Regardless of where you’re buying or the market conditions, there’s one thing every homebuyer has in common: you have to make an offer to purchase a home. Whether you’re still in the browsing stages or have started to put your plan into action, as a prospective buyer, it is wise to do some legwork and gain insight into the process of making an offer. While your real estate agent is there to guide you, the more you know about the home-buying process, the smoother it will be. A smooth process is especially pivotal in a seller’s market, where you’ll need to act fast and take quick and decisive action when you find a property that interests you. This makes understanding how to make an offer on a house essential.
How to Make an Offer on a House
Mortgage Pre-Approval:
New home buyers often wonder if they need pre-approval before making an offer on a house. Unless you plan to pay cash for the house, you’ll need to secure financing. It’s a good idea to get pre-approved for a mortgage before making an offer.
In case you need to move quickly with your offer, you’ll be ready in terms of your financing. As a buyer, you’ll know exactly how much you can spend, and the seller also wants the reassurance that you will not back out of the purchase based on financing.
A pre-approval also locks in the current interest rate for up to 120 days, so you can shop with peace of mind, knowing that you’re insulated from rate hikes in the near future. If the rate drops, your lender should honour the new lower mortgage rate when you’re ready to make your purchase.
Decide on an Offer Amount:
When preparing to make an offer on a house, a crucial step is understanding the property’s value and deciding on your offer amount. This begins with conducting a Comparative Market Analysis (CMA), which compares the property with similar homes in the area that have recently sold, are currently on the market, or were on the market and didn’t sell. This analysis helps you gauge the fair market value of the house based on factors such as location, condition, size, and unique features.
While determining the offer amount, it’s essential to balance the property’s market value with your budget. This decision is also influenced by the current market conditions. In a buyer’s market, you may have more leeway to negotiate below the asking price, whereas in a seller’s market, you might need to offer at or above the asking price to be competitive. Your offer should reflect both the property’s worth and what you can afford, keeping in mind that your initial offer sets the stage for potential negotiations.
Additional Considerations:
When making an offer on a house, there may be additional considerations beyond the offer amount, which are crucial for a successful transaction. When thoughtfully addressed in your offer, they protect your interests, demonstrate your commitment to the seller, and make your offer more appealing. They can include:
- Contingencies, which are conditions that must be met for the sale to proceed. Common contingencies include a satisfactory home inspection, which allows you to negotiate repairs or back out if significant issues are discovered; financing contingency, ensuring that the deal depends on securing a mortgage; and an appraisal contingency, to ensure the property is valued at a minimum specified amount.
- An earnest money deposit which is a sign of good faith that you are serious about the purchase, typically ranging from 5 percent to 10 percent of the purchase price. This deposit can be forfeited if you back out of the deal for reasons not stipulated in the contingencies.
- Proposed closing date and move-in timelines, aligning with your needs and the seller’s situation.
Real Estate Paperwork:
When you’re ready to put an offer on a house, your agent will draw up the necessary paperwork, typically referred to as a Real Estate Purchase Agreement, though its name differs across the country. To be valid, your offer documents must include some specific details:
- your legal name, the name of the seller and the address of the property
- the amount you’re offering to pay (the purchase price) and the amount of your deposit
- inclusions and exclusions (for example, are the window coverings included in the purchase?)
- the date you want to take possession (“closing day”)
- the date the offer expires
- any other conditions that must be met before the contract is finalized (for example, a satisfactory home inspection)
The Price:
When making an offer on a house, be prepared to negotiate. Your negotiating power will depend on a few factors. The current market conditions in the immediate neighbourhood will dictate whether you can make a lowball offer – a likely scenario in a buyer’s market – or perhaps an offer that’s higher than the asking price, which has happened over the last two years in the record-breaking seller’s market brought on by the pandemic.
Deposit:
While “deposit” and “down payment” are often used interchangeably, they are different. At the time of the offer, the buyer should come prepared to put a deposit on the home they hope to buy.
The deposit will be rolled in with your down payment, showing the seller that you’re serious about buying the home and have your finances in order. If the buyer walks away from the deal, they will forfeit their deposit in most cases.
There’s no standard deposit amount. It will vary based on the property type and the buyer’s desire for this particular home. The deposit is generally given to the seller’s agent to be held in trust until the deal is firm.
Down Payment:
A down payment is the amount of money paid up-front as a lump sum when you buy a home. It is calculated as a percentage of the total purchase price. The minimum down payment in Canada is five percent. Keep in mind that this is the bare minimum required to qualify for a mortgage. However, anything below 20 percent is a high-ratio mortgage and requires mortgage loan insurance.
Firm versus Conditional Offer in Real Estate:
With the competitive market brought on by the pandemic, it was common to hear of bidding wars where buyers would make an offer without any conditions. This is called a firm offer. The buyer is 100 percent certain of the purchase. They do not require any conditions for a home inspection or financing. Once the offer is made, the buyer can’t back out of the deal.
Conversely, a conditional offer requires specific terms to be satisfied for the offer to be valid. These conditions protect the buyer; some common conditions include:
- Purchase conditional on financing: This is a common condition for first-time homebuyers making an offer on a house, and it requires the sign-off of the mortgage lender for the deal to go through. The buyer will have a few days to get this, and the process will include a home appraisal. If the lender does not agree to finance the property, the buyer will notify the seller, and the offer becomes null and void.
- Purchase conditional on home inspection: A home is likely the biggest purchase you’ll make in your lifetime, so it’s always recommended that the offer be dependent on a satisfactory home inspection. A professional home inspector will look at things in and around the home that are openly visible (they will not be opening up walls or floors). The inspector will examine the structure, roof, plumbing, heating, and electrical systems to ensure the house is in good condition. If the home isn’t up to par, this condition allows the buyer to return to the seller and request repairs, a reduction in the price, or can rescind the offer entirely.
- Purchase conditional on the sale of a home: If a prospective homebuyer already owns a home, they may want to ensure it is sold before agreeing to purchase a new property. This isn’t ideal for the seller, as every condition has a potential domino effect.
A firm offer is typical in a hot market. With all other things being equal, a seller is more likely to accept an unconditional offer over one that could fall through for several reasons.
Negotiations:
An experienced real estate agent will be able to advise you on what you can realistically negotiate, depending on the market conditions. In a buyer’s market, you hold the cards, knowing that there are plenty of other options on the market. In a seller’s market, you compete with other buyers vying for the same property, so quick action and a strong offer are more likely to work in your favour.
Legal:
Your offer is a legal document, so ensure you read and understand everything outlined in the paperwork. The buyer can take the offer to a lawyer for review before signing anything. And remember, if you don’t understand it, don’t sign it.
Buying a home is a big deal, from the shopping and vetting process to the financial and emotional commitment you’re about to make. The offer is also a legally binding document. All your questions about making an offer on a house are valid. These seemingly small details will have a domino effect throughout the rest of the purchasing process and even long after you’ve taken possession. Work with an experienced real estate agent and an excellent lawyer to ensure your best interests come first.
