OK, you’ve done your homework, run the numbers and are ready to write an offer on that perfect home. Unfortunately, in a hot market, you may not be the only bidder. So, you should take nothing for granted related to the terms you set forth. Price isn’t always the top and bottom line in real estate.
- Earnest Money Deposit (EMD): Often called “good faith money,” or simply “deposit,” it is typically a personal check submitted with an offer, deposited into an escrow account upon acceptance, and returned to the purchaser at settlement to serve as part of the closing funds. The deposit is considered insurance for the seller since it could be forfeited if the buyer doesn’t perform under the terms of the contract. In a hot market, if your loan is solid and the contingencies few, the larger you make that deposit check, the more you’ll stand out. It’s called “good faith” for a reason. Give the seller some faith in you.
- Financing Contingency: These days, since so few people write competitive bids without some sort of strong preliminary commitment from a lender, this contingency can be pretty short, which sellers like. A financing contingency insures the return of your EMD in the event of loan denial. When choosing amongst bids, a seller will focus on which bid has the least chance of loan denial. However, there are ways to remove or make this contingency more attractive to a seller. First, buyers please don’t walk into your local bank or credit union and ask at the window for an application. There are many mortgage lenders, brokers and banks that deal strictly with home loans. They can take a broader view of your financial landscape and are often able to provide a more comprehensive approval letter to help you make your bid a better bet.
- Appraisal Contingency: Again, security for the buyer, risk for the seller. If the bank appraisal comes in below the contract price, the seller won’t reduce the price accordingly and you’re not willing to throw more cash at the deal, then your EMD is returned. However, if you’ve done your homework and your agent is experienced, you should know what the home would likely appraise for, what premium you might pay and what risk you are willing to take with this contingency. A local, experienced mortgage broker can help a lot with this contingency.
- Inspection Contingency: This implicitly keeps your EMD safe in the event of defects discovered during inspection that the seller isn’t willing to remedy. But remember, we’re talking about a competitive market. So, if you feel you’ve got a decent chance of getting the home, hire an inspector to go in prior to making your offer, include an AS-IS clause and increase the seller’s faith in you and your offer. In my mind, $300 for an appraisal is a small price to pay to secure such a big-ticket item.
- Settlement Date: Contractually speaking, this date is firm unless there is written consent from both parties to make a change, but there is wording that can allow a seller flexibility in their move. Also, if a seller requires some time post-settlement to move, make that available to them. If only a small holdover is needed, and the house works well for you, and of course is priced right, you might consider allowing the holdover at no charge provided you retain a deposit. Again, it’s small money in light of the big picture.
You may have noticed that I didn’t mention escalation clauses in these components. Check out my column from last year on that particular subject, which is unique to D.C. and other hot markets.
Also, you’ve found no talk about offering prices here since I’m assuming you’ve done your homework before spending hundreds of thousands of dollars — or you have learned the hard way after losing a couple of bidding skirmishes and now know what to do.
These contingencies and components can be turned upside down in a buyer’s market. Stay tuned.
The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of HillNow.com.