I have recently been inspired to write a blog on what happens when you find the home in Calgary that you love. I have wrote this mainly as a resource for new clients to understand what they can expect as they enter into a real estate transaction in Calgary. Hopefully, however, everyone out there will be helped by it!
You will have spent some time with your agent touring different homes and neighbourhoods until you find just the right one. When that happens, we will proceed to the offer-writing phase. There are few things to think about as you enter this phase:
1) Timing: How long should I wait before writing an offer?
2) Deposit: How much money should I put in my good faith deposit?
3) Possession: When do I want to move into this home?
4) Conditions: What do I have to do before I give the final “OK?”
5) Open Time: How long do I let them think about it?
6) Amount: How much money should I pay for this home?
7) Countering: How does the back and forth go?
8) Acceptance: What do I do after it’s all done?
9) Due Diligence Phase: Is this a sound home and can I pay for it?
10) Legal: how does title change hands?
How much time you have to write an offer from the point of discovering that you love a property is different, listing by listing. However, it’s important to check with market conditions to give you a good idea of how long it is prudent to wait to write an offer.
If you’re walking through a home that has been on the market for less than 10 days, you’ve seen most of the competition and this one is the clear front runner, chances are you’re not the only one who thinks so. It’s probably wise to write an offer on this property as soon as possible. If you can’t make up your mind that day and maybe need some time to sleep on it, ask your agent to phone the listing agent to make sure you’re alerted if another offer comes in on the property. In a fast-paced market, it’s best to move on an excellent property very fast.
If you’re walking through a home that has been listed for more than the average days on market for the area (usually around 45ish days for a move-up single family, and more than 60 for a luxury property) and there have been no price reductions on the property since they came on, and you love it, you have a bit more time to play with. It’s not a guarantee, but usually, in this case, you have a bit more time to think about whether or not this is the home for you.
Good Faith Deposit
First of all, let’s look at what the good faith deposit is. This is an amount of money that is usually given---either with the offer, or shortly after acceptance--- to the listing agent and is held in a trust account at the listing brokerage. This money does not go into the hands of the seller, but sits in a monitored and safe trust account until closing day when it will join your total down payment. So if you are putting $20,000 down on a home, and you put down $5000 up front and in good faith, on closing day, you will need to pay $15,000 more to your lawyer to complete your total down payment.
The big question of the deposit comes into play when you get into the due diligence phase and begin your quest for financing and hire out a property inspection (or a condominium document review if you’re buying a condo). The big question of course being: will I get money back if one of my conditions fails. The answer is: YES! (In most cases). If you are not able to get financing, you will get your deposit back, and if your property inspection reveals something you are not comfortable with (not including cosmetic concerns), you can choose not to waive and you will get your deposit back. Handling of the deposit is something you should discuss with your agent more at the offer writing stage.
Why do we have the good faith deposit? The GF deposit says, “Hey, I’m serious about buying your home. I’m not pulling your chain here.” It tells the seller that you have every intention of honestly pursuing buying their home, as long as nothing serious comes up in the process of your due diligence. How much to put down for a GF deposit is negotiable. The seller will always want more; the buyer will always want less. You can buy any home with any amount down that you want. I always tell my clients that there’s no use in writing any offer with less than $5000 down in the GF deposit. That’s the very bottom. Anything lower will almost certainly get rejected. (Although I have seen offers accepted with less once or twice. So it’s not totally impossible).
I would say 2% of your total purchase price, in most cases, is an acceptable number. 3% is moderate/good number. 5% is a great number, and 7% is an excellent number. These ratings, of course, are all through the eyes of the seller. The buyer, would see these numbers in reverse, as the buyer always wants to keep as much of his or her own money in his or her possession. My opinion on this is to give a decently healthy deposit. It’s great way to relax the seller, and if you’re very serious about purchasing the house, it won’t cost you anything extra. Something in the 4-5% range is just fine. However, if you’re looking for ways to make your offer look more appealing in order to get the seller to accept your offer in a multiple offer situation, or in order to get a seller to take a number that’s lower than he’d like, a bigger deposit can speak volumes.
In the case where you have asked for a long possession (anywhere in excess of 60 days from acceptance of the offer), you can expect the seller to be looking for a larger deposit. Why is this? He is pulling his home off the market, and making his own plans to move based on your firm contract. If, for whatever reason, you would decide to break contract (which I know you would never do because you’re an honest person) the seller is out 2+ months worth of marketing his home, and probably more costs associated with holding another property, or backing out of his own deal because you’re not bringing in the cash to close on your broken contract. When you unlawfully break your contract, your deposit is forfeited to the seller, which he or she will likely then forfeit to his or her real estate lawyer to spank you with the long arm of the law and make you sorry that you were ever born.
Don’t ever break your firm contract. It’s not cool.
This is the day that all of your down payment is due, and you get the keys to your new home. When you’re negotiating a contract, this is one of the things you need to agree upon with the seller: when does the home change hands? There are a number of factors to decide on in this area. Do you want to take possession of your new home before your old is sold? Do you have to have the money from your old home before you can financially take possession of your new home? Would you like a couple of days of overlap to make the move smooth? If you don’t have the cash available to finance both homes, this idea will require you to get bridge financing, which is fairly simple to get as long as you have a firm-sold contract on your old home. Do you need a few months before you take possession in order to try and sell your old home? Then we get down to the nitty gritty. Do you want to move in on a Friday or a Monday, or any other work day. Unfortunately you can’t take possession on a weekend day because lawyers offices aren’t open. However, if you’re looking to move on the weekend, you can always take possession on the Friday, and start your move on the Saturday.
You’ll want to pay a bit of attention to what the seller wants, as meeting their request to close at a certain time, could yield you a better purchase price. That said, everything is negotiable and if their closing doesn’t work for you, you can always negotiate your own closing date.
Conditions are the things you place in a contract that essentially say, “Yes, I will buy your home if…” The “if’s” that you set are totally up to you. You can make the contract conditional on just about anything. However, outlandish or unreasonable conditions are not likely to fly, and if they do, it may mean that the seller asks for a higher price to accommodate them. Let’s review a few common conditions:
1) Home Inspection Condition: I will buy your home if a professional home inspector inspects it and the review is to my satisfaction.
2) Condominium Document Review: I will buy your home if an independent third party reviews the condominium documents and the review is to my satisfaction.
3) Financing condition: I will buy your home if I can get financing for it for these set terms (interest rate and mortgage terms are noted in the contract).
4) RPR review: I will buy your home if my lawyer reviews your RPR and the review is to my satisfaction.
5) Sale of a Buyer’s Home Condition: I will buy your home if my home sells within a certain period of time.
These are common conditions but there are many more you can put in the contract. These conditions usually give you around 7 days to “satisfy” your condition. These 7 days are called your “due diligence phase,” which we will talk about later in the blog.
When a seller puts their home up for sale, they are putting out what is called an invitation to treat. This means they are looking for people to write offers and enter into negotiations. When you enter the scene and write your initial offer, you need to decide how long you would like to leave your contract open for, or how long you would like to give the seller to think about your offer. If you do not put an open to time, or an expiry time, your contract would be open forever, and they could accept it a year from now, when the property could possibly be worth less than what you initially offered. So it’s important to close the contract at some time which you determine to be a reasonable amount of time for the seller to consider your price and terms. I don’t like to leave my contracts open for more than 24 hours, and in fact, I prefer even shorter like around 12 hours or so. I think it can be prohibitive to both the buyer and seller to let the seller noodle on the contract for too long. If they don’t have a response for you within 12 hours, there is something wrong with their desire to sell, I would say. Either that, or they are trying their best to conjure up multiple bids. That being said, the one exception here would be writing offers on foreclosures or court-ordered sales where you are required to leave the offer open for anywhere from 72 hours to 30 days. This is simply because these offers usually have to cross several people’s desks before they can make a decision and get back to you.
The Bottom Line: How Much Should I pay?
That is great question. When making this choice, it should be based on facts which your agent can help you nail down. Choosing what price to offer has very little to do with what the seller is asking, and much more to do with what the home is worth. When I look at value, I evaluate a property using 4 sets of criteria:
1) Statistics: What are the trends for the specific area the home is in, and what is going on in the Calgary market at large?
2) Sold Comparables: What has recently sold that is very similar to this home, and how much did it sell for? These comparables are very important in all markets, but especially in a down or depressed market.
3) Active Comparables: What is this home’s competition? What is for sale that is like this home? These comparables are important in all markets, but are especially important in a fast-paced or booming market. When inventory is scarce, you need to put a bit more weight on what could be happening in the future, than what has happened in the past. That said, the sold comparables are always critical to any evaluation in any marketplace.
4) Gut: After years in this business, I’ve been able to take a mixture of what I see in the above three areas and kind of make like a golfer, lick my finger, and hold it up to see which way the wind is blowing. This fourth area is undergirded heavily by the above three criteria, has been invaluable to me in changing marketplaces.
These four criteria will yield a range. Unfortunately there are very few places where I will be able to give you an exact number for what a home is worth. In some smaller condos, I can give you a range of about $1000. However, as the value and the age of the neighbourhood increases, so increases the range that I will give you for value. When we’re up over a million dollars for a purchase price, your range could be as wide $50,000, sometimes more, sometimes less. As we head up into million dollar homes, custom homes, or homes with exceptional locations, perceived value enters the stage and value becomes quite subjective, although not impossible to pin with a great deal of accuracy.
Once I have given a range, you should be able to ask yourself what you think the fair market value of the home is. Believe me; you know better than you think you do! After seeing plenty of comparables for the home you are now bidding on, many of my clients have a gut feeling for what the value of a home is, because they have personally walked through all of the competition. If the home you picked floated to the top of your list, it’s probably because it’s the best one you saw. Consider the value for the home in comparison with other homes we saw. Like many others before you, you will start to think of a price that is fair, and more often than not, you’ll be right!
So moving back to what price a person should pay for a home. Consider market value and decide what number in that range is your highest number. When we look for a number to start our bid with, we look first look to market value, not to what the seller is asking you for. If the seller has a home listed for $500,000, but our comparative market analysis shows the home is worth is $425,000-$450,000, we start around those numbers, not factoring in at all what the seller is asking for. To help you make your decision about where to start, you may need to ask yourself: do I have to have this house? Would I be upset if I lost this house? Are there other homes that would make me just as happy or very close to it? If you find there are a lot of other homes, or even a few other homes that could work for you, you can be a bit more risky, hard-nosed, and low-price-seeking in your negotiations. Usually, in a fast-paced market, you’re bidding on a home that you love because it’s head and shoulders above the competition. In that case, it may not be the best to write a low-ball offer. You really have to consider what is the best way to approach your seller. If you’re looking for a good deal on the price, make sure all the other parts of your contract shine: have a great deposit, give them the possession they want, and don’t have unnecessary conditions. Do everything you can to make the contract attractive without increasing your price. When you are far apart on market value and asking price, I find it’s usually best to put your best foot forward in terms of what you’re willing to pay, rather than start low and try to meet in the middle. For example, if someone has a house listed at $500,000, but the value is really around $440,000, don’t start at $380,000 in order to meet in the middle. It will just infuriate your seller and you’ll end up paying more in the end. Instead, offer what you will pay. Say you’re looking for a deal and you don’t want to go over $435,000 for the home. Start at around $425,000 and put your foot down at $435,000. It’s a lighter touch, and often results in a better purchase price in the end.
If the seller is priced at $500,000 and the market analysis is coming in at around $495,000-$505,000, take the temperature of the market, and take your own temperature to see how much you want this property. If the market is slow, and you have plenty of options, you can low-ball it, but if the market is fast-paced and your options are few, it may be best to stick within a reasonable range of what the home is worth.
Countering: The Art of Negotiation
Back and forths in this process can be ongoing because everything in a real estate contract is negotiable. You’ll open with your price, terms, and conditions, and they’ll come back at you with the changes they would like to see. How much or how little you have to move depends a lot on the market. Are we in a buyer’s, seller’s or balanced market? Whoever has control of the market, can afford to dig their heels in a little more. It’s good to enter a negotiation with the mindset that this is not the only home for you. If you walk into a negotiation needing the property as a buyer, you may have lost before you begin. As a seller, you should not need to sell your house either. Keep in mind that all real estate sells for the right price. There can be many back and forths in this process or there can be only a few. A lot depends on the personality of the buyers and sellers. Some may not like dickering, where others need to dicker in order to feel like they got a good deal. It’s nearly impossible to plan a strategy before you enter into the negotiation because every buyer and seller is different. You just need to take the temperature of the negotiations as they go and be responsive to what is happening on both ends.
Once the buyer and seller have agreed on price and terms, both with sign the offer and it will become a firm real estate purchase contract which will guide all parties in how to proceed from the due diligence phase all the way until closing day. Accepting the offer is no light thing, for both sides. If you have accepted the offer as a buyer, it is very serious, and it means that you have every reasonable intention of buying the home as long as your conditions are all satisfied. This is not a time to be contemplative. The contemplative phase is over as soon as you sign on the final dotted line. All that is left is the due diligence phase which we’ll get into next.
Due Diligence Phase
After you have accepted the contract, you now set out to fulfill your conditions. This means you will order your home inspection, condominium document review, and bring your signed offer to your mortgage professional. At this time, you’re looking for things that would be red flags on the home which would make you not want to purchase the home based on the knowledge that you’re receiving. It is during this phase where you are protected by your conditions, and you have the option to waive or not waive your conditions. If you come to the end of your investigation, and everything still looks just as good as you thought it would be, then you’ll waive or release your conditions and you will be unconditionally committed to purchasing the property on the closing day! If you find something that is unacceptable to you, you can either renegotiate the contract, or you can choose not to waive conditions. If you choose not to waive or release your conditions, your deposit will be refunded and the contract will be dead.
You should select a real estate lawyer early in the process of looking for a home. Shortly before your property comes up on closing, your lawyer will phone you for an appointment to sign documents for the purchase or sale of your property. He will deal with your mortgage, title, title insurance (if any), and RPR (Real Property Report) issues. If you have not heard from your lawyer one week before you’re set to close, you should phone your lawyer and check in with him or her.
The Vanderveen Team
Maxwell South Star Realty
Phone: 403.253.5678 Fax: 403.592.6736