5 Things to Consider When Reviewing an Offer

You may be tempted to choose the highest offer. However, price is only one part of an offer. The earnest money deposit, contingencies, financing terms, and proposed closing date can all affect the strength of an offer and the likelihood of reaching closing.

1. Earnest Money Deposit

The earnest money deposit, or EMD, is money the buyer agrees to place in escrow as a sign of good faith.The purchase contract specifies both the deposit amount and the deadline for delivering it.

The deposit is held by the escrow agent named in the contract, which may be a title company, real estate brokerage, attorney, or another authorized party. If the transaction closes, the deposit is generally credited toward the buyer’s required funds at closing.

There is no standard amount required for an earnest money deposit. I generally suggest that buyers consider approximately $1,000 for every $100,000 of the purchase price. In a competitive market, a buyer may offer a larger deposit to demonstrate serious interest. The amount should always be based on the property, market conditions, and the buyer’s circumstances.

2. Contingencies

Contingencies are conditions within the contract that must be satisfied or properly waived for the transaction to proceed. Common contingencies include:

• Appraisal

• Financing

• Inspection

• Sale of the buyer’s current home

An offer with fewer contingencies may present less risk to the seller, but the wording and deadlines are also important.

A buyer does not automatically receive the earnest money deposit back whenever a transaction fails to close. Whether the deposit is returned depends on the contract, the reason for the termination, and whether the buyer followed the required procedures and deadlines.

3. Down Payment and Financing

The buyer’s down payment may vary depending on the loan program. A larger down payment can sometimes strengthen an offer because it may indicate that the buyer has additional financial resources.

If the property appraises for less than the agreed-upon purchase price, a buyer with sufficient available funds may be able to cover some or all of the appraisal shortfall. However, a larger down payment does not guarantee that the buyer has extra cash available or will agree to pay the difference.

The seller should also review the buyer’s preapproval letter or proof of funds and consider the overall strength of the financing terms.

4. Cash Offers

A cash offer may eliminate the risks and delays associated with lender approval and a financing contingency. However, a cash offer is not necessarily the best offer.

Cash offers may still include inspection, appraisal, title, sale-of-property, or other contingencies. Sellers should review the entire offer, including the purchase price, proof of funds, earnest money deposit, contingencies, and proposed closing date.

5. Closing Date

The proposed closing date should work for both the buyer and seller. Many financed transactions close within approximately 30 to 60 days, while some cash transactions may close sooner.

The actual timeline depends on several factors, including financing, inspections, appraisal, title work, insurance, and homeowners’ or condominium association requirements.

For most mortgage loans, the buyer must receive the Closing Disclosure at least three business days before closing. The buyer should compare the Closing Disclosure with the Loan Estimate and immediately ask the lender about unexpected differences.

Most changes do not create a new three-business-day waiting period. Generally, a new waiting period is required only if:

• The annual percentage rate changes beyond the permitted tolerance

• The loan product changes

• A prepayment penalty is added

Every offer is different. Sellers should carefully review all terms and consult their real estate professional, attorney, lender, or other appropriate professional when necessary before accepting or rejecting an offer.

*This information is provided for general educational purposes and is not legal, financial, or tax advice. Real estate contracts, practices, and requirements vary by location and transaction. Consult the appropriate professionals regarding your specific circumstances.