Negotiating the Purchase

Deciding how much to offer

In deciding how much you should offer, there are several factors you need to consider. Your agent can also help guide you through the process of making an offer on a house.

Before making an offer on a house, you need to know what your monthly housing costs would be if you purchase the house for the price you plan to offer. This requires knowing the annual cost of utilities, local taxes, property insurance, condo fee (if applicable), and any special assessments, as well as the interest rate you will be paying. Another step is to review and re-check all of your benefit considerations. Be sure that you know exactly if, and how, your benefits will be affected if you purchase this particular house.

Make sure that the amount of your down payment is adequate and that you will have enough to cover closing costs as well. If renovations or repairs are needed, you must set aside enough funds to cover them. Don’t be tempted to offer more for a house than you can afford.

Does the asking price compare to the market value of the house, based on recent sales of comparable homes in the area? This information can usually be obtained from the listing agent. You can also check the prices of similar homes that are for sale in the same neighborhood.

Before making any offer, you should be fairly confident that you are aware of any major problem areas in the house. You should have inspected the house to the best of your ability and questioned the sales agent and the owner about the structural soundness and condition of all basic systems. (Both sellers and real estate sales professionals can be held liable if they fail to tell the buyer of any defects they know of in the house.) You should also have a clear idea of what it will cost to fix any major problems of which you are aware. Obtain written cost estimates from at least two contractors.

In fact, if you are buying an existing house rather than a new house, a home inspection by a professional should be one of the "contingencies" in your sales contract. We will talk more about contingencies later in this chapter.

As you think about whether to make an offer on a particular house, you may want to gather your planning team together to help you evaluate how close this house comes to the ideal standards that you have developed. While it is unrealistic to imagine that you will find everything on your wish list, you must decide on which items you are willing to compromise.

Does the house require renovations in order for it to be accessible to you? If so, can the work be accomplished for a price you can afford? Must the work be done before you can move in? Will there be areas of the house that are impossible for you to access, such as the attic, second floor, or basement? If so, will that be acceptable to you? If you plan to obtain funds for renovations from various sources, how long will it take?

In deciding how much to offer for the purchase of the house, try to determine how anxious the owners are to sell. For example, if the sellers already have a contract on another house, you may be in a good negotiating position. They may need to complete the sale and collect their profit to use as down payment on their new house. It will be to your advantage to know how long the house has been on the market and whether the asking price has already been reduced. If it has not, then there is a good chance the sellers are prepared to accept a lower price. In order to leave room for negotiation, it is customary for a seller to start out with a higher asking price than they intend to receive. Also, how much did the seller pay for the house, and when? How much does the seller stand to make on the property? If the seller bought the house many years ago, they may have paid considerably less than the house is worth now. Also, their mortgage may be completely paid. If they are not bound to pay off a mortgage, they may be more willing to accept a lower offer.

Sellers are often willing to leave certain household furnishings behind. Some items may not be needed in their new home, styles may be different, or it may be more convenient to replace particular items than to move them. Sellers may leave appliances such as a washer, dryer, dishwasher, or stove; window dressings like curtains, shades, or blinds; or outdoor fixtures such as fencing, a doghouse, lawnmower, or garden hose. On the other hand, sellers may take all of these items when they move. It is important to know how many of these expensive items will be left behind so you can determine which ones must be purchased right away. Your purchase agreement, which we will discuss later in this chapter, may include any items that you would like the seller to leave behind.

There are two aspects to making an offer on a house. One is the price and the other is the financing terms. The terms may actually be more critical than the price. For example, if the seller is willing to offer attractive financing terms, including payment for title search, the home inspection, and other settlement costs, you may be more willing to accept the price.

This is a time when you should take advantage of the people who are providing you with assistance. Discuss all of your options and get advice from the planning group. The real estate agent may advise you as to how much you should offer, but remember, the agent typically works for the seller. Most buyers do not offer the full asking price, at least at first.

The next step is to submit a "purchase and sale agreement" to the real estate sales professional. A purchase and sale agreement is a signed offer to purchase the house for a given price under specified terms. Be sure that the agent has explained the contract to you, and that you understand it, before you submit the offer. The agent is required by law to deliver your offer to the seller.

This is a "good faith" payment that you submit with the offer to show the seller that you are serious about buying the house. There is no set amount required, and what is customary differs by location. Check with other homeowners in your area to learn what they offered as a deposit. The check should not be made out to the seller directly. Rather, it may be made out to the brokerage firm of the real estate agent. The earnest money, or deposit, should be kept in a special account to be returned to you if the seller does not accept your offer within a specified number of days. If your offer is accepted by the seller, and you decide later not to purchase the house, then you may lose your deposit.

The offer to purchase a house should include at least the following:

• a complete legal description of the property;
• the amount of the deposit accompanying the offer;
• the price you are offering;
• the size of your down payment and how the remainder of the purchase will be financed (including the maximum interest rate you are willing to pay);
• any items of personal property that the owner has said will stay with the house or that you want to be included;
• a proposed closing and occupancy date;
• the length of time the offer is valid (three to five days); and
• compliance with certain contingencies, which are discussed below.

In addition to the basic terms of the sale, certain "contingencies" may be included in the contract. These are conditions that must be met in order for the contract to take effect. Other provisions that may be included in your contract are described below.

When you apply for a loan, the lender will require a professional appraisal to determine the market value of the property. The appraised value of the house determines how large a mortgage the lender will be willing to give you. If the appraised value is lower than the agreed-upon purchase price, this contingency gives you the right to withdraw your offer. A lender can deny your loan if the appraisal is lower than the selling price of the home.

If a guardian or conservator has been appointed for you, the process of purchasing a home will be slightly more complex. A guardian is a person or organization who has been named by a court to exercise some or all powers and rights over a person and/or estate of the individual. In some states, the term "conservator" is defined in the same way. In other states, a conservator may be described as having control over a person’s estate only, while a guardian has responsibility for the person. Different states have different laws which apply if you have a guardian and wish to purchase a home. You should check your state’s laws.

Your guardian, if you have one, will probably need to be in agreement with, and put his or her signature on, any legal contract or business transaction into which you enter. A probate court judge may need to be involved as well. You may need to specify in your contract that the sale will be contingent upon court approval.

If you receive financial or other assistance from an agency, there may be requirements regarding the type of house in which you live. In order to continue to receive funding, your home may need to pass an inspection to become certified, or approved. This may be an important item to include in the contract.

The contract should state the purchase price, the amount of down payment, the total loan amount, and the exact financing terms you will accept, as well as how long you have to find the agreed-upon financing. It also will state the amount of deposit being held in escrow, and which closing costs are to be paid by the buyer and which are to be paid by the seller.

This contingency states that if you don't get the money you need at the terms you have specified, the contract is canceled and your deposit will be refunded. In turn, the seller may insist that a clause be included requiring you to make a "good-faith effort" to obtain the mortgage.

As we mentioned earlier, unless you are buying a new home, it is highly recommended to have the house inspected by a professional. You may also want to specify that certain inspections are completed before the sales contract takes effect. The buyer almost always pays for the home inspection, but the fees for other inspections may be negotiated between you and the seller. There are numerous resources, described in Chapter One, that may help with the cost of various inspections.

One of the contingencies in your contract should be that you obtain a satisfactory home inspection report. You and at least one other person will have examined the house to the best of your ability before making an offer on it. But before you go through with the purchase, you will want an expert to take a critical look at the property. Although you must pay for this inspection, the peace of mind you will have is well worth the expense.

Try to get a referral from a satisfied homeowner, such as someone from your planning team. Also, you may check the "Yellow Pages" under "Building Inspection Service." Ask for and check references from three recent clients. The American Society of Home Inspectors sets rigorous standards for its members. To obtain the names of local members of this organization, call 1-800-743-2744. It is a good idea to get quotes from two or three inspectors before you decide on one. You may expect to pay $150 to $350 for an inspection, including a written report (not just a checklist) within one or two days.

The home inspection is different than an appraisal. The inspection is meant to evaluate the structural and mechanical condition (not the market value) of the property. The inspector's report will be based on observable, unconcealed structural conditions. The inspector will not guarantee or warrant the condition of the home, or determine whether it is in compliance with local building codes.

We urge you to accompany the inspector on his or her rounds. You can expect the inspection to take about two hours. You will undoubtedly pick up valuable maintenance tips along the way, have a chance to ask questions, and learn more about the extent of possible problems. You will also be in a better position to understand the written report.

Every inspection should include an evaluation of at least the following:

• Foundations
• Doors and windows
• Roof and siding
• Plumbing and electrical systems
• Heating and air conditioning systems
• Ceilings, walls, and floors
• Insulation
• Ventilation
• Septic tanks, wells, or sewer lines
• Common areas (in the case of a condominium or cooperative)

The inspector's report will not include a recommendation as to whether or not you should buy the house, nor will it evaluate the purchase price. Some lenders will take the inspection results into consideration. No lender wants to loan money for a house that is in bad repair. This may be especially true of affordable lending programs. If major flaws are uncovered, it should give you an idea of what it will cost to repair or replace the problem. A reputable home inspector will never offer to complete needed repairs and should not refer you to a contractor to perform such repairs.

An inspection report may serve the following purposes:

1. identify problems before you purchase a home and prevent unpleasant surprises later;
2. enable you to cancel a purchase agreement (and get your deposit refunded) if serious problems are identified;
3. help you negotiate an adjustment in the purchase price if you want to buy the house in spite of the problems;
4. influence the seller to agree to pay for needed repairs, either before the sale or after the sale using escrowed funds; and
5. make you feel confident about going ahead with the purchase.

Once you and the sellers have agreed on all the provisions of the contract, you are ready to shop for the loan needed for the home purchase. The lender will want to see a copy of the signed purchase and sales contract when you apply for the mortgage. Shopping for a mortgage is the subject of Chapter Four.

Termites. It is standard practice to require the seller to pay for a termite inspection and to provide a written certification stating that the property is free of termite infestation and that any damage from past infestation has been repaired.

Water inspection. Another contingency should be that the water be tested and deemed suitable for drinking.

Roof certification. An inspection of the roof by a qualified contractor should be completed to insure that the roof is sound.

Be sure that the professional who does the home inspection checks for the following hazards as he or she completes their observations and recommendations.

Radon. Many home buyers today insist that the house be tested for the presence of radon. Radon is a naturally occurring, odorless gas that can seep into houses and cause major health problems. For more information about radon in your area, you can call your state or county public health department.

Lead-based paint. If the house was built before 1950, you can be almost sure that lead-based paint was used. For houses built between 1950 and 1978, there is a good chance that lead-based paint is present. The presence of lead paint should be investigated because even low levels of lead exposure can have very serious health-related consequences, especially for infants, young children, and pregnant women. Children do not have to eat lead-based paint chips to be poisoned. Lead-contaminated dust from children's hands and toys can pass into their mouths.

Before a sales contract can be finalized on a home built before 1978, the seller (or his or her agent) must give you a pamphlet discussing lead hazards in the home and tell you about any lead-based paint or lead-based paint hazards of which they are aware. Sellers must also allow you 10 days during which time you can hire a trained professional to conduct an inspection or risk assessment of lead-based paint hazards. You can make the sales contract contingent on this lead hazard evaluation. You need to find an inspector or risk assessor who has taken a U.S. Environmental Protection Agency course or is certified in your state. A lead paint inspection will tell you what surfaces are coated with lead paint. A risk assessment will identify any lead hazards--such as peeling paint or contaminated dust--and what steps are needed to correct them.

Renovation projects on older homes can disturb lead-based paint and be particularly dangerous. Don't attempt lead-based paint removal projects yourself. For further information, available in both English and Spanish, contact the federal lead information hotline at 1-800-LEAD-FYI.

Asbestos. Asbestos is a material that was used as insulation in homes and businesses before it was found to cause health problems. According to the Environmental Protection Agency (EPA), many homes built during the past 20 years probably do not contain asbestos products. You may hire a qualified professional who is trained and experienced in working with asbestos to inspect the home. A professional knows where to look for asbestos, how to take samples properly, and what corrective actions will be most effective.

Formaldehyde. Formaldehyde is a colorless, gaseous chemical compound that is released by many construction materials. It was also an ingredient in the foam used for insulating houses until the early 1980s. It can cause irritation of the eyes, nose, and throat, and is suspected of causing cancer. In the case of a new home, check with the builder to see whether construction materials containing formaldehyde were used. A qualified building inspector can examine the home for formaldehyde-emitting materials. Home monitoring kits are also available.

Hazardous waste sites. Generally, testing for hazardous waste involves skills and technology not available to the average homeowner or home remodeling contractor. The EPA has identified more than 30,000 potentially contaminated waste sites nationwide. Contact the nearest regional office of the EPA for information on the location and status of local hazardous waste sites.

You also may want to include certain other provisions in the terms of the contract so that nothing is left to chance.

Repair work. You may want to stipulate that the sellers are responsible for ensuring that the plumbing, heating, mechanical, and electrical systems are in working order at closing. Without this clause, you agree to accept the house "as is." You also should stipulate that you will conduct a walk-through inspection of the house on the day of settlement or several days before to determine if all conditions in the contract have been satisfied.

Personal property. Don't rely on the seller's verbal agreement that specific fixtures, appliances, and personal property are included in the sale. To avoid any misunderstandings or surprises, list in the contract everything that the owner is supposed to leave behind.

Closing and occupancy date. You also may want to include a provision that the sellers must pay you rent on a daily basis in the event they haven't moved out by the agreed-upon date (usually the closing date).

Clear title. The contract should state that the purchase is subject to your receiving clear title to the property. Clear title means that there are no legal questions as to who owns the property. The title search and title insurance will be discussed in Chapter Four.