GUEST POST: Do you know how to interpret the story behind any given offer to purchase?

Posted on What Customers Say
17.10.2008
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I’d like to welcome Kevin Grenier, licensed real estate agent in Edmonton, Alberta, to our blog. He’s one of the top-reviewed agents on our site, and he’s got plenty of useful advice to share with homebuyers and sellers —- and real estate agents! —- out there. What better way to find a real estate agent than to check out his reviews on our site and then read some of his great tips?

So, Kevin, take it away…!

GUEST POST: By Kevin Grenier of Realty Executives Polaris

Kevin Grenier, Top-Rated Real Estate Agent

Many people don’t realize that there is a very important story being told with every line they put into an offer when buying a home. This is vital information to know either as a seller or a buyer. This first of a series of blogs covers the deposit, what you don’t know could cost you the deal.

First things first. In preparing to write an offer as a buyer, find out as much as you can regarding the pertinent facts, such as:

Seller motivation
Preferred possession date
Presence of competing offers
Any offers received prior that were rejected
Any current interest (buyers that have booked a second showing or have said they want to write an offer)

Seller motivation is key. If the seller doesn’t need to sell the house and they have priced it above fair market value, you could be wasting your time and in for a whole lot of frustration. People get frustrated with buying and or selling real estate primarily because of one thing: working with a seller or a buyer that is not motivated, and by motivation I mean “a genuine need to buy or need to sell”. More on this in a later blog.

What about the “story”?

Glad you asked, let’s get started.

Consider the initial deposit. I’m often askedm how much should a deposit be? The answer depends on the story you want to tell, but to fully answer this, let’s look at why a deposit at all?

A deposit is assurance to the seller that the buyer won’t walk away from the deal and fail to bring the balance owing prior to the deal’s deadline. Hypothetically, a buyer could write an offer and secure it with a thousand dollars, remove any conditional clauses such as “passing of a property inspection” and then walk away from the deal. In such a case he would be in breach of contract, he would lose the deposit and the seller could sue for damages.

Does this sound like a horror story for the seller? You bet it does. Will losing a thousand dollars and the threat of a law suit that may or may not happen deter a buyer from simply walking away? Maybe, but maybe not.

This is why a “sizable” down payment is preferred by most informed sellers. What is sizable? Excellent question. The real estate boards typically like to see the amount of the selling commissions involved in the transactions which varies from area to area. Your real estate agent can help you figure this amount out.

Keep in mind, the deposit plus the balance owing equals the down payment. So if you are putting down 5% on a 400k house, the down payment would be 20k.

Some buyers like to put a small initial deposit and a large additional deposit upon removal of conditions. This is sometimes prudent especially for investors who may be buying more than one property at any given time, and to have money tied up in a deal before the conditions are removed limits the number of properties they might be willing to put “under contract”.

So, to recap, the money you are coming up with for the deposit is part of the down payment which is money you have to come up with prior to receiving the keys. I want to make that clear.

If you put a larger deposit, you are doing two things:

Increasing the seller’s confidence in your willingness to actually follow through with the deal
Raising the perceived value of the offer without costing you any more money

This is key because many times “surety of close” — or in other words the seller’s faith in your ability to give him the money you have offered him for the property when you say you will — is often more important than the price. You may want to re-read that.

So the story you want to tell with the deposit is, “Hi, Mr or Mrs. Seller. I will give you your money when I say I will and I am not about to walk away on this deal. I am someone you want to deal with even if that means letting me have your property for less.”

So, how much of a down payment should you put? How about the whole down payment? How about $10k? how about one dollar? How important is it to tell the above story?

If you are giving the seller the possession date they want, the condition dates are within a relatively short period (5 days for residential deals) but you are asking for a much lower than asking price, the story you tell with the deposit becomes much more important, doesn’t it?

A quick rule of thumb I’ve used is 10k is a good deposit on homes 300-500k, 5k is small and 1k must be followed with a reasonable explanation such as, the balance upon removal of conditions.

So now you can tell me how much of a deposit you want to put… and, if you still don’t know, I would be happy to help you determine what it should be after reviewing all the important details of your deal.

Please keep in mind that the deposit is never given to the seller prior to closing. Typically, it is written to the listing brokerage’s trust account but can be written to either the buyer’s or seller’s lawyer’s trust account.

Stay tuned for Chapter 2 of “The Story You Are Telling” and learn what you should put on the “Selling Price” line of the offer which will help you get the best deal without getting the door slammed in your face.

Thanks to Kevin

Frankly, I’ve never been that sure what the deal is with the deposit situation, Kevin —- I’ve just done as my agent has told me to!

It’s great to have this insight. Looking forward to the next chapter in the story.

BTW, this post was written with the permission of Kevin Grenier. What-Customers-Say.com really likes the story… but that doesn’t mean that we paid for it or that the opinions expressed are necessarily those of What-Customers-Say.com.

~jw

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