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Some people decide to buy a home within seconds of walking in. Even the most well-informed home buyers can't ignore their hearts. Their strings are pulled the second they see the garden and the bay window overlooking it, the fireplace at the end of a cozy living room or family room, or the luxurious master bedroom and bathroom. I know it's difficult, but try to keep your emotions in check when you're bidding on a home. Your business savvy will have to ignore the tug of your heart strings to make a smart offer.
How Much Should You Bid on a Home?
Money isn't the only consideration in home buying, though it usually appears near the top of the list! In making an offer, prioritize your needs. Is it important for you to pay the lowest price possible? Or is the ability to move in quickly your biggest concern? Your real estate agent can tell you what the typical difference is between asking prices and sale prices in your neighborhood. This will help you know what to expect.
Your offer or bid must be in writing. Most agents use the standard Minnesota Association of Realtors (MAR) Purchase Agreement forms. Your offer will include:
- The price you offer to pay and how you plan to finance the purchase.
- The time period you'll give the seller to accept or reject the bid.
- The date you want the sale to close and the date you want the seller to give you possession of the home.
- If it's a short sale, the date by which the Seller must obtain the necessary written short sale approval(s) from their lender(s).
Bid High or Low?
You don't need to offer to pay what a seller is asking for a home. Home buying is a game of negotiations. When sellers first put their homes on the market, they may ask for more than they are willing to accept. Later, if the home hasn't sold, the seller may be desperate to sell and could price the home below market value.
The amount you offer depends on whether you think the asking price is high, low or in line with the market. Check the value of homes like the one you want to bid on. Ask your real estate agent to prepare a comparative market analysis (CMA).
Don't worry about insulting the seller by offering less than the asking price (unless it's a totally low-ball offer). On the other hand, you may decide to bid higher if the home buying market is hot and homes are selling quickly, or if you really want to buy a certain home.
Understanding the Purchase Agreement
The purchase agreement is the major contract in home buying. It's what you submit when you bid on a home and it becomes a binding legal contract when accepted. If you change your mind about buying the home after the seller has accepted your offer, be prepared for a battle and the likelihood that you will forfeit your earnest money deposit. The purchase agreement legally locks you into buying the home. You'll probably have to pay hefty legal fees to try to get out of buying the home, and you may still be stuck with it in the end.
So read the purchase agreement thoroughly and ask questions if you don't understand something. A real estate agent may want to hurry you into signing it if another buyer is considering making an offer on the house you want to buy. Don't be pressured! On the other hand, if you wait too long you could lose it. Understand the purchase agreement before you sign it! You can also ask an attorney to review it before you sign it, but there will be a cost.
A Word About Contingencies
Contingencies are your safety net. Contingencies are conditions, or "what if" provisions, that you add to your purchase agreement. Carefully consider under what circumstances you will or won't buy the house by attaching contingencies that can make the agreement null and void. A real estate agent or an attorney can help you write your contingencies. Make sure it reflects your understanding of the conditions under which you're willing to make the offer. Here are the most common contingency addendums to the standard MAR Purchase Agreement. For example, you might want to use contingencies to allow you to cancel the purchase if:
- You aren't accepted for a home loan. (This is covered by the Conventional, FHA and VA Financing Addendums.)
- The house has structural, mechanical or environmental defects that are discovered through your home inspection. (This is covered by the Inspection Contingency Addendum.)
- The house appraisal comes in lower than the price you offered to pay. (This is covered in the FHA and VA Financing Addendums; but this condition will need to be written into the Conventional Financing Addendum.)
- You can't sell your current house. (This is covered by the Contingency Addendum.)
- There are liens or other charges or claims on the property. (This is covered in standard MAR Purchase Agreement.)
- The Seller does not receive short sale approval within the allotted time. (This is covered in the Short Sale Contingency Addendum.)
The Home Inspection
Once you buy a home, repairs can eat into your pocketbook, making the home of your dreams a "money pit." Homes can have wet basements, shaky foundations, rotting roofs and a multitude of other problems - even if they are relatively new. But a thorough home inspection before you buy can keep you from getting stuck with the bills.
Invisible Enemies
Unlike watermarks, some defects can be difficult to see. For example, radon (a gas emitted from the ground) has been discovered in dangerous levels in many Minnesota homes. A high level of radon may cause cancer. Not only is radon impossible to find without special detectors, it may be expensive to get rid of. Other potentially harmful "invisible enemies" include lead paint and asbestos.
Isn't the Seller Required to Tell You About Problems?
When a seller signs the standard Minnesota Association of REALTORS® purchase agreement, he or she is required to note only certain problems and environmental hazards, and state that certain mechanical systems are in working order. In other words, a seller doesn't have to disclosure everything. Also, a seller may not always know a problem exists.
What Is a "Truth-in-Housing" Report?
Some Minnesota cities require a Truth-in-Housing Report that tells you the condition of the home based on the city’s housing code standards. The report is completed by a licensed evaluator. Some cities have limited requirements to meet, so don’t rely on this report alone.
Most communities that have this ordinance do not require the seller to make repairs. The intent of the report is to provide prospective home buyers with thorough, accurate information to assist them in making a good decision about buying a home. When a Truth-in-Housing Report is required, the seller must provide the report to all prospective buyers at the time of the showing.
If you have questions about a Truth-in-Housing Report for a particular home, contact the evaluator or the city in which the home is located.
Should You Have a Home Inspection?
Hiring a qualified inspector will protect you and help you feel confident about the condition of the home you’re buying. The home inspector you hire should identify any major plumbing, heating, electrical, structural, safety and environmental problems. If a home inspector identifies numerous minor or major maintenance items, you may be able to negotiate the final sales price of the home with the existing owner.
There are several ways to do an inspection. You can hire a professional inspector or contractor, or, if you’re knowledgeable about construction, inspect the home yourself.
Where Do You Find a Good Inspector?
If you plan to hire a professional inspector, keep in mind they are not regulated by the state. Talk with friends and family about inspector’s they have used. Your real estate agent may also be able to suggest someone. You can also check the yellow pages under "Building Inspection Services" or "Inspection Service."
However you find your inspector, make sure you ask if the inspection company has adopted the Standards of Practice and Code of Ethics of the American Society of Home Inspectors (ASHI), and if its inspectors are Certified Member of ASHI.
Here are some other things to discuss with prospective inspectors:
- What training and experience do you have?
- What items does the inspection cover? What doesn’t it cover?
- How do you define major problems? Any repair over $500, $1,000 or $2,000.
- Do you stand behind the report, or is there a clause limiting your liability to the amount of the inspection fee?
- Have you ever written a report that caused a buyer to walk away from a sale?
- Do you carry professional liability insurance?
The price of home inspections varies considerably, so shop around.
What if the Property Doesn't Pass Inspection?
The FHA and VA require their own appraisal with minimum property standards and may ask the seller to make repairs as a condition of the sale. These are known as lender required "work orders." But if a house does not pass a buyer’s independent inspection, the buyer may cancel the purchase agreement. Otherwise, the seller and the buyer might have to negotiate who pays for the repairs.
Arbitration
At the time you fill out the purchase agreement, you may have the opportunity to sign an arbitration agreement. You don’t have to sign it. Signing or not signing won’t affect your purchase agreement. You can agree to arbitrate later.
So what is arbitration? In simple terms, it’s a system for settling out of court all differences or disputes about the physical condition of the property that arise after the closing. An arbitrator will hear all sides of an argument and make a decision. Sound appealing? It is to those who think court is just another word for "high legal fees." But that not always the case.
Disputes among buyers, sellers and agents are often simple misunderstandings that involve a limited amount of money. Maybe you thought the washer and dryer came with the house, but the sellers didn’t think so. If you can’t agree on a solution, you’ll have to go to court, submit the dispute to arbitration, or use another dispute resolution process. However, if you sign an arbitration agreement, it is binding and you waive your rights to pursue any action in court.
The arbitration envisioned in the standard MAR arbitration agreement is a system that was developed by the National Center for Dispute Settlement (NCDS) and the Minnesota Association of Realtors® (MAR) to deal with real estate disputes among buyers, sellers, brokers and agents. NCDS arbitrators have backgrounds in building inspection, property management, engineering, the building trades, and other related fields. Arbitration hearings are usually held at the home site. Usually an arbitrator will pick a winner - the buyer, seller, broker or agent. Keep in mind that arbitrators aren’t bound by legal rules. Make sure you study the pros and cons of arbitration closely before you sign any agreement.
If you don’t sign the arbitration agreement you can often have your case resolved quickly and inexpensively in Conciliation Court or "Small Claims" Court. Currently, judges in Conciliation Court can decide cases involving disputes up to $7,500 (this amount can change). If you would like more information on Conciliation Court, the Attorney General’s Office offers a free publication entitled Conciliation Court: a User’s Guide to Small Claims Court.
If you sign an arbitration agreement at the time you sign the purchase agreement, you will be committing yourself to a particular method of dispute resolution before you know what the dispute is about. And you will be giving up your right to go to court to assert specific legal rights you may have if you find yourself in a dispute. For this reason, you may want to consider waiting until a dispute arises and then choose a method of dispute resolution - whether that method is arbitration, mediation, Conciliation Court or District Court.
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Mavrik Realty is not engaged in the practice of law nor gives legal advice. It is strongly recommended that you seek appropriate professional counsel regarding your rights and responsibilities as a homebuyer and homeowner.
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