If you are a home buyer just starting the process or have been looking at real estate in Central Massachusetts (Norfolk, Bristol, Worcester Counties) for a while now but haven’t yet made an offer on a home (or maybe you have made an offer) there are some things you should know about the offer and some of the terms associated therewith, like “earnest money” or “P&S”, etc.
For the purpose of this blog post, I will refer to the widely used form from the Massachusetts Association of Realtors. There are several other variations (depending on what county in Massachusetts you are in and which Board your real estate agent is a member of). But the information contained is basically the same.
Once you find a home, you’ll need to act pretty quickly to submit your offer and you may not have enough time to get answers to your questions but you will be signing a contract. In Massachusetts, the offer to purchase is an actual binding contract. So you should definitely sit down with your real estate agent and go through a copy of one and ask your questions. It is a fairly simple contract and I have plenty of people who sign offers without ever reading it in its entirety. When homes are selling fast, and it’s a bidding war, and you have to submit your offer fast, you’ll be asked to sign this probably electronically if you can’t sit down with your agent.
In this series (because one blog post is entirely too long) titled Real Estate Offer to Purchase, I’ll break down each section of the offer.
So here were go! Part 1
The first section of the offer is fairly simple to explain. It’s just the names and addresses of the parties (buyer and seller) and the address for which you are making an offer on. The MLS number of the listing should be listed here as well as who the real estate company is for the buyer and the seller.
Section 2 is EARNEST MONEY DEPOSIT
Earnest money is the initial check (typically $500 or $1,000) that will legally bind the offer to purchase. And then the final downpayment that is delivered after you have a home inspection and the purchase and sale agreement (“P&S”) has been signed by all the parties. These 2 amounts, considered earnest money, will be applied to your down payment and is NOT in addition to the purchase price. The amount will be deducted from the amount you owe at the time of the closing. The breakdown is as follows:
Section i) is the earnest money deposit. Typically $500 or $1,000. This initial check is held by your real estate agent until the seller signs the offer. During negotiations of the price, your real estate agent retains this check and only delivers the check to the sellers’ real estate agent once parties have agreed on the price and both buyer and seller have signed the offer. This earnest money gets applied to your downpayment. This is NOT in addition to the purchase price.
Section ii) is the second part of the down payment. Typically the total down payment totals 3, 3.5 or 5% of the agreed upon sales price. The second part of the down payment is not handed over until after you have had a home inspection and negotiated any issues and the purchase and sale agreement has been negotiated and ready to sign. Buyers sign the Purchase & Sale Agreement first and give the second part of the down payment to their real estate agent who then delivers the purchase and sale agreements and check to the seller’s side. This too gets applied to the amount you would owe at the closing. You should never, ever put down more than 5% total as a down payment, even if you are financing 80%, 85%, etc. The reason is because this money is the money that a seller will keep should you default on any of your contingencies so you want to minimize the potential loss. Keep in mind, sellers are very interested in the amount of money a buyer is willing to risk as it shows seriousness of the buyer. So although it would be nice to only put down $2,000 as the earnest money, be prepared for the sellers’ agent to say they want to see more money down.
You can not make an offer on a home without earnest money and down payment funds. Even if you are using a VA loan or USDA loan (both of which are 100% financing). You cannot expect a seller to remove a home from the selling market without you, the buyer, putting some skin into the game in the form of money. If you are using a 100% loan program, the money you do put down for earnest money is usually returned to you at the time of closing minus any closing costs and adjustments.
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