Once the buyer identifies the home he would like to buy, he can either (a) negotiate informally with the seller regarding the essential terms of an agreement, or (b) he can prepare a formal purchase offer.
Starting the process with informal negotiation is usually the best approach for both parties. The key items to discuss are:
(1) Purchase Price – This is the price that seller is willing to accept and that the buyer is willing to pay to buy the home, excluding any closing costs….
(2) Closing Costs – Closing costs are added onto the purchase price and usually represent about 1-2% of the purchase price. The main items are the escrow fee, title insurance, and city/county transfer taxes. Most buyers and sellers choose “the standard allocation” of closing costs for their county. But closing costs are negotiable too, so if you want any unique apportionment of closing costs between the parties, then the negotiations stage is the time to say so. The typical allocation of closing costs varies from county to county – click here for a helpful list for Northern California.
(3) Initial Deposit – Also called an ‘earnest money’ deposit, this is the dollar amount that the buyer deposits (goes toward the purchase price) with the escrow company promptly upon the signing of a formal agreement (usually deposited within 3-days of signing). A useful rule of thumb is that earnest money rarely exceeds 1% of the purchase price.
(4) Property Condition – The parties should discuss the physical condition of the property and any appliances that will be included with the sale. If the buyer wants the seller to make any repairs prior to the close of escrow, then those repairs need to be stated clearly in the signed purchase contract (usually described in an addendum/attachment). Whether repairs are requested or not, after the purchase agreement is signed it is customary for the buyer to hire a contractor to perform a home inspection (average cost: $300-$500), and for the seller to provide a termite inspection report from a local contractor (average cost: $150). After receiving these reports, if the buyer does not like what he finds (i.e., cracks in the foundation), the buyer has the right to promptly cancel the agreement and receive a full refund of any initial deposit.
(5) Close of Escrow Date – On this date the deed is transferred to the buyer, and the escrow pays off any of loans owed by seller on the property, and the seller receives the remainder of funds. This date is usually at least 30-days from the time that the purchase agreement is signed. So, in the purchase agreement you can specify this date either specifically (i.e., December 1, 2012) or generally (i.e., approximately 60 days).
(6) Other Key Dates – the parties need to specify the dates when:
- (a) The seller will provide buyer with all the required disclosures — usually these are provided no later than 7 days after signing the purchase agreement
- (b) The buyer will finish his home inspections — usually these are completed within 17 days.
- (c) The buyer will confirm that his loan has been arranged and that the lender will pay out the funds on the date for close of escrow — usually this is confirmed within 17 days.
(6) Any Contingencies – If the buyer is getting a loan, then the agreement will need a loan contingency. Contingency is just a legal term meaning that some event needs to happen first before the agreement can be completed (i.e., loan must be approved, or buyer must first sell his own house); and if that event does not happen, then the agreement will not be consummated. So for example – with a loan contingency, the buyer is only obligated to go forward with the purchase if he can get a satisfactory loan. If the buyer tries diligently (in good faith) to get a loan, but is unable to do so, then the buyer is entitled to a refund of any initial deposit and the parties just walk away. Thus, for purposes of the purchase contract the buyer needs to state how much money (the % of the purchase price) that he is prepared to put down (pay out-of-pocket) for the house to get a loan. In the typical home sale these days, the buyer should be prepared to put down 20%-25% of the purchase price in order to get a conventional bank loan.
Formal Purchase Offer
A formal purchase offer is a complete and written ‘agreement’ document signed by the buyer and presented to the seller. It becomes a binding contract when the seller signs it. Or the seller can choose to present a counter-offer (see section below on counteroffers).
The purchase offer should be specific enough to define the key terms. Please see the six-part list above for the key terms that need to be in the purchase contract offer. And here is an example: Purchase Offer Sample. As a real estate attorney, I generally use a CAR form, especially when working with sellers who are represented by an agent. It adds to the mutual confidence of both parties, and lenders like CAR forms too.
If the seller accepts the offer by signing it within the allowed time stated in the offer, then a valid contract is formed. To open escrow, just give a copy of the contract to whatever escrow company the parties mutually choose.
Many times, especially where the parties have chosen to forego informal negotiations, the seller will respond with a counteroffer. Then it is up to the buyer, to either accept the seller’s counteroffer or continue the formal negotiation process by presenting the seller with yet another counteroffer.
A counteroffer is accepted when both parties sign it. If the counteroffer is not a complete contract itself (i.e., it is a 1-page document stating only a few sentences that request changes to the original offer) then to form an agreement it will be necessary for the parties to concurrently sign the original offer that the counteroffer is modifying, so long as they all handwrite at the bottom of the original offer, “See counteroffer dated _______”
Legally, if the seller presents a counteroffer and the buyer rejects the counteroffer, then the seller cannot go back to the original offer and accept it unless the buyer explicitly says the original offer is still valid despite the counteroffer. This is because a counteroffer acts as an automatic rejection of the original offer or previous counteroffer, unless explicitly stated otherwise.
Greg Glaser, Attorney at Law
San Francisco Bay Area – Northern California
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