Buyer’s Guide – Making An Offer

Making An Offer

Once you have found the property you would like, a written offer to purchase must be prepared. Considering the substantial nature of this investment, you should work with a lawyer, notary public, or a real estate licensee when preparing an offer to purchase. An offer is usually recorded on a standard form entitled Contract of Purchase and Sale.

What should the offer contain?
When you prepare an offer, it should contain a number of standard details, plus any conditions which are important to you. Be fully aware that once you sign this document and the seller also signs it, a legally binding contract has been formed. Legally binding means both you and the seller will be bound by the terms of the contract and must each perform your respective obligations as stated within that contract. Either of you can go to court to compel the other to perform his or her part of the contract. Even if a contract contains subject clauses, it is legally binding as soon as both the buyer and the seller have signed the contract.

Your offer should include:

  • Date of offer.
  • Date and time your offer expires.
  • Full legal names and addresses of both the buyer and the seller.
  • Full legal description of the property.
  • Amount of the deposit you are giving (which will be held in a trust account and will form part of your down-payment).
  • Sale price.
  • Amount of your cash down-payment and details as to how you will finance the remainder of the purchase price.
  • Your desired closing and possession dates.
  • A list of the conditions which must be satisfied before the sale can occur. These are called “subject clauses” or “conditions precedent”.
  • A list of items which are not attached to the building (chattels), but which you state are to be included in the sale price; for example, drapes, refrigerator, stove, etc. It is helpful to be specific in the description of these items.
  • Your signature.

What are the seller’s options?

When the seller receives your “offer to purchase,” he or she has three options.

Accept the offer exactly as written
If the seller signs your offer without making any changes, a legally binding contract has been formed. Again, legally binding means both you and the seller will be bound by the terms of the contract and must perform your respective obligations as stated. Your performance can be enforced in a court of law.

Reject the offer

Make a counter-offer
If the seller changes anything at all on your original offer, the seller is considered to have rejected your offer and to be making a new offer back to you. This new offer is usually referred to as a “counter-offer”. When you receive a counter-offer, you then have the same three options as the seller had: accept, reject or make a further counter-offer. The process of counter-offers may continue until an agreement is reached. If the counter-offer is unacceptable to you or if you have changed your mind about the purchase, the seller does not have the option of returning to your original offer and accepting it.

What are the buyer’s options?
If, after making a written offer, you decide you don’t want to purchase the property, it may be possible to revoke the offer. Many legal problems can result from the revocation of an offer, so you should seek professional advice about the correct procedure to follow.

What are Subject Clauses?

The purpose of a subject clause (also know as a condition precedent) contained in an offer to purchase is to set out a specific condition which must be fulfilled before the sale can go through, although the contract is legally binding once it is signed by both parties.

Subject clauses must be carefully and precisely worded. You would be wise to get professional help in composing them; however, it is ultimately your responsibility to be sure the clauses mean what you want them to mean. There can be as many subject clauses as you are able to
negotiate with the seller; however, the fewer you put into an offer, the more serious you seem as a buyer and the better the chance is that your offer will be accepted. Remember that you are, in effect, asking the seller to take the property off the market during the period while you are attempting to fulfill the conditions you have set. Some possible items you might wish your purchase to be “subject” to include:

  • a satisfactory professional building inspection
  • the arrangement of the financing you require
  • the lender’s approval of your application to assume the seller’s existing mortgage
  • the sale of your present home

When you place “subject” clauses on your offer to purchase, you are required to use every reasonable effort to see that the conditions are satisfied. It is important to know that subject clauses are not “escape” clauses that allow you to avoid your legal responsibilities in the contract. Once you have fulfilled the conditions, written notification should be given to the seller that you are removing the subject clauses. If you are unable to meet the conditions after making every reasonable effort to do so, the contract ends and there is no legal obligation to complete the purchase. It is important to remember that if the brokerage is holding your deposit, both you and the seller must sign a deposit release form prior to the deposit being released to you. A seller may wish to accept your offer containing subject clauses, yet still be free to consider other offers until you have removed the conditions. To allow his or herself this freedom, the seller may ask for a clause in the agreement which permits the seller to require you to remove all subject conditions within a short, specified time period (usually between 24 and 72 hours) if the seller receives another attractive offer. If you
cannot do so, your conditional contract comes to an end. Sellers are most likely to request this time clause where you have made an offer which is subject to the sale of your current
home.

More Information You Need To Know

More about Deposits
Usually, you will make a deposit with your offer to purchase or after your offer is accepted. That deposit is usually held in your brokerage’s trust account. The brokerage holds the deposit for the benefit of the transaction, not just for your benefit. Note: If your contract contains subject clauses in your favour and you do not remove those clauses, you will not automatically get your deposit back. Both you and the seller will have to sign a separate release form. If the seller will not sign the release, you will have to obtain legal advice, as your brokerage cannot release the deposit unless you and the seller have agreed to do so.

More about Financing
Mortgage loans are available from banks, credit unions, trust companies, insurance companies, finance companies, private lenders, and mortgage brokers. It pays to shop in several places for the best mortgage loan deal!

What is a mortgage?
Obtaining a loan to finance the purchase of your new home will probably require you to sign a document called a mortgage. This document will set out the terms and conditions for the loan and its repayment. If you fail to meet your debt obligations, the lender will have the right to claim your home to pay off what you still owe.

What types of mortgage loans are there?
All mortgage loans are of two basic types:

  1. A conventional mortgage loan allows borrowing up to 75% of the purchase price or the appraised value of the property, whichever is less.
  2. A high-ratio mortgage loan allows borrowing more than 75% of the purchase price or the appraised value of the property, whichever is less. But the borrower must pay a mortgage default insurance premium to protect the lender if payments are not made. This premium can be as much as 3.75% of the loan amount.

What is an amortization period?
Typically, the size of a mortgage loan payment is calculated as if the loan payments were going to be paid over 20 or 25 years. This is called the amortization period. Each payment will repay the interest due up to the payment date along with some of the principal owed. The longer the amortization period you choose, the lower the regular payment will be. Keep in mind that the faster you repay any money borrowed by choosing a shorter amortization period, the more you reduce the total cost of borrowing.

What is a term?
Most mortgage loan contracts only permit the regular payments to continue for a specified term which is shorter than the amortization period. The term can be as short as six months or it can be five years or more. At the end of the term, you are required to repay the full unpaid balance. If you don’t have the cash required to pay the balance, it is necessary to refinance the loan. Deciding on the length of term you want will depend partly on whether you think interest rates will go up or down. Keep in mind that the longer the term you choose, the longer your monthly payment remains stable. CAUTION: The lender is not obligated to renew your mortgage loan at the end of the term.

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