Looking at homes is an exhilarating experience for many. It’s fun to walk through each house, whether at an open house or private showing, and imagine yourself and your family working, playing, relaxing, and living in its rooms.
But the dreaming phase of your new home search must eventually end. Once you find a house that fits your needs, it’s time to buckle down and actually buy it before someone else does.
You can’t buy a house without first making an offer on it. A purchase offer, also known as a purchase agreement or letter of intent to purchase, is a legal document that outlines the price you’re willing to pay for the home, how you intend to pay for it, and other key terms of the transaction.
Purchase offers generally become legally binding once the seller accepts the terms. The laws governing their execution and nullification vary by state though, and it’s extremely common to amend them prior to closing or make their execution conditional on certain favorable outcomes, such as a passing termite inspection or other inspections.
If you’re working with a real estate agent, he or she will likely modify a pre-written template with terms specific to your transaction. In some states, such as New York, a licensed attorney is actually required to draft or sign off on any formal purchase agreement, regardless of whether the buyer is working with an agent.
Still, given the size and long-term implications of any residential real estate transaction, it’s in your best interest to fully understand the following:
- The components of your purchase offer
- Common contingencies that could affect its execution
- How to craft a strong offer within the constraints of your local real estate market and personal situation
- How to respond to any counteroffers by the seller
Key Components of a Purchase Offer
Many residential real estate purchase offers are drawn up using state-specific templates, so the wording and order of a given offer’s clauses is likely to vary by location. But the vast majority of purchase offers made in the U.S. contain these key components:
- Consideration Window. This clause specifies how long the offer’s terms remain valid – in other words, how long the seller has to consider it. If the seller doesn’t respond by the end of the window, the buyer is free to make another offer.
- Earnest Money Deposit. The earnest money deposit shows that the buyer is serious about purchasing the house. The amount, usually about 1% of the total offer price, is spelled out in the offer and in a personal or cashier’s check accompanying the document. If the transaction closes successfully, the earnest money is credited at closing (reducing total closing costs). If the transaction falls through, the earnest money may or may not be refundable, depending on state law and whether the offer includes specific language about when the deposit must be refunded.
- Legal Description of Property. This is the legal description of the physical property as written on the original title. Depending on local custom, it includes some combination of the subdivision name, block and lot numbers, the property’s numerical measurements, and descriptions of its physical boundaries. For newly subdivided properties, the seller must warrant that all boundaries are final and have the necessary government approvals.
- Description of Included Fixtures and Appliances. This section describes any and all fixtures, appliances, mechanical items, personal property, and other “appurtenances” to be included in the property’s sale at no additional cost. Common examples include kitchen appliances, HVAC equipment, outbuildings, garden plants, smoke detectors, and cable jacks.
- Total Purchase Price and Financing. This outlines the total price the buyer is willing to pay for the property, the down payment (cash at closing) amount, the amount to be financed, and the financing method (such as a conventional or FHA mortgage).
- Deed. This describes the type of deed, such as a warranty deed or trustee deed, involved in the transaction. It also describes what (if any) restrictions the deed is subject to, such as reservation of mineral rights and utility easements.
- Prorated Taxes and Utilities. This spells out the buyer’s and seller’s respective responsibilities for property tax and utility payments before and after closing. For simplicity, the seller often pays utilities (water, sewer, refuse, electricity, and so on) through the end of the billing period that includes the closing date. Property taxes are usually paid in advance of 6- or 12-month assessment periods, so it’s customary for the buyer to reimburse the seller for taxes already paid on the interval between closing and the end of the current assessment period.
- Special Assessments. This provision assigns responsibility for payment of special assessments. Special assessments are one-off tax assessments levied by local government units for public infrastructure projects, such as new water lines or street lighting. They’re more likely to occur in newly built subdivisions and recently annexed municipalities. Typically, the seller pays any special assessments levied prior to the closing date, while the buyer pays any after closing, regardless of when the actual infrastructure project is completed.
- Closing and Delivery Dates. This section stipulates the closing date, or the day the transaction is finalized. It also stipulates when the home is to be delivered by the seller to the buyer – in other words, when the buyer can move in. Most often, the closing and delivery dates are identical, but sellers sometimes allow buyers to move in early. Both dates can be pushed back if loan approval, property modifications, or other transaction components take longer than expected.
- Sewage and Water. This section describes the property’s water and sewage services, spelling out whether it’s connected to municipal water and sewage lines, a potable water well, a subsurface sewage treatment system (such as a septic tank), and other relevant improvements. Properties with wells and subsurface sewage treatment often require additional inspection and verification prior to closing.
- Dual Agency Representation. In some states, it’s legal for the same agent to represent the buyer and the seller, a condition known as “dual agency,” or “dual agency representation.” If the transaction involves dual agency, this section outlines the buyer’s and seller’s respective rights and requires affirmative consent from both parties.
The typical purchase offer contains multiple addenda that vary by situation and location. Some addenda spell out key aspects of the purchase offer, such as how the purchase is to be financed and who pays closing costs. Others are detailed disclosures required by law. Though each addendum is structured as a separate document with its own signature page, it’s considered an enforceable part of the purchase agreement.
Common addenda include:
- Closing Costs. This addendum stipulates who is responsible for closing costs, and in what amounts. For instance, the buyer might request that the seller pay $3,000 toward closing costs, with the buyer responsible for the balance. A closing costs addendum may not be required if the buyer agrees to pay all closing costs in full.
- Financing. If the buyer is financing part of the purchase price with a mortgage loan, this addendum describes the loan’s structure, term, and rate. It also spells out whether the lender requires the seller to make any repairs to the property before issuing the mortgage (and if so, the nature of the repairs) and what happens to the earnest money if financing falls through.
- Arbitration Agreement/Disclosure. By signing this optional addendum, the buyer and seller agree to settle all disputes through binding arbitration and waive their rights to court trial.
- Lead-Based Paint and Other Hazard Disclosures. Depending on the jurisdiction, a purchase agreement often includes multiple hazard disclosures required by local laws. Common hazard disclosures cover radon, wells and subsurface sewage treatment systems, and lead-based paint (for homes built before the late 1970s).
- Property Disclosures. Purchase offers typically include a seller’s property disclosure, in which the seller affirms that the property is represented accurately to the best of his or her knowledge. Local laws sometimes require a third-party disclosure or report outlining, in detail, the condition of the home’s components.
Common Contingencies and Amendments
In most states, a purchase offer becomes a binding contract once it is accepted by the seller and signed by both parties. However, the contract’s execution is almost always contingent on certain things, collectively known as “contingencies.” Some contingencies are inserted by the buyer or their agent for the buyer’s protection, while others are inserted by the seller or their agent for the seller’s protection. Some, such as the home inspection and appraisal, are part of the standard purchase offer language in many states.
In some cases, the outcome of a particular contingency results in an amendment to the purchase offer. For example, say a buyer-ordered home inspection reveals a previously unknown defect that the buyer wants fixed before closing. The buyer or their agent then draws up an amendment describing the issue and specifying when and how it needs to be fixed. If the seller agrees, he or she signs the amendment and presumably fixes the issue. If the seller balks, the buyer can choose to walk away from the agreement and ask for his or her earnest money’s return.
Common purchase offer contingencies and related amendments include:
- Home Inspection. Not all lenders require a buyer-commissioned home inspection before deciding whether to issue a loan, but buyers are strongly encouraged to spring for one (typical cost is approximately $300 to $500, payable on the inspection date and usually nonrefundable). During a home inspection, a licensed inspector thoroughly looks over the house, pointing out minor defects and major issues that aren’t always apparent to untrained buyers. If the inspection uncovers a major issue that wasn’t previously reported, such as roof or foundation damage, the inspection contingency allows the buyer to demand that the issue be fixed or walk away altogether.
- Hazard Inspections. Hazard inspections look for more specific issues that aren’t covered in a typical home inspection, including radon, pests, and lead paint. Though always optional, hazard inspections are recommended when the risk of a particular hazard is high – for instance, in areas where termite infestations or radon contamination are common. Costs vary based on inspection type, but typically fall in the low three-figure range.
- Sewer and Well Inspection. Sewer and well inspections assess the condition, functionality, and safety of a property’s water and sanitation systems. Cost is a function of the inspection’s comprehensiveness and location – a nonrefundable, upfront payment of $200 to $500 is typical. As with home and hazard inspections, buyers can demand a fix for major issues (such as a contaminated well or sewer line damaged by tree roots) or cancel the agreement.
- Appraisal. No lender wants to approve a mortgage loan worth more than the underlying property. For this reason, lenders almost always require an appraisal (typically $300 to $500, upfront and nonrefundable) before approving a buyer’s loan application. If a home’s appraised value comes in lower than the purchase price, the lender will only agree to finance an amount equal to the appraised value.
- Loan Approval. If the buyer’s lender ultimately denies their loan application for any reason, the seller isn’t obligated to complete the transaction. This contingency specifies whether the earnest money is to be returned or forfeited to the seller if the transaction falls through.
- Buyer’s Existing Property and Other Purchase Offers. If the buyer is trying to sell his or her current home and relying on the proceeds from that sale to fund a new home purchase, he or she is likely to make closing contingent on a successful sale. If the home isn’t sold by closing, the purchase offer specifies whether the new home purchase is to be canceled or the closing date extended. Likewise, if the seller is considering other purchase offers on the home, the current purchase offer is typically made contingent on their cancellation by a specified date.
- Early Occupancy. If the buyer doesn’t expect to have a permanent home prior to closing (for instance, the sale of their previous home closes prior to the current sale), the seller may agree to allow move-in before the closing date and amend the purchase agreement accordingly.
- Walk-Through. Buyers are traditionally allowed to walk through the home shortly before closing (typically on the same day) to ensure that all requested fixes and updates have been completed and that the house’s condition hasn’t materially changed since the home inspection. A major problem, such as new water or fire damage, could delay closing or scuttle the transaction entirely.
How to Craft a Strong Offer
As you’re compiling your purchase offer, keep these tips in mind. Just don’t mull over then for too long, or a more quick-footed buyer could beat you to the punch.
1. Order a Comparative Market Analysis
Before setting the initial asking price, most sellers order a comparative market analysis (CMA). A CMA estimates the current market value of the home by evaluating at least three recent sales of similar properties in the surrounding neighborhood.
Before putting in an offer, ask your real estate agent to conduct a CMA on your behalf. This gives you an up-to-date picture of your local market, which is particularly crucial if the home has been on the market for a few months. It also spots a home that’s obviously overpriced – if the CMA suggests a market value in the $250,000 to $270,000 range and the home is priced at $300,000, you’ll have space to negotiate. But even if the home is fairly priced at the high end of the range, your CMA gives you a reasonable starting point for a first offer.
2. Consider Time on Market and Other Market Indicators
Beyond the results of a CMA, the amount of time a home has spent on the market is a good indicator of buyer interest. This data is publicly available in the MLS and home-finding sites such as Trulia.
More broadly, the average home’s time on the market in your area (ZIP code, city, or county) offers insight into the overall state of the area’s housing market – whether it’s a buyer’s market, seller’s market, or neither. Homes stay on the market longer in buyer’s markets and sell faster in seller’s markets.
Your offer needs to reflect current local demand and must be in line with other offers the seller is likely to receive. For instance, a seller whose house has been on the market for a long time and struggled to attract bids is more likely to accept a lower offer than a seller who just listed the property. In hotter markets, homes often stay on the market for just a few days (or even hours) and attract bids at or above list price.
Then again, every situation is different. For instance, even in the hottest seller’s markets, outrageously overpriced newer homes and older homes with serious defects struggle to attract substantial offers. When in doubt, ask your real estate agent (or, if you’re self-represented, an acquaintance who’s familiar with the local market) for guidance.
3. Ascertain the Seller’s Motivations
The seller’s personal motivations are just as important as the market’s overall temperature. Some sellers need to unload as quickly as possible, perhaps due to an urgent relocation or a pressing need to raise capital to purchase another property. Such sellers are known as “motivated sellers” and are often willing to accept substantially less than their asking price, particularly in buyer’s markets.
Other sellers, such as those downsizing from a long-held family home into a shorter-term rental home, are in no particular hurry and can afford to wait for the right offer. Look for clues, such as whether the home is owner-occupied and the seller’s own statements, as to which category your seller fits into.
4. Find Out About Other Offers on the Property
In many jurisdictions, sellers don’t need to disclose purchase orders under consideration. Only after the seller accepts an offer does it become a matter of public record.
However, it’s possible for seasoned real estate agents to sniff out competing offers. Before sending in your offer, ask your agent to ask the seller’s agent about recent showing activity. The seller’s agent probably won’t divulge whether the seller is in possession of another offer, but he or she may admit that there isn’t much serious interest in the property or, conversely, that there’s been a lot of recent interest. If you don’t have an agent, you need to do this sleuthing on your own.
If you suspect that the seller has multiple offers in hand, submit your offer quickly and make it more seller-friendly (higher offer price, fewer seller-paid costs) than you would have done otherwise. If it seems unlikely that there are multiple offers on the house, make your offer more buyer-friendly, as you’ll likely have an opportunity to negotiate.
5. Remember That Certain Pre-Closing Costs Are Nonrefundable
Remember that certain pre-closing costs must be paid upfront and aren’t refundable. At minimum, you’re likely to pay for a home inspection and appraisal – which could run a combined $1,000. You could also pay for pest, radon, sewer, lead paint, and other hazard inspections, adding $1,000 or more to your upfront costs. And if your earnest money isn’t refunded, you could be out hundreds or thousands more.
Making any of these payments on a property that doesn’t make it to closing can affect your budget, as well as your morale. Before you send out a purchase offer, even a low-ball offer that you’re sure won’t be accepted as-is, gut-check that you’re serious about buying that particular property.
6. Obtain a Pre-approval Letter for Financed Transactions
Before making any offers, ask your lender for a pre-approval letter, which states that you’re provisionally approved for a mortgage loan up to a certain dollar amount. To get a pre-approval letter, you likely need to meet with a loan officer, consent to a credit check, and provide income and asset verification (usually pay stubs or bank statements).
Though it’s not the same as final loan approval, pre-approval increases the likelihood that your loan application will eventually be approved. Due to the lower likelihood of final approval, many sellers don’t seriously consider financed offers without attached pre-approval documents. Pre-approval isn’t required for all-cash transactions, since no financing is involved.
7. Stretch Your Down Payment
The larger the cash component of your offer, the more attractive it looks to the seller. That’s because offers that require smaller loans are less likely to fall through due to a financing issue.
All other things being equal, a seller presented with a $200,000 offer with a 3.5% down payment and a $200,000 offer with a 20% down payment is likely to choose the latter. All-cash offers are even better, though they’re unattainable for most first-time home buyers.
8. Have an Attorney Review the Offer
A real estate purchase offer is a one of the more important legal documents you’re likely to sign in your lifetime. Even if your state’s laws don’t require a licensed attorney to draw up purchase offers, it’s almost always worthwhile to have an attorney review your offer and ensure that there’s nothing unorthodox or potentially harmful to you in it.
Many real estate attorneys do this work for a reasonable flat fee, which could run between $150 and $300, or more depending on the location. That’s a bargain compared to the potential cost of a poorly worded or carelessly reviewed offer – for instance, if you sign your offer assuming that your $2,000 earnest money deposit is refundable and later find out that it isn’t.
Seller Responses & Counteroffers
Once you submit your purchase offer, the seller has until the end of the consideration window to respond. If the seller has multiple offers on the house and yours isn’t among the most attractive, he or she may simply ignore the offer.
More commonly, sellers respond to purchase offers by:
- Accepting the Terms. When the offer is as good as the seller can hope for under the circumstances, he or she accepts it as written and signs it, creating a binding purchase agreement. It’s still possible to make amendments (such as requests to fix issues uncovered by a home inspection) up to the closing date, provided both parties agree and sign.
- Rejecting the Terms. When the offer price is too low or the offer’s terms are unfavorable to the seller, the seller rejects the offer outright. While a rejection always stings, the silver lining is that the seller is at least willing to engage with you. You’re free to follow up a rejected offer with a new, more seller-friendly offer.
- Making a Counteroffer. When the offer is tempting but not totally satisfactory, the seller modifies it by amending key clauses (such as the purchase price and seller-paid costs), signing it, and sending it back. This is known as a counteroffer. You can choose to accept the counteroffer as written or modify it further, sign it, and send it back to the seller for review. This process can go on for as long as necessary until the seller accepts an offer or either party breaks off negotiations.
In some situations, sellers who receive multiple offers at once negotiate with each prospective buyer individually in an attempt to get the best possible deal. If the seller wants to reach a binding agreement more quickly, he or she may simply ask each interested buyer for their best possible offer, then choose the most favorable one.
Compiling and executing a purchase offer isn’t quite as compelling as visiting open houses or walking through homes for sale, but the process has its charms. Even though my wife and I had a real estate agent who drew up the purchase offers and counteroffers we made on our recently purchased house, we learned a lot during the process. Plus, the negotiating process – though stressful – was actually fun, and it was immensely satisfying to hear that the seller had accepted an offer substantially below what we were willing to pay. I don’t want to go through the process again anytime soon, but I’m definitely more confident in my ability to navigate it when the time eventually comes.
Have you made a purchase offer on a home?