How to make an offer on a house
Trust in Real Estate Services Act (TRESA)
Let us first begin by apprising you of The Trust in Real Estate Services Act (TRESA), effective December 1, 2023, brings key changes to empower Ontarians in their real estate transactions. It focuses on educating buyers and sellers on their rights and what is legally required of a real estate agent.
So as a home buyer or seller, the TRESA information guide is the very first document that you would need to review and sign to formalize your working relationship with your REALTOR®, followed by other real estate forms, such as the Buyer Representation Agreement (BRA), or the Listing Agreement.
As a first time home buyer or a newcomer to Ontario, Canada, it is especially important to familiarize yourself with how residential real estate works here, what is the role of REALTORS®, why you should have one to represent your best interests, what are the fees or commission involved and who pays these, how does the real estate agency relationship work and what are the different real estate forms as well as the governing bodies and code of ethics for REALTORS®.
In this blog post we will review the offer making process on a home or a condo. This assumes you are working with a REALTOR® and have liked a home or a condo and have expressed interest in purchasing a property, and would like to submit an formal offer to the seller.
Mastering the Art of Homebuying: A Comprehensive Guide on How to Make an Offer
Regardless of your location or prevailing market conditions, every homebuyer encounters a common task: making an offer to purchase a home.
While your real estate agent is a valuable guide, a deeper understanding of the process ensures a smoother transaction, especially for first time home buyers, or in a seller’s market where swift and decisive action is crucial.
Whether you’re in the early browsing stages or actively viewing homes with a REALTOR®, being aware of and understanding the intricacies of making an offer is crucial.
How to Make an Offer on a House
For new home buyers, the question of whether to seek mortgage pre-approval before making an offer often arises.
Unless you plan to pay in cash, which is rarely the case, securing financing is necessary. Obtaining pre-approval not only prepares you for swift action but also provides reassurance to the seller.
As a buyer, knowing your spending limits and securing a locked interest rate for up to 120 days offers peace of mind during the home search.
Decide on an Offer Amount
Making an offer begins with understanding the property’s value and deciding on an appropriate amount. A Comparative Market Analysis (CMA) provided by the REALTOR® aids in this process, comparing the property with recent sales and current listings.
Balancing the property’s market value with your budget is crucial, especially considering market conditions.
In a buyer’s market, negotiation flexibility may exist, while in a seller’s market, offering at or above the asking price might be necessary for competitiveness.
Beyond the offer amount, successful transactions often involve additional considerations that protect your interests and enhance the appeal of your offer.
These can include contingencies such as a satisfactory home inspection, financing, and appraisal.
Addressing these factors demonstrates commitment to the seller and strengthens your offer.
Real Estate Paperwork
When ready to submit an offer, your agent will prepare necessary paperwork, commonly known as a Real Estate Purchase Agreement.
Essential details include legal names, purchase price, inclusions/exclusions, possession dates, and any specific conditions outlined by Canada Mortgage and Housing Corp.
Clarity in paperwork ensures the offer is valid and legally binding.
Negotiation becomes a key aspect when making an offer on a house. Your negotiating power depends on various factors, including current market conditions in the immediate neighborhood.
Whether making a lowball offer in a buyer’s market or offering above the asking price in a seller’s market, understanding these dynamics is crucial for a successful negotiation.
Deposit and Down Payment
The terms “deposit” and “down payment” are often used interchangeably but hold distinct meanings.
The deposit, combined with the down payment, signals the buyer’s commitment to purchasing the home, showcasing financial readiness. If the buyer withdraws, the deposit is usually forfeited. Deposit amounts vary, dependent on property type and buyer preference, held in trust by the seller’s agent until the deal finalizes.
Regarding down payments, it is an upfront lump sum, calculated as a percentage of the total home purchase price. In Canada, the minimum is five percent, the threshold for mortgage qualification. Anything below 20% necessitates mortgage loan insurance for high-ratio mortgages.
Firm versus Conditional Offer in Real Estate
Market dynamics, competitive environment, shortage of listings, all these play a role in the type of offer you may choose.
The Canadian and the GTA real estate market in particular has experienced a notable rise in competitive bidding wars, with buyers increasingly opting for a strategy known as a firm offer.
In this context, a firm offer denotes a buyer’s unwavering commitment to the purchase, as it involves submitting an offer without any conditions, such as those related to home inspections or financing. Once a firm offer is made, the buyer becomes legally bound to the agreement, unable to withdraw from the deal.
In contrast, a conditional offer introduces specific terms that must be met for the offer to remain valid. These conditions are strategically implemented to safeguard the buyer’s interests and commonly include the following key aspects:
Purchase Conditional on Financing:
This condition is particularly prevalent among first-time homebuyers and necessitates approval from the mortgage lender for the deal to proceed.
The buyer typically has a specified period, often a few days, to secure financing, and the process involves a comprehensive home appraisal. If the lender declines to finance the property, the buyer must promptly notify the seller, rendering the offer null and void.
Purchase Conditional on Home Inspection:
Recognizing the substantial nature of a home purchase, it is advisable to link the offer to a satisfactory home inspection. Conducted by a professional inspector, this assessment covers visible aspects of the property, excluding invasive measures like opening walls or floors.
The inspector thoroughly examines the structure, roof, plumbing, heating, and electrical systems. If the inspection reveals deficiencies, this condition empowers the buyer to negotiate repairs, a price reduction, or withdraw the offer entirely.
Purchase Conditional on the Sale of a Home:
For buyers who already own a property, a condition may be set to ensure their current home is sold before committing to a new purchase. While this condition provides financial protection for the buyer, it introduces complexities for the seller. Each condition in a deal creates a potential domino effect, influencing subsequent transactions.
Firm offers gain prominence, particularly in hot markets characterized by high demand and limited supply. In such scenarios, where multiple buyers vie for the same property, sellers are inclined to favor firm offers over conditional ones.
The certainty of a firm offer provides sellers with reassurance and minimizes the likelihood of a deal falling through, a crucial consideration in competitive real estate environments.
Understanding the nuances of firm and conditional offers is essential for both buyers and sellers navigating the intricate real estate landscape. In markets where uncertainties abound, having a comprehensive grasp of these terms significantly influences the success of a transaction.
Furthermore, the negotiation landscape is inherently shaped by market conditions. In a buyer’s market, where supply exceeds demand, buyers wield more negotiation power. Conversely, in a seller’s market marked by high demand and limited inventory, sellers may receive offers at or above the asking price, prompting buyers to act swiftly and decisively.
Legal aspects play a pivotal role in the real estate transaction process. The offer itself is a legally binding document, necessitating careful scrutiny by both parties.
Buyers are encouraged to seek legal counsel to review the offer before committing to ensure a clear understanding of the terms and implications. In the intricate realm of real estate law, comprehension is paramount to avoid potential pitfalls.
The significance of a firm offer extends beyond the initial transaction. From the shopping and vetting process to the financial and emotional commitment associated with homebuying, the offer serves as a foundational document with a lasting impact.
Collaborating with an experienced real estate agent and a knowledgeable legal professional is imperative to navigate the complexities of real estate transactions and ensure the best interests of all parties involved.
The offer you make is a legally binding document, influencing the entire purchasing process and beyond. As you embark on this journey, collaborate with an experienced REALTOR® to prioritize your best interests and ensure a successful and fulfilling home purchase experience.
Team Kalia has been helping first time home buyers, millennials, buyers looking to upsize or downsize and investors purchase their first, or additional investment properties since 2003.
Contact Team Kalia to Buy Your Home or Condo in and around Mississauga