Ready to Make a Home Offer: Required Details and Documentation
If you’re considering making an offer on a property, there are several key elements you'll need to prepare to ensure your offer stands out and meets all necessary requirements. Here’s a comprehensive checklist to guide you through the process.
Pre-Approval Letter or Proof of Funds:
Pre-Approval Letter: If you’re financing your purchase, you’ll need a pre-approval letter from your lender. This document shows that you’ve been approved for a mortgage loan up to a certain amount.
Proof of Funds: For cash offers, you must provide proof of funds. This could include recent bank statements or investment account summaries that demonstrate you have the necessary cash available.
Offer Price:
Choosing the right offer price is one of the most critical decisions in the home-buying process. Your offer should be based on recent comparable sales (often called "comps") and current market conditions. In competitive markets like California, properties often receive multiple offers, so it’s essential to be strategic.
I always ask my clients: What is your strongest offer? Think about it this way - If someone else were to offer $50,000 more than you, would you be okay walking away from the deal? If not, it might be worth reconsidering your initial offer. Remember, you might not always get the opportunity to counter, so it’s crucial to come in strong from the start.
For buyers in California, cash offers play a significant role. In many cases, cash is king as sellers prefer the certainty and speed of cash transactions because they eliminate financing contingencies, appraisals, and potential delays. If you’re able to make a cash offer, you’re in a much stronger position to compete, especially in a market flooded with multiple bids. Cash offers often win out even if they are slightly lower than financed offers because they simplify the transaction for the seller.
If you're not able to offer cash, don't be discouraged. There are ways to make your financed offer more appealing, such as a larger down payment, fewer contingencies, or a shorter escrow period. In highly competitive situations, you may also consider an escalation clause, which automatically increases your offer if higher bids come in, up to a maximum price you're comfortable with.
Beyond price, consider the full picture of your offer. A seller is often looking for the least risk and hassle, so presenting an offer that aligns with their needs, whether through cash or strong financing, is key to standing out in the fast moving California market.
Earnest Money Deposit: Earnest Money Deposit: Securing Your Commitment
To prepare an Earnest Money Deposit (EMD), you will need to provide a payment, typically ranging from 1% to 3% of the offer price. This deposit is held in an escrow account chosen by the seller until the closing date of the property sale. It demonstrates your good faith commitment to purchase the home. After the seller accepts your offer and escrow is opened, the escrow company will provide wire transfer instructions, and you will need to submit the deposit within three business days from the opening of escrow.
Can You Get Your Earnest Money Deposit Back?
Yes, there are situations where you can get your EMD back. The ability to recover your deposit largely depends on whether the sale falls through due to unmet contingencies that are part of your offer. Here’s how it works:
Contingencies Protect Your Deposit: Common contingencies like inspection, financing, and appraisal are designed to protect your EMD. If the property doesn’t pass the inspection, or the appraisal comes in lower than expected, or you can’t secure financing, you have the right to back out of the deal without losing your deposit. However, this is only possible if you exercise these rights within the contingency periods specified in the purchase agreement.
Contingency Removal: Once you’ve completed inspections, received financing approval, and are satisfied with the appraisal, you will need to officially remove these contingencies to move forward with the transaction. After the contingencies are removed, the EMD becomes non-refundable if you back out of the deal for reasons not covered in the contract. At this point, the seller is entitled to keep the deposit as compensation for taking the property off the market.
When Can You Lose Your Earnest Money Deposit?
You can lose your EMD if you fail to meet the terms of the contract after contingencies have been removed. Here are a few scenarios where the seller may retain the deposit:
Failure to Remove Contingencies on Time: If you don’t remove your contingencies within the agreed timeframes (such as the inspection or loan contingency period), the seller has the right to cancel the deal. In this case, you may forfeit your EMD, as the seller has effectively taken the home off the market for a period of time.
Backing Out After Contingency Removal: Once you’ve removed all contingencies and are set to close, changing your mind or being unable to proceed with the purchase could result in the seller keeping your deposit. This is why it’s important to be confident in your decision before removing contingencies.
Contract Breaches: If you breach any terms of the contract, such as failing to secure financing after removing your loan contingency or not closing on the property by the agreed-upon date, the seller may be entitled to retain your deposit as damages.
The Process for Releasing the Deposit
If the deal falls through for any reason, the escrow company holds the deposit until both the buyer and the seller agree on how the funds should be distributed. Typically, the escrow company will require both parties to sign a cancellation of contract or an instruction form indicating whether the deposit should be refunded to the buyer or retained by the seller. If there is a dispute, the deposit may remain in escrow until the issue is resolved, potentially through mediation or legal action.
How to Protect Your Earnest Money Deposit
Understand your contingencies: Make sure your contract includes the necessary contingencies that allow you to walk away from the deal under specific conditions.
Meet all deadlines: Adhering to contingency periods and other contractual deadlines is crucial to protect your deposit.
Get everything in writing: If any changes to the contract are needed, ensure they are properly documented and agreed upon by both parties.
By following these steps, you can ensure your Earnest Money Deposit is protected while demonstrating your commitment to the purchase.
Purchase Agreement: A California Real Estate Purchase Agreement, also known as a Residential Purchase Agreement (RPA), is a legally binding contract that outlines the terms and conditions of a real estate transaction in California. It's a crucial document that's the foundation of a real estate transaction and defines the rights and responsibilities of both the buyer and the seller. Your real estate agent will discuss and have you sign the purchase agreement. Once the seller accepts your offer, both parties will sign the RPA, which means you are officially in escrow. Being in escrow indicates that the transaction is moving forward, and both parties have agreed to the terms outlined in the agreement.
Terms included in an offer in California
Purchase price
Property address
Contingencies
Concessions
Target closing date
When making an offer, it’s essential to include any contingencies that are important to you. Common contingencies include home inspections, appraisal, financing, and contingent sales. Understanding the default timeframes for these contingencies is crucial:
Appraisal and Property Inspection Contingencies: The default period for these contingencies is 17 days.
Loan Contingency Period: The default period is 21 days.
Due Diligence Period: Sellers must deliver disclosures within 7 days.
These timeframes can be adjusted if both parties agree. Contingencies are conditions that must be satisfied for the sale to proceed. If you do not remove a contingency by the end of its specified period, the seller has the right to cancel the transaction.
Counting Contingency Days
It’s important to note that contingency days are counted as "day after" the contract start date, which is the day following the last signature on the contract. This count includes weekends and holidays.
Concessions
Concessions refer to requests or offers for additional terms, such as having the seller cover some of the closing costs or include specific appliances or repairs. In California’s competitive real estate market, each concession or contingency can impact your offer's attractiveness. Sellers often prefer offers at or above the asking price with fewer contingencies, as time is of the essence in these situations.
Target Closing Date
The target closing date is the proposed date when the transaction will be finalized, and ownership will transfer.
By following this checklist and understanding these components, you’ll be well-prepared to make a strong and competitive offer. Staying informed about local market conditions is also wise to ensure your offer aligns with current trends and expectations.
If you have any questions or need further assistance, don’t hesitate to reach out.
Best regards,
Lindsay Woolf | CA DRE #02236711
DOMO Real Estate | CA DRE #01290500
Disclaimer: The information provided in this blog post is for general informational purposes only and does not constitute legal advice. Real estate transactions can be complex and subject to local regulations.
