How to Make an Offer
Okay, you started out back home in Canada by researching Arizona real estate and how you would finance your Arizona home. Then you found an experienced Arizona Realtor you trust and took a trip to Arizona where you found a gorgeous, sunny home you want to buy.
Now, you want to make an offer to buy that home.
The vast majority of resale (not new) homes in Arizona use the Residential Resale Purchase Contract created by the Arizona Association of Realtors (AAR). Whenever I say “contract” I am referring to this contract.
After discussing your options with your Realtor, you will tell your Realtor what you want to offer for the home. Your Realtor will prepare your offer.
Unlike many States, especially Back East, in
An offer is just a Purchase Contract with only your signature on it. It’s not a contract until the Seller agrees to it and signs it.
Some of the most important points in the offer are;
- Offer price
- Amount of earnest money
- Amount of down payment
- Loan Status Report
- Closing date
- Personal property included
- Seller contribution to Buyer closing costs, if any
- Escrow Company
- Home Warranty
- Additional Terms
- Offer Expiration
- Counter Offers
Offer Price
Your Realtor can research recent comparable sales and help you decide on the price you would like to offer.
Earnest Money
The earnest money is usually a personal check written by you and made out to the escrow company you have chosen. The earnest money check is then temporarily held by your Realtor.
If you and the seller eventually reach an agreement, your Realtor will give your earnest money check along with the contract signed by the buyer and the seller to the escrow company. This is called “opening escrow.” The escrow company will deposit your earnest money check immediately so be sure you have enough money in that account to cover the check.
If ultimately you can’t reach an agreement with the seller, tell your Realtor to either return the earnest money check to you or to destroy the earnest money check.
The Importance of Being Earnest… Money
The larger the earnest money amount, the stronger the offer.
In Arizona, earnest money of around 1% percent of the purchase price is common.
A buyer who offers earnest money significantly less than 1% is often interpreted by sellers as not being very serious about the purchase. Conversely, earnest money significantly more than 1% is often interpreted as a sign of a serious buyer. (FYI: In California, earnest money is customarily much higher than 1%.)
The earnest money provides the seller a small… very small, assurance that if you, the buyer, breach the contract that the seller may be able to keep your earnest money. That is rare in my experience. I have never had a seller keep a buyer’s earnest money and I’ve never had a buyer lose their earnest money but, nevertheless, your earnest money check is a way of showing the seller that you are a serious buyer.
Down Payment Amount
In the end, the seller will be paid in cash whether the money comes from the your bank account (the down payment) or from the money you just borrowed from your lender.
An all cash offer combined with a quick close (let’s say, three weeks) can make a very strong offer, IF the seller wants to close quickly. If the seller does not want to close quickly, a quick-close is of no benefit in negotiations with that particular seller.
Be careful: If you as the buyer promise in the contract to have a down payment of $X at closing but then it turns out that you cannot buy the home because you don’t have all the down payment money on the date agreed to in the contract, then you could very well lose you earnest money to the seller. This is one of the few scenarios where buyers actually lose their earnest money.
Arizona’s Loan Status Report
Arizona has an unusual feature in our contract. We don’t normally use pre-approval or pre-qualification letters from lenders to judge if a buyer will actually be able to borrow the money to buy the home.
In Arizona, we have a special form called a Pre-Qualification Form. The form gives the seller much more detailed information about where the buyer stands in getting approval for a loan compared to a pre-qualification letter.
The Pre-Qualification Form is prepared by your lender and a copy should be sent to your Realtor. Your Realtor will include a copy of the Pre-Qualification Form when submitting your purchase offer. Including the Pre-Qualification Form or the similar Loan Status Report greatly strengthens your offer.
The Pre-Qualification Form is another reason why you should contact a lender before shopping for homes.
Closing Date
In Arizona, it’s common for the closing date to be about a month to 45 days after an offer is made. That is, if you make an offer on January 1, you might put in the offer that the closing date will be February 1 or February 15. However, closings longer than 45 days are not uncommon.
The processing of your loan by your lender is usually the item that takes the longest to complete.
Be careful: Buyers should be aware that you are responsible for having the loan ready by the closing date agreed to in the contract. If your loan is not ready at closing because your lender is incompetent or because your didn’t give your lender the paperwork he needed on time, then you, the buyer, could end up in breach of contract and at risk of losing your earnest money.
The morals are, 1) Choose a reliable Arizona lender, not your aunt’s college friend in Minnesota, 2) When your lender asks you for any documents, get those documents back to the lender as soon as possible, and 3) Ask your lender how long he will need to process your loan before you and your Realtor write an offer.
Tip: In contract negotiations, being flexible on the closing date is often a cost-free concession a buyer can give a seller. If a seller needs an unusually long, unusually short, or unusually specific closing date, the seller may look favorably on offers that accommodate their situation.
Personal Property Included
Is the refrigerator part of the house or is the refrigerator the seller’s personal property like furniture? How about the stove? The drapes?
The AAR Residential Resale Purchase Contract (the “contract”) in Section 1g gives many examples of items that are part of the house, also called “fixtures.” These items are included in the sale unless specifically excluded somewhere in the contract.
In Arizona, the refrigerator, clothes washer and dryer are not usually considered part of the house. It is very common, however, for a buyer to state in an offer that the refrigerator, washer and dryer will indeed be included in the sale. If the seller does not want to include those items in the sale, he may want to make a counter offer that says those items are not included in the sale. What personal property, if any, will be included with the home is part of the contract negotiations.
A big problem today is confusion over large expensive, flat panel televisions. If you want it, make sure the wall mounted TV is explicitly mentioned in your offer so there is no confusion or hard feelings later.
In Arizona, the stove/oven, dishwasher and draperies are considered to be included in the sale unless otherwise stated in the contract. However, the refrigerator, clothes washer and dryer are usually considered personal property and are not included in the sale unless otherwise stated in the contract.
Seller Contribution to Buyer Expenses
It is not uncommon for buyer’s to ask sellers to pay for some of the buyer’s closing costs. This has the effect of reducing the offer price.
Escrow Company
The buyer selects the escrow company. I recommend buyers choose a company that has an established relationship with their Realtor.
Home Warranty
Seller’s in Arizona will often agree to pay for a 12-month home warranty for the buyer, so you should ask for it. A home warranty will cover different items depending on the warranty company used and the specific warranty purchased. Major items like the air conditioner are almost always covered. Home warranty companies typically charge the buyer a flat trip charge of about $50 to $70 per warranty service performed.
Additional Terms
This is where you might add custom clauses such as, “Seller to remove shed in backyard before close of escrow.”
Offer Expiration
It is not uncommon for offers to be valid for only about 24 hours.
Counter Offers
After the buyer summits an offer to the seller (in fact, it will be the buyer’s Realtor submitting the buyer’s offer to the seller’s Realtor), the seller may accept the offer in which case the buyer and seller have a fully executed, valid contract. On the other hand, the seller may reject the offer outright and the negotiations may be over.
Or, the seller may make a counter offer. Counter offers typically propose changing the sales price but they can attempt to change anything in the offer, such as the closing date or personal property included in the sale.
For example, if the buyer’s original offer included the refrigerator, washer and dryer, the seller’s counter offer might simply say, “Refrigerator, washer and dryer not included in sale.”
The buyer could accept that counter offer in which case the buyer and seller have a fully execute, valid contract.
Or, the buyer could write Counter Offer #2, (“Washer and dryer to be included”) and so on until agreement is reached or the negotiations fail.
If the negotiations succeed, the original offer and all counter offers together become the purchase contract.
Once an agreement is reached, your Realtor will take the purchase contract, all counter offers and the earnest money check to the escrow company to “open escrow.”
Escrow companies are private companies that act as neutral third party intermediaries. They represent the buyer and seller equally but their real “boss” is the contract. They look to the contract for their instructions.
Escrow companies also sell title insurance.
Next: Buyer inspections during escrow
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