You found a house, now what? What goes into writing an offer on a house? What do you need to consider? What does the process look like as a first time home buyer when it comes to writing your first offer? What do you need to consider when making an offer to buy a house? What are contingencies contingency timeframes and why are they important? Who pays for what fees when making an offer? In this episode, we take a deep dive into the process of writing an offer to buy your first home to help you become The Educated HomeBuyer.
Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: firstname.lastname@example.org ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert
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For Show Notes, See Below 👇 :
[00:00:00] Josh Lewis, California Mortgage Broker: Welcome back to the Educated Home Buyer Podcast. We’re in the middle of a series here where we’re discussing everything you need to know. If you’re thinking about buying a home in 2023, and whether you’re listening to this in late 2022, middle of 2023, late 2024, these are the fundamentals of buying a home.
We started off with. Home buying 1 0 1, getting yourself pre-approved so you can go back a couple episodes, listen to all of the details on getting a full rock solid pre-approval. From there, we discussed getting connected with the realtor, getting set up on an MLS search where properties are dripped to you every day, seeing homes and defining what it is exactly that you’re looking for, so you’ll know the right home when you see it.
Today, we’re gonna go to the next step and go through the process of once you have found a home, what does writing an offer look like? What are the things that you have to decide and what do you have to determine about writing an offer that’s both going to get accepted and get you what you want and need and keep you protected throughout that transaction?
So Jeb, you wanna kick us off there?
[00:01:01] Jeb Smith, Huntington Beach Realtor: I’d like to start today’s episode by actually talking about writing an offer. What goes into writing that offer? Most people when they think of writing an offer, they’re just thinking price. But I wanna take it a little bit deeper today and not only talk about the idea of price what goes into that, what you should be thinking about as a potential buyer, and now that you’ve found the house that’s really where we are in the series, right?
Like Josh mention, You’ve been pre-approved, we’ve taken you through the steps of the mortgage. We’ve set you up on a search with a real estate agent. You’ve talked to an agent, now you’ve actually gone to open houses, whatever and now you’ve found the property, right? So now you’re ready to write an offer.
So again, most people are thinking about the price of that offer which is clearly one of the most important pieces because the price affects your budget, it affects your monthly payment, it affects everything. But there’s some other things that you need to think about when writing that offer. the residential purchase agreement today, Josh, I mean, I should know this, but I think it’s like 15 or 16 pages at the moment.
Every year it grows.
[00:02:01] Josh Lewis, California Mortgage Broker: Well, sometimes it shrinks. In 26 years of doing this, it’s grown. It’s shrunk. It’s gone from legal paper to letter paper back to legal. So, it’s hard to remember what the CAR is using as of today.
[00:02:10] Jeb Smith, Huntington Beach Realtor: Yeah. But there’s really. Six to seven areas in my opinion. When writing an offer that you should focus on, right? And price is the one that comes to mind for most people. And price is one of those things that is going to change and vary from time to time, just depending on what type of market you’re in and the agent that you’re working with and how you want to write the offer, how you like to negotiate as a potential home buyer. But there’s some other things that we’re gonna talk about today and it really, a lot of it has to do around the contingencies, of writing an offer. But some things I like to tell clients to start with is, you need to be thinking about escrow deposit, right?
How much are you going to put on that contract? And we’ll talk about the idea of what an escrow deposit here is in just a minute. But you know, term of the contract, how long do you want the escrow period to be? How much money are you putting down on that property? Are you willing to shorten your contingencies?
Do you need a little bit more time? Do you have a property to sell or, what are you asking the seller to pay for in the contract? Are you asking for any seller credits? Maybe your lender at the moment is telling you, Hey, let’s do a two, one buy down or some sort of adjustable rate and get a credit to, to do X.
These are all things that need to be discussed in that original purchase agreement. Now, can you negotiate the price, go under contract, and negotiate some of these things after the fact? Yes, you can. But, in my experience of almost 20 years of doing this business, you want to negotiate as much as possible upfront, right?
Getting your offer accepted is really just negotiation Number one, there are things that come along after you’re already in contract that you might end up renegotiating, but you don’t have a deal until you’re under contract. But what I like to tell clients, You really want to make sure that you know what’s important to you is in the original agreement upfront versus trying to negotiate some of the stuff after the fact.
[00:04:07] Josh Lewis, California Mortgage Broker: You said you wanna make sure that you get what’s important in there to deal, but I’ve heard you go through this and discuss it with people on the podcast, on the live a million times, one of your big roles as a realtor is before this offer gets written, you are reaching out to the listing agent and you want to find out what’s important to the seller.
We came off of a market here where for the better part of two years, you didn’t have to ask, you had to give them everything cuz there were so many offers that someone was going to give them everything. So, as we’re going through the items that you’re gonna talk about today, it was how much are you willing to give in each one of these areas?
But now we’re in a more normal market where you have to determine if there’s a property and there’s no offers coming in, then, yeah, a hundred percent Jeb, all we’re talking about is what is important to you the buyer.
[00:04:50] Jeb Smith, Huntington Beach Realtor: Mm-hmm.
[00:04:51] Josh Lewis, California Mortgage Broker: But if we’re in a situation, there might be two or more offers, you’re going to reach out and find out what’s important to the seller. Always price, and price isn’t [00:05:00] actual top dollar, it’s net of concessions. All that fun stuff that you’re gonna go through in the details here. But I If two offers are relatively equal and one agent and their client understand what is important to the seller in that contract, that is gonna be more likely to get accepted.
So as you go through that, for you that are listening, understand that yes, the first and foremost thing is figuring out what’s important about all of these things for you, but your agent, and you also are gonna be determining what’s important to the seller on these, and where can I give and take and still craft this offer that’s gonna be as desirable to them as possible while getting me everything that I want and need in the transaction.
[00:05:40] Jeb Smith, Huntington Beach Realtor: What makes a good negotiation, right? I, I think it’s when both parties ultimately get what they’re looking for to some regard. Right now, it’s very difficult and most of the time for the buyer to get everything they want and the seller to get everything they want in the same transaction, right?
Like you just mentioned, we’re coming out of an environment where. the seller was really able to get everything they want in many ways, and the buyer was able to get nothing. Well, we’re starting to see the tables turn a little bit. Buyers are now getting little bit more favorable ne negotiations, able to get the properties for less than the asking price of many markets, able to get some seller credits, able to maybe have a contingency on selling their property and getting a seller to accept that offer, with that contingency in place whereas, a couple months ago, a couple years ago, that wasn’t the case at all. So a negotiation is really coming to an agreement where both sides feel like they’re getting a good deal.
And that’s part of my job as a real estate agent is to help facilitate that transaction. To hear you as a buyer, hear what is important to you, what you want to make work, but also talking to the agent on the other side, figuring out what’s important to the seller, coming back to you as a potential buyer and saying, Hey, listen, how can we get the seller what they want and how can we get you what you want? Which is ultimately the property where both of you guys are on the same page.
So, we kind of started with price. How do you pick the price, uh, on a property? What I’ll be honest and transparent about is, is there’s no surefire way to do it. In any market, right?
In a climbing market where prices are going crazy in a declining market, where prices are going down a little bit, there’s no way to nail price where it is, say the perfect price for, for everyone involved. It’s all about figuring out what’s important to the seller, what’s important to you as the buyer, but also what are the comps supporting? Is the market currently a stable market or is it a declining market? Is it an increasing market.
And what I mean by that is, you know, take us back 12 months ago. You would say, how do you write an offer on a property? when properties are continually selling for over the asking price or more than the last property that’s sold?
Well, we had to look at the market and say, okay, this property’s sold, right? it went into escrow 30 days ago it closed on this date. Now the next property is listed at this price. Now it’s selling above. And so the market’s increasing at say three, four, 5% a month.
Well, we’re starting to try to factor that into how we write the offer so that our offer presents well against other offers out there. Yeah. We see the markets increasing. We know there’s other offers on the table. This is how we do it. Well in a declining market or a more stable market. We’re, not necessarily looking at comps from six months ago.
Typically an appraiser will go out six months when they’re trying to justify the value of a property. They’re trying to get active comparables and typically they’ll use the most recent comparable properties. But they’ll use properties going back six months in some cases. Whereas now, you really wanna find properties that have sold within the last couple of weeks, if possible, because that’s a better idea of what the market is doing.
And so, that’s where you want to try to make offers, right? Is based off recent data in the environment that we’re in. And also factor in, hey, it’s a slower time of the year, real estate is seasonal. And this time of year we know things are going to be slower.
So just because a home is sitting on the market a little bit longer today doesn’t necessarily mean that it’s way overpriced. Maybe it is, but it’s helping you as a buyer understand that there are seasons, there are ebbs and flows and properties, values do different things depending on what time of the year it is, and we are trying to factor that in and how we present that offer.
[00:09:21] Josh Lewis, California Mortgage Broker: Jeb, when we get to contingencies, we’ll go a little bit deeper on the appraisal. The thing that I always like to tell people at this point, the appraiser is not the voice. They are not God. They don’t come in and say, this is what this home is worth. They have very clear and direct appraisal principles that they have to use and follow to bring in a valid appraisal.
But we’re coming off a two year period. Again, home prices were going up really quickly and we had, oftentimes, an appraisal come in low when there were eight people lined up, willing to pay the sales price or more. That doesn’t mean that the home wasn’t worth that. The value of any home is what a buyer and seller in an open market agree to.
So a home that’s [00:10:00] listed in the multiple listing service, other buyers have the opportunity to buy and a buyer and seller agree on a price, that is the value of the home. That’s not to say that the buyer and seller couldn’t be off and sell too low or sell too high. So the appraiser is another voice in the room and primarily there to protect the lender.
They are not the voice that says what the value of the home is. The two real estate professionals, the buyer and the seller are the primary voices there and the appraiser is there to, cosign on the dollar amount that they’ve agreed to and confirm for the lender that the property is reasonable collateral for the loan that the buyer borrower is asking for.
With, with that, Jeb, we’re gonna transition here into the deposit. Why don’t you walk through what the deposit is and we’ll, we’ll circle back and answer that big question what is normal? What is the right amount for a down?
[00:10:46] Jeb Smith, Huntington Beach Realtor: Yeah. A lot of people don’t realize that when they purchase a home that there is a dollar amount associated with a binding contract. Depending on where you are in the country, people refer to it as earnest money deposit or, escrow deposit. Most people here in California use escrow just because we are an escrow state.
It’s a deposit that binds the contract, right? Some contracts, right, you might be able to put nothing on there, $0 and get somebody to sign it depending on where you are in the United States.
But most of the time there’s a dollar amount associated with that contract. And what that is is it just shows good faith. It shows that, yeah, you and I, buyer and seller are going under contract. We’ve both executed the residential purchase agreement. And part of that agreement is that we’ve agreed on a dollar amount as a deposit to show that I’m a serious buyer, right?
To show that I’m not out there writing 20 offers across 20 properties with nothing on the table with any of them. I’m showing you I’m serious. I’m willing to put a deposit down to do that. Now one of the questions we get is who holds that money? It’s typically here in the state of California, like I mentioned, we’re in escrow state.
It’s held by an escrow company. They’re a third party between the buyer and the seller. They don’t work for the buyer, they don’t work for the seller. They’re a third party that essentially holds that money and facilitates the transaction to make sure all parties have done what they’re supposed to do in order to release that money, in order to close on the property.
In some states, you might have an attorney involved and the title company might hold that money. Or is it held by an attorney? Josh, do you know? Or is it by title?
[00:12:18] Josh Lewis, California Mortgage Broker: I think the attorney holds the money. I think they review the contracts, but again, neither of us are experts in attorney states.
[00:12:22] Jeb Smith, Huntington Beach Realtor: At the end of the day, there’s money involved in that. And so one of the questions that comes up often is, how much money do I need to put on the contract. And it varies by state, varies by location varies I’m sure by price point in some markets.
Here in the state of California, what a lot of people have wanted to see over the last couple of years is 3% of the purchase price. So I, in theory, if you’re buying a $500,000 home, your escrow deposit, your earnest money deposit’s gonna be $15,000. That money is transferred into an escrow company within three days per the contract.
The state of California, the residential purchase agreement, gives you three days to get that money to escrow in order for your contract to stay binding. Now, if you don’t put that money into escrow within three days, In theory, you don’t have a binding contract at that point. And if the seller had signed that contract, they could actually get out of the contract if you hadn’t put that money into escrow at that point.
Another question that often comes up around the deposit is, does that money, is that in addition to my down payment, or does it come from my down payment? Well, it’s all one and the same, right? At the end of the day, you’re going to have closing costs when you buy a home, you’re typically going to have some sort of down payment and whatever that total amount is at the end that you need to bring in your deposit is essentially subtracted from that.
So you just have to bring in the difference, the remainder after, that deposit’s deducted, in order to close on the deal. It’s not in addition to, it’s part of that original contract. And one of the last questions that comes up, Josh, is, is this money refundable?
Do I lose it when I put it into escrow? What happens if I decide to back out of the contract? Where does that money go? Again, this is one of those things that varies by state, varies by purchase agreement, depending on where you are. In the state of California, that money is refundable until you release all the contingencies on that transaction.
Right. Now, maybe when purchased it. We’ll talk about contingencies here in just a little bit. Maybe you released some of those with the original contract, like people have done over the last couple of months in writing offers. Maybe you haven’t at all.
But that deposit is 100% yours until you release those contingencies. Whereas other states, I know that they have a deposit that is partly refundable and part of that deposit isn’t refundable. I believe North Carolina is one of those states that you go under contract, you change your mind, you decide to back out, you could lose part of your deposit.
So just make sure wherever you’re located, you’re having that conversation with your agent upfront, so that you fully understand deposit. Because the [00:15:00] last thing you want to do, start writing offers on properties, get in, change your mind for some reason, and end up losing money because of that.
[00:15:07] Josh Lewis, California Mortgage Broker: Jeb, a couple things. A comment here and then I’m gonna circle back with a question. Yep. You said something very, very helpful early in that process. Not only does that deposit, let the seller know that you’re serious. I’m willing to put some money and some skin in the game and tie up my money. It lets them know that it’s a significant enough amount that you can’t be doing this with 10 different people.
So let me give you an example. When the market was in the tank in 2009, 2010, we were buying and flipping a lot of homes. And we did buy directly from some sellers at that point, not banks. Banks will operate very similar to a traditional seller, but sellers had no leverage at that point. So oftentimes these had $100 deposits and reasonably I could go tie up 10 properties with $100 deposits.
I knew that I was serious and was going to close. I also knew that I had no need to tie up any more of my money because the seller had no leverage. The $100 is to let them and let escrow know I’m serious. It’s what’s called consideration in the early part of the process. It makes a valid contract.
It doesn’t have to be dollars. It can be other things. In an escrow contract, it always is. But, in the current market, let’s say I went down and I make a hundred dollars deposit and tie up a property, I could tie up 15 more. And really what have I risked?
I get 30 days in and I go, “Hey, you know what? I really only want this one because this seller would give a bunch of repairs and credits no one else did”, and I walk away from a hundred dollars. That’s the reason for the larger dollar amount.
Now, Jeb, how does that 3% figure that you were discussing in California, in our contract, we also have a liquidated damages clause that kind of ties in with that 3%. What is that and what does that mean and why is that generally why sellers aren’t pushing for a five or a 10 or a 20% deposit?
[00:16:45] Jeb Smith, Huntington Beach Realtor: So part of the residential purchase agreement, one of the things that you can opt into signing or not signing is a liquidated damages clause and I will say in my experience, the majority of sellers and buyers sign that and if unless both signs, that part you don’t have a binding contract. So either you both agree to it or you both don’t agree to it.
But typically you do agree to it. And the reason for that is because it’s less expensive typically to go the route of the liquidated damages, the arbitration/mediation side of things, versus going the other direction and getting attorneys and all of that involved without trying to work it out initially, but part of that liquidated damages clause says that the most that the seller can take from you as a buyer is 3%.
What you’re doing is saying, “Hey, listen, we know the max is 3%. We’re willing to put up to that max in there to show that we’re a serious buyer, in escrow deposits. But what I will say is, I know there’s states out there. That where one percent’s common, where it might be 500 bucks might be common.
So don’t take this as the end all when it comes to escrow deposits, because we’re here in California, we’re in a highly litigious state to begin with, but also one with very expensive real estate. And so some of the dollar amounts we’re throwing out can be really, really high. And it might be more than you really need to worry about.
So just make sure you’re, when you’re working with your real estate professional, you’re having these conversations up front and that’s part of the reason that we’re bringing this to you now is so that it’s not a shock when you go to write an offer initially and you’re like, “what? I’ve gotta have this much money. I’ve gotta think about all of these things. I just want to write an offer on a property. I, I really like that property. I wanna try to purchase it”…
Well, these are things that by going through them now, You have some time to think about them prior to writing an offer. And you can have those conversations with your agent prior to maybe looking at property or finding the right property. That way you’ve already had the conversation, you know what you’re going to do, and the contract’s really at that point just about figuring out the price versus, trying to go through all this stuff at one time.
So, Josh, next thing I wanna talk about is, escrow time frame. There’s no set timeframe a contract has to be. What I will tell you in doing this again, almost 20 years is 30 days is kind of the magical number for escrow time periods out there and what that means is that an escrow time period is from the time that your offer gets accepted, when do you want to close on that transaction?
And it happens quickly, guys, it happens really, really fast and people don’t understand how fast it happens. But when I say 30 days, that means from the time your offer gets accepted to the time you close, keys are in your hand, that’s typically a 30 day period.
So you as a buyer have to figure out what timeframe you want. Right? And sometimes it’s about thinking like we talked about earlier, what’s important to the seller? Does the seller have something that they’re trying to accomplish from their end? Maybe they’re moving outta state. Maybe they have a certain deadline or a certain timeframe they’re trying to meet. And so maybe you structure your timeline around the seller in order to make your offer a little bit more attractive to the seller.
Or maybe it’s about you. Maybe you have something that you’re trying to accomplish from your end. Maybe you need to close by a certain [00:20:00] date, to facilitate something you’re trying to do.
Maybe you’re trying to do a 1031 tax exchange as an investor and you only have a certain number of days based on that 1031 time period in order to close a deal. So you need it to close by X in order to make sure that you avoid any capital gains taxes.
Now, for those of you listening and not understanding that, that’s probably a little too deep, but it’s really all about figuring out what’s either important to the seller, what’s important to you as a buyer, maybe what’s important to both of you guys, or maybe you’re in a situation where you’re renting and my lease on my apartment doesn’t expire for three more months. I don’t really want to pay for a house and my apartment at the same time, but I really like this house. I’d like to make an offer, but I need a 90 day escrow because I wanna make sure that my lease is done before I’m paying on this property or whatever.
So that’s where it’s important to start thinking about these dates so that when you’re ready to make an offer, you know the number and it’s, a really easy question to answer.
[00:20:58] Josh Lewis, California Mortgage Broker: Jeb. So with that, we talked about the size of the deposit and how that relates to the transaction. How about the loan amount and how that relates to your contract and how attractive the offer is to the seller.
[00:21:10] Jeb Smith, Huntington Beach Realtor: Well, I mean, honestly, that’s where you come in, right? Most of the time is that I’m usually reaching out to the lender. I’m asking the buyer, are you approved? We know this, right? Going into the process cuz you’ve heard us in the other episodes talk about this, but I know you’re pre-approved. But oftentimes, A client might be changing the amount they’re putting down, the amount they’re financing based on whatever loan amount it is that they’re purchasing.
Maybe cuz they’re not just a 20% down, at any loan amount, maybe they’re 20% down if they’re at 500,000, but if they go to 600,000, they can’t quite do 20% down, so it’s gonna be a little bit less. So that’s really where I’m talking to the client, the buyer and having that conversation.
But really more importantly, reaching out to you as the lender and saying, okay, Josh, this is where they are. This is what they’re purchasing. How much are they putting down? And then you’re probably, I’m assuming, having that conversation with them just confirming that, hey this is what the numbers are at this price and this is how much we’re putting down.
[00:22:06] Josh Lewis, California Mortgage Broker: When we go back to that pre-approval process, we’ve gone through and we’ve identified how much money they have, so what’s the most they could put down? Obviously some of the variables you’re reaching out, their realtor, whoever that is, is reaching out and saying, “Hey, we found this home. It’s listed for $625,000. It’s gonna be competitive. We may need to go as high as $650k.” So now we back in and we have that conversation with the borrower.
What I will say about 90% of borrowers, probably 98% of borrowers, they have a fixed amount of money, and that is what they’re going to use. Less than 5% of buyers, they have a chunk of money and we’re having a discussion. Do we want to keep some money aside? Do we want to pay off some debt? Or do we want to put that all down.
The last few years it’s been, we wanna put it all down because sellers look at this contract and think whoever’s putting more down is more of a serious buyer. So the only thing that I tell them is whatever we put on that contract, that is what you are agreeing to do.
Now, can the seller accept a smaller down payment? So let’s say someone on that $625,000, they could put $200,000 down. They would prefer to put 20% down. To be aggressive, they get with the realtor, they write that contract at $200,000 down. They have to be prepared to put that $200,000 down. The seller does not have to agree to a 20% down transaction.
Now, the reality is if loan docs show up at escrow with an approved loan and a 20% down payment, the seller doesn’t care at that point, but you could upset them. They could feel they were duped. So be prepared that in your worst case scenario, you have to make the down payment that you put in the contract.
But a lot of clients, the number is what it is. We have this much money we’re going to work with after our closing costs and prepaids and any seller concessions. This is how much is available to be allocated for the down payment. So from our end Jeb, nine times outta 10, it’s a fixed amount.
Occasionally there is a little bit of wiggling there and determining how to work with you in writing that offer and making it as attractive as possible to the seller.
[00:24:03] Jeb Smith, Huntington Beach Realtor: No, you said something important there that I wanna elaborate on just a moment. And that’s the idea of changing your down payment a little bit just based off whatever the circumstance may be, right?
So we’re coming out of an environment where the more money you put down, the more likely your offer was to succeed. And I often had people reaching out saying, “Hey, listen, can we say that we’re putting 25% down when we’re really only putting 5% down just to make our offer look more attractive. We’ll change it after the fact.”
And the easy answer is no, right? I mean, whatever you put on that contract is essentially what you’ve agreed to as a buyer. And the seller signs that that’s what you’ve agreed to. So if that changes, in theory, the seller could decide not to move forward with your offer if you’re changing the terms of your financing. So you want to make sure that whatever you’re putting on the contract is accurate, right?
You don’t want to say that you’re putting more down just to make your offer look more attractive to the seller, just so they’ll accept it and [00:25:00] then after the fact, change it. Right? Do what’s ethical, do what’s right, and make sure that you’re putting an accurate amount down so that you’re not putting yourself in any precarious situations if something were to arise with the contract changing.
[00:25:12] Josh Lewis, California Mortgage Broker: Because Jeb, there’s a handful of things in the contract that we say. Well, this could be your worst case scenario but I’ve really never seen it happen. This is one where I think you and I both have seen it happen. Seller just gets pissed. They’re like, no, this is not what I agreed to, I think you’re a liar. I’m canceling the transaction.
So it is one of those ones where it is much dicier. So I prep everyone, if you wanna do this, be prepared that if you have to, you are going to close at that. So someone that only has 5% down, don’t write a 25% offer because you do not have it to, to make up.
[00:25:45] Jeb Smith, Huntington Beach Realtor: As you guys are probably getting, there’s a lot of information we’re throwing at you today and Josh and I like to keep these episodes 25, 30 minutes max. So what I’d like to do today is actually cut this right here. We’ll come back next week where we actually dive into contingency timeframes, we’ll talk about what contingencies are, really explain those in detail so that when you’re writing an offer, you know exactly how to prepare it. What to shorten, what to potentially ask for longer if needed in order to help you make the best offers.
So join us next week where we take a look at part two. Until then, adios.
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