by the buyer. This shows that buyer has completed due diligence and is further committed to purchasing this property.
Three: The Closing
A completed PSA kicks off a title search and also the financing application. A title search ensures that property title is clean and not “encumbered” by any lawsuits or claims. Concurrently, the banks will officially begin reviewing and underwriting your loan request. As mentioned above, your financing contingency protects you in the event of any surprises that can affect your credit. Once you receive a clean title report and a commitment letter from your bank, you’re ready for step 3 – closing.
Closing is the 3rd and final step in your home buying journey. Your attorney will walk you through all the necessary disclosures and schedule a date for closing. During closing, the attorney will review the stacks of closing documents and make sure you sign through every page. Once signed, the attorney registers the deed at the local municipality and you officially become a homeowner!
In Summary
No amount of browsing will turn you into a homeowner. The offer is the first step that officially kicks off your home ownership journey. It sets off a cascade of actions from pricing the property, to your inspection and financing contingencies. It is highly recommended to craft the offer with the help of a qualified real estate agent. Lastly, if you’re interested in becoming a real estate agent yourself and making your own offers, there are many online resources including Real Estate Express School which provides comprehensive training and licensing support. Check it out!
