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 continue our conversation on 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: email@example.com ➡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. Today we are gonna be continuing last week’s discussion and walking you through everything that you need to decide when you’re writing a contract, what you need to do to protect yourself and what you need to do to make that offer as attractive to sellers as possible.
If you missed the first half, a lot of good details last week, make sure you go and catch that and today, we’re gonna jump right back into the conversation. Jeb, let’s transition to the next topic here. That also involves working with the lender. Not all of this, but a portion of it, contingency timeframe.
So you’re getting ready to write up the offer. This is where realtor reaches out and says, Hey, what can you do in terms of appraisal timeline, loan approval timeline? Why don’t you walk us through that?
[00:00:42] Jeb Smith, Huntington Beach Realtor: Yeah, I think, I mean, a really important piece of the contract here is contingency timeframes. You know, me as an agent, I change these numbers all the time. Where these are things that are easily changeable to make your offer look more attractive. And so in a competitive environment, we’re trying to shorten these timeframes as much as possible.
And so I think it’s important as a buyer to understand these upfront, so that you know when you’re ready to write an offer what you’re comfortable shortening and what you’re not comfortable shortening. Depending on what state you’re in, you’re going to have a handful of different types of contingencies.
Here in the state of California, I think the current contract gives you seven different contingencies, potentially even eight, depending on if there’s a property to sell and that sort of thing. But, In short, what those are is you have an appraisal contingency, right? That essentially says, if the value of this property doesn’t come in at the purchase price, then you don’t have to move forward.
So that’s an appraisal contingency. Another one would be a home inspection contingency. You have the right to get an inspection on that property. If something comes back in the inspection that you’re not comfortable with, then you, in theory, could use that contingency to back out of the contract.
You also have HOA docs if the property’s in an association, you have an opportunity as a buyer to review the homeowner’s association docs. Now, let’s say that you’re buying a property that doesn’t have a homeowner’s association then that contingency doesn’t apply, right? So they only apply when you actually have that potential piece of the puzzle as part of your offer.
The next thing is seller disclosures. You have an opportunity to review the seller disclosures. Here in the state of California, there’s a laundry list of disclosures that go along with purchasing a property.
But a couple of those disclosures are specific disclosures that the seller has to fill out pertaining to that property. And it’s gonna tell you, pretty specifically, in detail about, things like death on a property, water intrusion, insurance claims. Just certain things that you as a buyer might wanna know, more specific details about that they have to fill out.
And so you have an opportunity as a buyer to review those seller disclosures and you get so many days to review them as part of your contingency period. In addition to that, Josh, we have, what do we have? I’m drawing a blank.
[00:02:57] Josh Lewis, California Mortgage Broker: Your financing contingency. The big one.
[00:02:58] Jeb Smith, Huntington Beach Realtor: Financing contingency, there we go. That’s the one I was missing and that’s where you come in. A loan contingency is what it’s often called. And so, Typically, here in the state of California, the contract gives you 17 days. 17 days to do all of these contingencies that I just mentioned. Now, different contracts in the past have given you a little bit more to do the loan or what have you.
Right now everything is 17 days and so, I might be reaching out to you, Josh, going, Hey, listen. We shortened the appraisal contingency, we were able to shorten the home inspection contingency cuz my inspector can go out there tomorrow. We know that the seller disclosures are gonna come back, relatively quickly and there’s no HOA here. The loan, really, we’d like to shorten our contingency to make everything say 10 days.
I’m reaching out to you as the agent, on behalf of the buyer saying, can you get a loan approval within that 10 day period so that we can release that contingency? And so Josh, that’s where you come in and we’re having this conversation.
[00:03:54] Josh Lewis, California Mortgage Broker: And that’s a pretty simple conversation cuz we both want the same thing. If the buyers decided they want this property, how do we maximize the odds of getting that? So I just have to know, the Smiths would like to buy this property and they are getting a unique portfolio loan that we have one and only one lender who can do that.
And they are seven business days in underwriting right now. So from the day that you write that, seven business days is 9, 10, 11 calendar days. Maybe we can shorten it to 12 days, or they’re getting a vanilla Fannie Mae loan that I can go to 57 different places and I have a lender that’s underwriting those in four hours, we could do a three day loan contingency.
So the important thing with both of those is where is it going? Who is going to perform the service? In this case, underwriting and funding the loan. The other piece, we don’t get to pick the appraiser, but we are going to know which appraisal management company, it has to be ordered through.
We can find out timelines on that. And a lot of that is determined by the part of the country that you’re in. In Southern California, we’re blessed. We’ve got lots of appraisers, so generally our appraisal turn times are not very long at all. If you’re in a rural area, if you’re unfortunately in [00:05:00] Hawaii or Alaska, they don’t have a lot of appraisers.
You can have a two month waiting period. It’s something we don’t deal with a lot in Southern California, but in other parts of the country, it is very important that we know those timelines and what it’s going to look like. Best example, I can give, I have a client, Friday night was writing an offer up.
There was gonna be at least two, maybe three offers coming in on the property. We wanted to shorten those up as much as possible. We went seven days on the appraisal, and 10 days on the loan contingency. So we can be as aggressive as possible. And to that point, every other thing in this checklist that Jeb’s walking us through, the agent was, telling me what they’re doing.
Hey, we’re gonna bump up our down payment. They wanted to do 5%, but they can do 10%. We’re gonna shorten it to a 21 day escrow. We’re gonna shorten the contingencies. We’re not asking for anything.
Is that common? Is that the most likely way for it to play out? Probably not, but it doesn’t matter. every property is unique. Every transaction is unique. Your realtor and your lender need to be working with you and guiding you to writing this contract in a way that you are comfortable with that is most likely to be appealing to the seller.
[00:06:00] Jeb Smith, Huntington Beach Realtor: And keep in mind, as a buyer, you don’t have to shorten these contingencies. In the environment that we’ve been in, it’s been one of those things. It does make sense to shorten them just to be a little bit more competitive.
Now, some states out there have contingency periods almost all the way until the close, right? You might have your loan contingency in place until the day before you close on that transaction, so you’re never at risk of losing your earnest money deposit because you have that contingency in place.
But states like California, you’re not able to keep your contingencies in place unless the agent on the other side’s just not forcing you to release them, or they’re not abiding by the contract in some way. So there are certain timeframes the seller has to stick to as well, with regards to providing you documentation.
And then from that point you have so many days to review that documentation after the fact. So, in some cases you might say, ” We’re willing to release these contingencies in 10 days, but the seller and the seller’s agent, the listing agent, don’t get you the documents for five or six days and say you have five days to review them.
You might be out past that original contingency period that you’ve agreed to. At no fault of your own. So it’s all about good faith from your side. You don’t want to come out and be super aggressive on timelines that you can’t actually perform by. But at the same time, what I will say, in my experience, there’s usually a little bit of grace on some of these things.
Assuming there’s open communication, people have been talking and just, staying up to date on what’s actually going through the transaction as a listing agent, somebody that deals with a lot of listings, what I don’t want is somebody calling me on the day that contingencies are supposed to be released, telling me that they can’t do any of the contingency removal because of things that I should have known about 3, 4, 5 days ago, right?
You want to be open in communication and that’s part of your agent’s job, to help move that process along and not to push you to release things. To guide you, to advise you on why you’re doing some of the things you’re doing.
If you don’t have a loan approval, We’re not releasing your loan contingency on that property. Even if, Josh tells me it’s gonna be another week, right? Something happened, something changed with your loan, whatever. He can’t get a loan approval. Well, guess what? I’m calling the listing agent saying, “Hey, listen, this is the problem. We’ve got an issue here. We’re not in a position to release contingencies.”
I’m never going to put a buyer’s deposit at risk. I’ve been doing this again almost 20 years, knock on wood. Never had anybody lose a deposit and I don’t plan on starting at this point in my career. So your agent should be looking out for your best interest and guiding through that process.
Now, it might feel like sometimes they’re pushing you to release things. And in some cases we have buyers that are a little timid. They know that once they release that deposit, that money’s at risk. And even though their loan’s approved, even though the appraisal came in at value, we’ve negotiated everything with regards to the repair request.
They have a hard time releasing because they know at that point that they have to move forward or lose that deposit if something happens after the fact. And so it can feel like your agent’s pushing you a little bit, but they’re more just trying to keep you in contract so that there’s no violation and you’re not putting yourself at risk of actually losing that deal.
[00:09:16] Josh Lewis, California Mortgage Broker: Let’s talk a a little bit though about that loan. All of these contingencies are pretty cut and dried clear. If your appraisal is in and you get a chance to look at it, we need to remove that contingency. There’s not a lot of gray there. It’s black and white.
Your home inspection, Jeb, maybe there’s five things on there you’re asking the seller to pay for, but you’re gonna go back and begin a negotiation on who’s gonna pay for what in terms of required repairs, more black and white. The loan approval comes back and you have a conditional loan approval.
What does that mean? It means the lender is saying, yes, we will do the loan, but we want these 23 things. Out of those 23 things, 18 of them are things that escrow, title and your loan processor and loan officer need to do. There’s probably four or five of those items that need to come from [00:10:00] you. We are most likely going to release your loan contingency before those five items have been cleared.
And in your instance, it might be one, it might be three, it could be eight, just depends on how well and how clean the package was when it went to underwriting. The important thing to know is we’re gonna review those and you and I are gonna have a conversation and you’re gonna be able to say, oh yeah, that’s no problem.
I’ve got that document right here. Oh yeah, not a big deal. I can get that. If there’s anything that’s in question that we’re not sure if we can get, we’re not releasing that loan contingency till it’s cleared, but many times there’s 2, 3, 4 basic boiler plate things that are still open. They’re not deal breakers, they’re not anything that we’re worried about, and we will clear those.
That’s a big one, Jeb, that I get where people are just confused about that. Like, I’m not clear to close. They haven’t cleared all these loan conditions. I’m not releasing my loan contingency. The offer that we’re writing now where we have a 10 day or 12 day loan contingency on that, we’ll have the loan approval easily within 12 days. We will not have every condition cleared within 12 days.
So it’s unreasonable to expect the seller to wait. I had one, Jeb, you and I talked about this extensively last month where the buyer didn’t wanna accept that, and he would not release his loan contingency until we cleared all these conditions on the loan.
And he was seven or eight days late to clear his loan contingency. And it made the seller very unhappy and it made their agent very unhappy and rightfully so. They never issued a notice to perform because it was more important for them to keep things on track for a successful closing than it was to rock the boat, but I assure you, they weren’t happy. So it’s important to note that.
Jeb, do you wanna talk about what a notice to perform is within the context of contingency timeframes and what happens if you don’t release your contingencies?
[00:11:35] Jeb Smith, Huntington Beach Realtor: Yeah. So what happens is when you have a binding contract between a buyer and a seller, at least in the state of California, it’s very difficult for the seller to get out of that transaction.
It’s easy in most cases, for the buyer to get out of a transaction. They just cancel. In the state of California, you can use one of the contingencies that we talked about earlier, or in some cases you can just say, changed my mind. Don’t wanna move forward. And there’s very little that can actually be done, in that circumstance where the buyer just says, Hey, listen, I’m still under my contingency period. I’m backing out and moving on.
Seller can’t really do that. Once they’ve signed that contract, there’s not really an out for that seller. Part of the agreement that you sign the residential purchase agreement, there’s an area of that contract that’s written in there that’s a notice to perform and a buyer can give a notice to perform or a seller can give a notice to perform. But typically it comes from the seller side and it’s when a buyer’s not doing what they’re supposed to do.
So say for example, Josh mentioned the case earlier where somebody is supposed to release their contingencies on their property. If they don’t do that, the seller can issue a notice to perform and say, Hey, listen, per the contract, I’m giving you 48 hours to do X, and if you don’t do x, I can back out of the contract legally.
And at that point, the seller would have an out and not need anything more to back out of that contract. Whereas as long as they haven’t issued that notice of perform, they’re still in a position where they can’t really back out, even if it’s 10 days past that date, if it says 48 hours in the contract with regards to the notice to perform, that’s the pre-written language in there.
It can be shortened, it can be extended too, I guess. But 48 hours is the timeframe. As long as that notice perform hasn’t been given on that specific task, then you’re both still under contract and still moving forward, even if you’re past the original closing date. So, you don’t like to issue notice to performs unless you’re willing to put that line in the sand.
Because as a seller, if you issue it and the buyer doesn’t perform, then you’ve got a choice to make. You either cancel and stick to your guns or you continue to drag it out and just let time expire or time move on really and not force your hand. And I think that shows another side of the negotiation when you do that.
So I think you only really want to issue notice performs when you’re ready to draw that line in the sand. But like I mentioned a moment ago, the buyer can issue a notice to perform as well. If the seller isn’t getting something to the buyer, isn’t responding in a way the buyer can issue the seller a notice to perform.
And this can be after the contingencies have been released, and if the seller doesn’t perform whatever task that needs to be performed, the buyer could back out of that contract, retain their deposit and move on. So it’s one of those things that’s there that’s really helped to enforce the contract.
But at the end of the day, you don’t wanna just go throwing those things around without really understanding it and understanding the pros and the cons of using it. But with that said, Josh,
[00:14:21] Josh Lewis, California Mortgage Broker: Let’s move on to one of my favorite things, allocation of costs. So that’s a fancy way in the contract of saying who’s paying for what. So, which things in the contract Jeb are negotiable among buyer and seller, regardless of what’s typical or traditional in your area.
[00:14:37] Jeb Smith, Huntington Beach Realtor: Well, really everything, right? I mean, everything’s negotiable to some extent. You can ask a seller to pay for it all. You can ask a buyer to pay for it all. Not normal or typical, but when buying a house, most of the cost, with regards to buying that house, outside of lender fees, fees that come from your side of the transaction are typically paid for by the seller for the most part.
There are gonna be some fees that the buyer does have to pay for, but things that we’re typically [00:15:00] talking about, Title and escrow fees. Who typically pays those? Here in the state of California, the escrow fee, typically the buyer pays their own escrow fee. The seller pays their own escrow fee. But the title is actually paid for by the seller, right?
The seller needs to provide a clear title showing that there’s no liens, nothing wrong on title with that property, and so that’s something that the seller is going to pay. Now, as I mentioned earlier, can this stuff be negotiated? Sure, it can be, but we’re just going over what’s normal in the contract.
But these are things that when I’m having a conversation with a client, we’re not even really saying, “Hey, listen, do you want the se… it’s, Hey, listen, this is what’s customary. If I were buying a house, this is how I would write the offer. The seller’s going to be paying for this based on the way that it’s written.
And I expect them to accept it based on how offers are typically written and accepted, but the things that we’re more or less talking about, if you’re in a state where you’re getting termite inspections and there’s potentially work that needs to be done, who’s gonna pay for that work?
Is it gonna be you, the buyer? Are you willing to take on that cost or are you gonna ask the seller to pay for it? How about a home warranty? You’re purchasing a property, the appliances are somewhat older in the house. The furnace is older. Water heater needs some work. Do you want a home warranty on this property?
And if so, are you willing to pay for it or do you want the seller to pay for it? And what I will say just kind of talking out loud here, most of the stuff is typically paid for by the seller. So as a buyer, you’re more or less writing that into the contract that way. But in some cases, like over the last couple years we wrote it where, hey, listen, the buyer’s actually willing to pay for these things so that the seller’s not incurring any additional cost, and that makes our offer look more competitive.
So if you’re in a competitive situation, people often ask, well, what can I do to make my offer more competive? These are things you can do. You can take some of those costs that the seller would typically pay and pay them so that, there’s not additional cost on their side. But another one that’s coming up right now, Josh, that’s kind of popular is asking the seller to pay for closing costs, right?
Asking them for money so that you can buy down your rate. These are things that you’re negotiating upfront as part of the original offer. Now, you can negotiate as part of the original offer, which as a buyer, if you’re wanting closing costs, if you’re needing closing costs, you absolutely want to negotiate that as your original offer.
But it can also come as a later negotiation in the way that, hey, listen, there are repairs on the property that we want completed. There were some things done to the property that we want fixed and in lieu of you fixing those items or doing whatever, how about just giving us a credit and we can use that credit for closing costs, if that makes sense.
[00:17:34] Josh Lewis, California Mortgage Broker: Absolutely. And the one thing that I would say as a lender, as Jeb was saying, he’s explaining to you right now what’s most typical in that, but anything is open to negotiation. If you and your agent decide on something that is outside of the norm, please make sure you tell your lender.
As a lender, I’m going through and not hitting you with a lender’s title policy because what’s not typical for you to pay that, but a couple times a year we’ll see a contract written that way, and I have to explain to the buyer, Hey, your cost are $1,300 more because that’s the cost of the title policy that you agreed to pay.
And it can go either way, but just be aware that the vast majority of transactions are very similar. So when we, before you find a property, when we as a lender are giving you numbers of how much you need to be prepared to bring to the table at closing, that’s based off of the typical way a contract is written.
So there’s nothing wrong with doing it anyway you want. Just make sure that your lender is aware of that. So, Jeb why don’t you walk us through the timelines of what this looks like. Cause that’s an important part. Everything we talked about here is dollar amounts or things that we’re asking for. But the timelines are a number as well, A number of days that we’re asking for or giving. Why don’t you walk us through that.
[00:18:43] Jeb Smith, Huntington Beach Realtor: Buying a property is emotional and most people want an answer immediately. When you buy something, you don’t want to usually wait two to three days to figure out if you’re actually getting what you’re putting in an offer in on and buying a house is one of those things, right?
People are anxious. A lot of times it’s the first purchase, you’re excited and you want some finalization with regards to that negotiation. And so, it can vary though. It varies by the type of market you’re in, by the seller, by how many offers they have, by how long that property’s been on the market, by whether or not the seller’s traveling or they’re in town or what have you.
So, it’s gonna vary depending each negotiation but the way the contract’s written, at least here in the state of California, is that the seller has three days to respond to your offer. What I will say is, in my experience, most people respond sooner than three days.
Some sellers like to drag it out the entire three days. Now, what happens if a seller doesn’t respond to your offer within three days? Does that mean your offer is no longer valid? Does that mean the seller can no longer accept your offer? No, it doesn’t mean that at all. In theory it means that, but I can’t tell you how many times I’ve had offers drag on in negotiation past the three day period or not hear a response because something happened.
Seller was out of town, couldn’t get back, [00:20:00] whatever. And we didn’t get an answer for four or five days, and at which point the seller accepted or sent us a counter, and we still were able to put that deal together even though it was after that timeframe. So, it all depends on you as a buyer.
It’s one of those things you can negotiate as part of your original contract. You can shorten that. You could say, Hey, listen, seller, I’m willing to write this offer today. But I need you to respond in 12 hours or I need you to respond in 24 hours. What I will say is unless you’re willing to draw that line in the sand with shortening timeframes and being very specific on a certain timeframe, then don’t press the issue because I can’t tell you how many times, buyers put in an offer and said, Hey, listen, I need a response in 12 hours, or we’re not moving forward.
And then whatever happens and it gets accepted, 24 hours later and then that person ends up moving forward anyway. So they were trying to play hardball and at the end of the day, they didn’t really want to play hardball.
So the timeframe can change a little bit just understand there’s a lot that goes into to negotiating offers with regards to all of the things that we’ve mentioned today. So sometimes a seller has to take some time and sleep on it. Sometimes, like I said, they’re maybe negotiating a couple of deals or whatever.
And so, it doesn’t necessarily happen as quickly as most people want it to happen but usually it’s within a couple of days that you’re gonna end up hearing back on that offer. And even with that said, You might hear back and receive some sort of counter offer, right?
And then that kind of opens up another negotiation and it might take a couple of days. So in some cases it might take a week to go from writing that offer to getting an offer under contract, ready to open escrow. But also understand that your timeframe, that 30 days that we were talking about earlier, doesn’t actually begin until you have a fully executed offer. So as long as your negotiation, is ongoing, you know nothing in stone, that time period hasn’t actually started yet.
[00:21:49] Josh Lewis, California Mortgage Broker: Jeb, you just brought up a really good point that I think everyone needs to think of in terms of this. The offer that you’re writing is not the be all end all.
It’s not a take it or leave it. Just like the seller putting the sign in the yard and putting their home in the multiple listing service saying, Hey, I wanna sell my home for $600,000. They’re offering that out there for $600,000.
And in essence though, what they’re doing is they’re soliciting offers from you and your agent saying, “I would like to sell my home, please tell me what you would like to pay.”
This is round number one of you laying out the groundwork that in an ideal world, this is what I would like to pay for your home. The timelines, the contingencies, the allocation of costs, all that fun stuff. They don’t have to reject it or accept it.
They can come back with their counter offer and go, “Hey, I like all of this except for this one part. So we’re accepting, subject to you accepting this.” And I have one right now that there was three rounds of that. Offer went over, seller comes back and counters, buyer goes back and counters back, and then the seller comes back and counters. And at that point everyone goes, yeah, those terms work for all of us.
And that’s pretty common in somewhat of a normal market right now. For the last few years we didn’t have a lot of that because once a seller said, “Hey, I want these things”, you may have the offer, the seller would make their counter offer, and the buyers were pretty much saying yes or no. Or you had a multiple counter situation where sellers were asking for, “tell me the most you’ll pay for my home.”
We’re getting into a more normal market. I’m seen more of these contracts where there’s 2, 3, 4 counteroffers back and forth, just finalizing the details and working on something to get to an agreement that works for everyone.
[00:23:19] Jeb Smith, Huntington Beach Realtor: And you said something important there. I will tell you rarely does anyone ever make an offer, say if I’m the listing agent, make an offer to me that there’s not some sort of counter offer. And/or I make an offer on behalf of my clients.
I like to pride myself on making very clean offers, a professional offer where the seller and the seller’s agent have everything they need in order to make an informed decision. They don’t need to come back to me and ask for anything because everything is in that offer.
Even then, rarely does that offer just get accepted outright. There’s usually some sort of counter offer coming back, negotiating something in the contract. Maybe who the title company is, who the escrow company is maybe changing home warranty, who’s paying for what, or just simple little things because you, you want that contract to be as accurate as possible from the beginning so that you’re not having any issues once you’re actually into the process.
You know, once escrow opens up, you wanna make sure everything’s a go so that there’s no issues holding it back from actually getting to the finish line for both the buyer and the seller. I know we just threw a lot of information at you there but hopefully it’s gets you full picture of what it is like to write an offer.
And I don’t want it to be overwhelming because, so there was a lot that was thrown into that, but we tried to get as detailed as possible on some of this stuff. Just help you understand it, help you understand the things that you need to be thinking about when writing an offer. Your agent’s gonna make it sound a lot simpler or they should and be able to really help you navigate this stuff but these are the things you should be thinking about when writing that offer.
So hopefully, that gives you some insight on what you need to be thinking about and help you prepare to buy a house in 2023. But next week we’re actually going to be taking a look at what happens once you open escrow, what that timeframe, [00:25:00] what that process looks like. So make sure you join us then. Until then, Adios!
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