The residential real estate market has been red hot across the country. Prices have pushed skyward as sellers receive multiple offers. Navigating these competing offers is tricky, and applicable laws vary from state to state. This article will not constitute legal advice, and you should consult an attorney during a transaction. But generally, here is what you need to know.
Make me an offer
You find a house that you love. How do you make an offer? Usually, your real estate agent walks you through a standardized residential real estate contract. The legal language of each section is already set forth, but the form will have blank spaces for you to fill with the following information:
- Your names and the sellers’ names.
- The official legal description of the property (not just the address).
- The price you are offering.
- The amount of escrow money you are putting down.
- The length of the option or due diligence period and the amount of the option fee, if any.
- Whether you, the buyer, are accepting the house “as is” or want a financial concession for necessary repairs.
- A statement that you will have the house inspected and, if you are financing, that you will apply for a mortgage within the due diligence period.
- The date you want to close.
- Your signatures.
Sometimes buyers will put contingencies in their offer. They may make their offer contingent on the sale of their current home or upon mortgage approval. In a red-hot market like today’s, sellers often reject offers with home-sale contingencies.
The seller’s response to an offer
Sellers can respond in one of four ways to your offer.
- They accept it by signing the contract. Your agent will notify you that your offer has been accepted. Congratulations, you have bought a house!
- They counteroffer. Through their agent, the sellers strike through some of the terms you wrote in, such as the price or closing date, change them to terms of their liking, and return the contract to you for approval. Essentially your first offer has been rejected, and a new offer is on the table. It is up to you to decide whether to take it, modify it even further, or reject it outright. If you modify their counteroffer and return it, you have made your own counteroffer. All counteroffers will have an expiration date.
- The sellers sit on your offer, awaiting others, which can ignite a bidding war. If you have set an expiration date on your offer and the sellers do not accept it by that date, your offer expires.
- They accept an offer from another buyer. This is a rejection of your offer in favor of another.
If other buyers are bidding on the same house, the seller’s agent may make you and your agent aware of it, although ethically she cannot disclose the terms of any of these offers.
The sales contract takes effect In many states when both parties have signed it and each party receives notice that the other has officially signed.
Buyer’s responsibilities under the contract
As the buyer, once you’ve formed a contract, you have responsibilities you must handle immediately. The contract gives you a certain period, often ten days to two weeks, to have the property inspected and, if you are financing, to apply for a mortgage. You must make a reasonable effort to accomplish these steps within the period spelled out in the contract. You may pay a non-refundable amount, as an “option or due diligence fee” to compensate the sellers for having their home off the market while you conduct due diligence. This is separate from the escrow amount, which is often one percent of the sales price. That money is held until closing as your good faith security on the home.
During the due diligence period, if the inspection reveals a defect serious enough that you are not willing to go forward with the sale, or you find you cannot get a mortgage, the contract can be terminated and your escrow money returned to you.
Many states have a three- or five-day “right of rescission” period from contract signing that allows buyers to terminate without forfeiting their escrow money. After the due diligence period, if you terminate the contract you will forfeit your escrow except in some exceptional circumstances some states’ laws may allow.
Seller’s responsibilities under the contract
In most states, the seller must provide the buyer with a disclosure notice on the history of repairs and the current condition of the property. Many states require disclosure of lead paint. The seller must make the property available to the buyer’s inspector and to the mortgage company’s appraiser.