Welcome back to this installment of 'Ask Agnes'. Here we'll talk about finding a home and review an offer to purchase real estate.
"Ok Agnes, I have spoken to a reputable local bank and am pre-qualified for a purchase price of $400,000 and have a few neighborhoods in mind. I also know I want a 3 bedroom house."
"Great, with those parameters I can keep a keen eye out for new properties that may fit your needs. If you are interested you can do some hunting yourself by registering and saving searches on our website so that you can be notified when new properties appear. Finding the perfect house requires an open mind and patience. It also helps if you consider finding a great house that you can turn into a perfect house. Finally always look a little outside of your search parameters. For example, if you are qualified for a $400,000 purchase price, consider looking from $325,000-425,000. Love 3 bedrooms? Maybe 2 or 4 with better floor plans are just as suitable."
"Agnes, I have found the perfect home! What do I do now?"
"Well, before getting too excited let's let cooler heads prevail. Are you sure you can afford the home? Is it a good match for your needs? Is everyone on board? If so then let's get going! Buyers indicate their interest in a home by extending an 'Offer to Purchase Real Estate' (an offer) via real estate agents, to the owner. Commonly offers are contingent on a number of items; home inspections, financing, review of condominium documents, passing Title V reports etc.... It is always prudent to add these contingencies now since a submitted offer, once signed, is a legally binding contract."
"What is a passing Title V report?"
"Well that's a '5', not a 'vee', but these are reports certifying that a septic system has passed a required inspection. Because of the prevalence of septic systems on the Cape as well as the price of replacing one, this is generally written in black and white up front. Check out our page on home-ownership for more information on septic systems and other useful info.
"What are all of these other items on the offer?"
"Well let's have a look at this example at right. In order to keep things simple we are using standard time frames and amounts but it is important to keep in mind that these are always variable and it is rare that a closing will go through without a change to the original agreement at some point.
"To begin the offer identifies the relevant parties, buyer(s) and seller(s) as well as the property address and the real estate agent used to introduce the buyers to the property. Fairly standard stuff here.
"The purchase price identifies the total amount being offered to the seller by the buyer. In this example, $350,000. Offers are also accompanied by an initial earnest money deposit (line i) demonstrating the good faith and sincerity of the buyer. This amount depends on the price of the property but $500 or $1000 is typical, although we have seen others. When the Purchase and Sale (P&S) agreement is signed an additional deposit is expected usually bringing the total to 5% of the purchase price (line ii). Still with me?"
"Makes sense so far"
"Great. The next section limits the amount of time an offer lasts, usually 24 hours. We drew up this example on May 1 so May 2 is when it would expire. In the event an offer is rejected or expires and the parties do not wish to negotiate further, all earnest money is returned. Frequently negotiations take longer than 24 hours and, as is customary on the Cape, negotiations in good faith can continue past the deadline. However, it is always prudent to have things in writing.
"The next few sections identify a timeline for events, all of which change and are different depending on the needs of the parties. Generally speaking a purchase and sale agreement is set for signing two weeks after the offer, the closing is then set for 30 days after that.
"Contingencies are important to understand. In brief these are points that must be satisfied before a closing can occur. If a mortgage will be used and our buyers are well qualified, pre-approved and using a reputable local bank we set the mortgage commitment for 1 week before closing (or we can set a later closing date if other factors necessitate more time, like estate sales). We also stipulate the same day as the purchase and sale agreement for applying for a mortgage since many lenders require the P&S to truly begin the application process in detail. Inspections are also conducted before a P&S and, can sometimes trigger renegotiation of certain points, or ideally, nothing serious is found. Finally and very importantly is section 9, 'Additional Terms'. Here is where the buyer can stipulate anything else they may wish to be a part of a sale. For example homes that are a part of associations often have rules and regulations as well as financial statements associated with them, buyers should absolutely request to see these and may even consider having a lawyer review them before moving forward. In our example the buyers want a passing Title V certificate for 3 bedroom system (it is important to specify the size of the system as they sometimes do not match the number of rooms in the house)."
"Wow thanks Agnes, that is a lot of information and I think I'll spend some time looking over this document."
Feel free to contact us with questions about buying (or selling) on the Cape and stay tuned as our next installment will finish this series on buying and selling on Cape Cod.