The Real Deal: What to Expect with an Offer
Homebuyers and sellers often obtain their knowledge of real estate transactions from various sources, from TV shows to blogs to word of mouth. Not all of this information is complete and accurate, so misconceptions happen. The intent of this page is to help clear up these misconceptions, so buyers and sellers have a realistic idea of what to expect when an offer on a home comes in.
The following is a breakdown of the terminology, definitions, and steps of a home sale, including common misconceptions and explanations of how these concepts work in practice for the vast majority of sales. We want you to know "the real deal" before you sign on the dotted line.
Also Known As: Purchase & Sale offer, purchase offer, binder, contract to purchase
Definition: A legally binding document that outlines the buyer's requirements to go through with the sale. An offer letter typically includes the address, the price the buyer is willing to pay, the amount and terms of the earnest money deposit, the desired move-in date, the details of any contingencies, the date and time at which the offer will expire, and other details.
Common Misconception: Once typed up, the buyer's agent hand-delivers it to the listing agent along with the deposit check.
The Real Deal: Like many things these days, offers are usually submitted digitally. The buyer’s agent typically emails the offer to the listing agent directly. The listing agent will talk to the seller, and the seller will decide whether to accept, reject, or make a counter-offer. This back-and-forth communication continues until both parties agree on the terms and the seller accepts the offer. The buyer’s agent receives the acceptance by email from the listing agent. The offer only becomes a legally binding contract once both the buyer and the seller agree on and execute the offer.
Also Known As: Earnest money, good faith deposit
Definition: Money put down by the buyer towards the purchase of the home to demonstrate that they intend to go through with the purchase. The deposit is usually held in escrow by the listing brokerage. There may be multiple deposits, and the amount of these deposits can vary. They may be submitted with the offer or the Purchase and Sale Agreement.
Common Misconception: The deposit is attached to the offer letter, and both are hand-delivered to the listing agent.
The Real Deal: Buyers may send the deposit electronically or by mail to the listing brokerage rather than the listing agent. This may happen within 24 hours of the offer being accepted, once the Purchase and Sale Agreement is signed, or both.
The Mortgage Pre-Approval
Definition: A preliminary approval to obtain a mortgage, obtained by completing a mortgage application and the lender verifying the information. Buyers who plan to get a mortgage loan should provide this with their offer.
Common Misconception: Getting pre-approved means that you'll definitely be approved for the mortgage.
The Real Deal: A lender doesn’t know what they’re agreeing to finance until you find the home you’re actually buying, which is why an appraisal is required for final loan approval. There also may be major life changes between the pre-approval and the purchase of the home, such as job changes or changes to your credit score, that affect the lender’s willingness to provide the loan. While a pre-approval from a reputable lender will usually turn into a realized mortgage without any problems, it’s not a full guarantee.
The Purchase and Sale Agreement
Also Known As: P&S Agreement, PSA, purchase and sale contract
Definition: A comprehensive document written and signed by both buyer and seller after coming to an agreement on the price and terms of the sale. The PSA defines the responsibilities of each part up to the closing, including earnest money details, the planned closing date, any contingencies, the details of the agreed-upon title company and escrow company, etc. There may be instances in which terms survive the purchase and sale agreement e.g. leases, warranty, etc.
Common Misconception: Signing the purchase and sale agreement means the home is now sold.
The Real Deal: A signed Purchase and Sale Agreement will usually turn into a successful home sale, but there’s a reason for the contingencies included in the document. If one party fails to uphold their responsibilities or one of the contingencies brings new information to light, the transaction may still fall through. Your real estate agent will advise you on the best course of action, depending on the situation.
The Financing Contingency
Also Known As: Mortgage contingency, loan contingency
Definition: A provision in the offer and PSA that specifies a period after which the buyer must have their mortgage approved, typically between 30 and 45 days.
Common Misconception: If the buyer doesn't obtain their mortgage by the specified date, the seller keeps the buyer's earnest money.
The Real Deal: If a buyer who needs additional time to secure their mortgage gives the seller proper notice before the date supplied in the contingency rolls around, they have the option to back out of the sale and keep their deposit. However, if they’re denied the mortgage after the contingency runs out, the seller is usually entitled to keep it. In this case, buyers and sellers will want to refer to the brokerage’s escrow policy. There may be other monetary consequences of failing to close, so both parties in this situation may wish to work with their real estate agents to negotiate alternative solutions.
The Home Inspection Contingency
Also Known As: Due diligence contingency
Definition: A provision in the offer and PSA specifies a period in which a buyer has the right to have the home inspected and specifies what types of inspections will be conducted.
Common Misconceptions: Homes "pass" or "fail" inspection. If a buyer backs out of the sale after the inspection, they'll lose their deposit.
The Real Deal: Home inspections result in an itemized report of the condition of each component inspected, including necessary repairs and safety concerns and the inspector’s professional opinion and recommendations. The buyer can choose to do with this information as they will. The information presented in the report may lead the buyer to negotiate terms such as repair credits or pre-sale repairs, back out of the sale entirely, or proceed with no changes to the agreement.
This contingency exists so buyers who are unsatisfied with the home’s condition have the option to back out without consequence. If this contingency comes into effect, the buyer is also entitled to reclaim their deposit. If the buyer chooses to proceed, they’ll issue a notice of fulfillment for this contingency. If the terms have been renegotiated, such as for pre-sale repairs, there will be an amendment to the agreement detailing the agreed-upon repairs and the date by which those repairs will be completed.
The Appraisal Contingency
Definition: A provision in the offer and PSA allowing a buyer to back out of the sale if the home doesn't appraise at the agreed-upon sale price or higher. A home appraisal allows the lender to confirm that the home's value warrants the mortgage amount that the buyer applied for.
Common Misconception: An appraisal can substitute for a home inspection.
The Real Deal: The appraisal and home inspection cover entirely different concerns, and you can’t substitute one for the other. A home inspection informs the buyer of the home’s condition and may be acted upon or not, and an appraisal informs the bank of the home’s market value. A mortgage application may be denied if the appraisal result is lower than the amount the buyer is requesting to borrow.
Usually, an appraisal is in line with the listing price. However, if it comes in too low, the buyer and seller can negotiate to complete the sale. Your real estate agent can advise you on the available options and assist in negotiations.
The Closing Date
Also Known As: Completion date, settlement date
Definition: The date specified in the PSA upon which legal ownership and possession of the home are transferred to the buyer, typically 30 to 45 days after the offer is accepted (though it can be delayed).
Common Misconceptions: The closing date can be easily changed by either party after signing the PSA. The seller can remain in the property 2-3 days after closing if possession is delayed without the buyer’s consent.
The Real Deal: The closing date is included with the contract as a firm date. The seller must vacate the property by this date. This is also the date the buyer takes possession and can move in. A closing date may be delayed if unforeseen circumstances arise, but the buyer and seller must agree upon the new date.