Making an Offer on a House: What You Need to Know to Close the Deal
When you’re in the home-buying game, especially in hot markets, you’ll discover a process that is both multi-layered and time-consuming—and, at the end of the day, designed to take you from writing an offer to holding the keys in your hand. Understanding each part, your role in it, and how to maximize your participation in each part will save you time and money, and keep you ahead of the game.
Property Due Diligence and Inspection
Regardless of how perfect a home may seem during a casual walk-through, it’s important to identify potential issues that could require expensive repairs down the line. Include a home inspection as a contingency clause when you present your offer.
Finding an inspector
If the sellers accept your initial offer with the inspection contingency, the next step is to hire a professional home inspector. Here, you have two options: ask your realtor for a referral or hire one yourself. If you’re worried that a pre-existing relationship between your realtor and an inspector may influence the report, you can do your own search for an inspector who is affiliated with either the American Society of Home Inspectors or the National Association of Home Inspectors.
A thorough inspection using high tech equipment may cost up to $1,000, but should be worth the investment if you can detect and fix problems prior to taking ownership of the home.
The inspector will typically assess the plumbing, mechanical systems, and the structural aspects of the home.
– Plumbing assessments include testing to ensure that toilets flush and that drainage from sinks, bathtubs, and showers is adequate.
– Mechanical systems include electrical wiring, heating, cooling, and ventilation. Each system is run for a period of time to ensure proper operation.
– The structural inspection covers the foundation, support structures, walls, attic, and roof.
When considering the inspection components, the structural assessment is the most complex and important because serious problems may not be easily visible and structural issues are often the most expensive to repair. The most common problems found in this phase are water-related, such as roof/plumbing leaks, mold, and mildew. Additional issues may include a cracked foundation, termites, dry rot, and roof deterioration. If there are severe structural issues, consider hiring a structural engineer for a more in-depth inspection. It’s better to know about structural problems upfront then to be surprised down the road since they can be costly to remedy.
Once the inspection is complete, you should receive a report within a couple of business days with a detailed account of any problems with the home. With this information in hand, you can go back to the seller for a second negotiation regarding the price of the home and necessary repairs. Generally speaking, this negotiation will have one of four potential outcomes:
– The sellers agree to make all repairs.
– The parties agree to a lower selling price and the home will be sold “as is.”
– The sellers agree to pay for some repairs and a slightly lower selling price.
– Damage is so extensive and costly that the purchase of the home under consideration does not make financial sense.
Unless you decide to walk away from the deal, the conditions agreed to by both parties will be added to the final contract and the process can proceed to the final phase.
Buyer Tip: In a strong market, a non-contingent offer is what you may need to land the home. Do as much due diligence, including the inspection, prior to making an offer and signing a contract.
While you do your due diligence on the home, a typical lender will do its review of the collateral and your contract with the seller. Your offer may be contingent upon this approval, which may include the property appraising at no less than the contract price. As a part of the approval process, which can take up to 60 days, typical lenders ask for additional financial information and backup. SoFi differentiates itself by significantly streamlining the underwriting process. SoFi could need at the very least a present pay stub, two years’ tax returns, and two months of bank statements in order to get a loan. That means loans can close on average in 30 days, subject to a suitable property and customary closing conditions.
Once your loan is approved, you are clear to head to closing. Either on the day of the closing or a few days before, depending on the state in which you are buying, you’ll need to review and sign your loan documents.
Buyer Tip: Get pre-approved before you start shopping. Most lending issues are a result of problems the buyer could have remedied weeks or months earlier.
The Closing Process
Because the paperwork is all prepared by the various entities participating in the transaction, the closing process is relatively simple for both buyers and sellers.
The escrow company/closing agent will calculate legal fees, transfer taxes and closing costs, as well as coordinate the transfer of ownership via the deed. The lender provides documentation of the loan, including the note, the mortgage, closing fees, and other disclosures. The title company will also record the loan for public record.
The title company will furnish documentation of clear ownership. In situations where there is the uncertainty of the chain of ownership, title insurance may be suggested.
Make an Offer by Writing a Contract
In order to make an offer, you do so in writing, using a standard real estate contract, put together with the help of your real estate agent, or in some states, an attorney. An offer is considered binding, once signed by the seller. Upon ratification, an “earnest money” deposit is held in an escrow account. In a competitive market, buyers have been known to put up more earnest money, which, depending on the seller could send a message that you are seriously committed to, and in the financial position to close the deal.
There are two major components to an offer–price and terms and both are negotiable. Your contract may be contingent upon certain terms, including a property inspection, due diligence, and loan approval. While sellers do want top dollar, terms matter a lot. A clean offer, one that boasts few or swift contingencies can trump a higher priced offer. In red-hot markets, it’s not uncommon for buyers to waive all contingencies.
In some states, the closing requires buyers and sellers to sit around a table with their attorneys. In others, the parties never meet and separately sign any closing papers via a title and escrow company.
Prior to closing, you will need to schedule a final walkthrough to ensure that any agreed-upon repairs have been completed and the home has been left in satisfactory condition. If everything checks out, the closing documentation can be signed by the sellers and the buyers. After the documentation and all financial transactions have been verified as complete by the escrow company or closing agent, you will be given the keys. Congrats! That’s when you’re officially the new owner.
Download the SoFi Guide to First Time Home Buying to get valuable tips on these topics and more. Our guide also demystifies modern mortgage myths around down payments, the pre-approval process, student loans, rising interest rates, and more.
Editor’s Note: This post was originally published in September 2014, and was updated in April 2017. We welcome your comments below.