Okay, you started out in Canada by researching Arizona real estate and how you would finance your Arizona home. Then you found an experienced Arizona real estate agent you trust (I hope it’s me!) and you took a trip to Arizona where you found a gorgeous home you want to buy.
Now, you want to make an offer to buy that home.
The vast majority of resale (not new) homes in Arizona use the Residential Resale Real Estate Purchase Contract created by the Arizona Association of Realtors (AAR). Whenever I say “contract” I’m referring to this contract form.
After discussing your options with your real estate agent, you’ll tell your real estate agent what you want to offer for the home. Your real estate agent will prepare your offer for your signature.
Unlike many states, especially states back East, in Arizona lawyers are usually NOT involved when homes are bought and sold. Normally in Arizona the buyer’s real estate agent will draft and negotiate the contract under the direction of the buyer and without the inconvenience and expense of an attorney.
An offer is just a contract with only your signature on it. It’s not a contract until the seller agrees to it and signs it.
Some of the most important points in your offer are;
- Offer price
- Amount of earnest money
- Amount of down payment
- Closing date
- Personal property included
- Seller contribution to Buyer closing costs, if any
- Escrow company
- Home warranty
- Additional terms
- Offer expiration date and time
- Counter offers
Your real estate agent can research recent comparable sales to help you decide on the price you want to offer.
The earnest money is usually a personal check written by you and made out to the escrow company you’ve chosen. Your earnest money check (made out to the escrow company) is then held by your real estate agent .
If you and the seller eventually reach an agreement, your real estate agent will give your earnest money check, along with the contract signed by the buyer and the seller, to the escrow company. This is called “opening escrow.” The escrow company will deposit your earnest money check immediately so be sure you have enough money in that bank account to cover the check.
If ultimately you can’t reach an agreement with the seller, tell your real estate agent to either return the earnest money check to you or to destroy the earnest money check.
The Importance of Being Earnest… Money
The larger the earnest money amount, the stronger the offer.
In Arizona, earnest money of around 1% percent of the purchase price is common.
A buyer who offers earnest money significantly less than 1% is often interpreted by sellers as not being very serious about the purchase. Conversely, earnest money significantly more than 1% is often interpreted as a sign of a serious buyer. (FYI: In California, earnest money is customarily much higher than 1%.)
The earnest money provides the seller a small… very small, assurance that if you, the buyer, breach the contract that the seller may be able to keep your earnest money. That is rare in my experience. I’ve never personally had a seller keep a buyer’s earnest money and I’ve never personally had a buyer lose their earnest money but, nevertheless, it can happen and your earnest money check is a way of showing the seller that you are a serious buyer.
Down Payment Amount
In the end, the seller will be paid in cash whether all the money comes from your bank account or the money comes from both your bank account and from the money you just borrowed from your lender.
An all cash offer combined with a quick close (let’s say, three weeks) can make a very strong offer, especially if the seller wants to close quickly.
Sellers also like all cash offers because they don’t have a financing contingency. That means it’s less likely the buyer will flake out at the end of the transaction (because they couldn’t get a loan after all).
Be Careful – If you as the buyer promise in the contract that you’ll have a down payment of $X but then it turns out the purchase can’t be completed on schedule because you don’t have all the down payment money you promised in the contract, then you could very well lose you earnest money to the seller. This is one of the scenarios that could lead to buyers losing their earnest money.
Arizona’s Pre-Qualification Form
We have an unusual feature in our Arizona contract. Sellers don’t normally use pre-approval or pre-qualification letters from lenders to judge whether a buyer will actually be able to borrow the money needed to buy the home.
In Arizona, we have a special form called a Pre-Qualification Form. Compared to a “Pre-Qual” letter, this form gives the seller much more detailed information about where the buyer stands in getting approval for a loan.
The Pre-Qualification Form is prepared by your lender and a copy should be sent to your real estate agent . Your real estate agent will include a copy of your Pre-Qualification Form when submitting your purchase offer. Including the Pre-Qualification Form with your offer greatly strengthens your offer without costing you a dime.
Having your Pre-Qualification Form ready when you’re ready submit an offer is a very important reason why you should contact a lender before shopping for homes.
In Arizona, it’s common for the closing date to be about a month after an offer is made. That is, if you make an offer on January 1, you might put in the offer that the closing date will be February 1. The time for short sales and bank-owned homes is longer.
The processing of your loan by your lender is usually the item that takes the longest to complete.
Be Careful – Buyers should be aware that you are responsible for having the loan ready by the closing date agreed to in the contract. If your loan is not ready at closing because your lender is incompetent or because you didn’t give your lender the paperwork he needed on time, then you, the buyer, could end up in breach of contract and at risk of losing your earnest money.
The morals are, 1) Choose a reliable Arizona lender, not your aunt’s college friend in Texas, 2) When your lender asks you for any documents, get those documents back to your lender as soon as possible, and 3) Ask your lender how long he will need to process your loan before you and your real estate agent write an offer.
Expert’s Tip – In contract negotiations, being flexible on the closing date is often a cost-free concession a buyer can give a seller. If a seller needs an unusually long, unusually short, or unusually specific closing date, the seller may look favorably on offers that accommodate their situation.
Personal Property Included
Is the refrigerator part of the house or is the refrigerator the seller’s personal property, like a chair? How about the stove? The drapes?
The Arizona Association of Realtors’ Residential Resale Real Estate Purchase Contract (the “contract”) in Section 1g gives many examples of items that are part of the house, also called “fixtures.” These items are included in the sale unless specifically excluded elsewhere in the contract.
In Arizona, the refrigerator, clothes washer and dryer are NOT usually considered to be part of the house. It is very common, however, for a buyer to state in an offer that the refrigerator, washer and dryer will indeed be included in the sale. If the seller does not want to include those items in the sale, he may make a counter offer that says those items are not included in the sale. What personal property, if any, will be included with the home is all part of the contract negotiations.
A big problem today is confusion over large expensive, flat panel televisions. If you want it, make sure the wall mounted TV is explicitly mentioned in your original offer so everyone is on the same page and there is no drama later on.
In Arizona, the stove/oven, dishwasher and draperies are usually considered to be included in the sale unless otherwise stated in the agreed upon contract.
The buyer selects the escrow company. I recommend buyers choose a company that has an established relationship with their real estate agent .
Seller’s in Arizona will often agree to pay for a 12-month home warranty for the buyer, so you should ask for it. A home warranty will cover different items depending on the warranty company used and the specific warranty purchased. Major items like the air conditioner are almost always covered at least partially. Home warranty companies typically charge the buyer a flat trip charge of about $50 to $70 per warranty service performed.
This is where you might add custom clauses such as, “Seller to remove shed in backyard before close of escrow.”
It is not uncommon for offers to be valid for only about 24 hours.
After the buyer summits an offer to the seller (more specifically, it will be the buyer’s real estate agent submitting the buyer’s offer to the seller’s real estate agent );
- The seller may accept the offer in which case the buyer and seller have a fully executed, valid contract,
- The seller may reject the offer outright and the negotiations are pretty much over, or
- The seller may make a counter offer.
Counter offers typically propose changing the sales price but they can attempt to change anything in the offer, such as the closing date or personal property included in the sale.
For example, if the buyer’s original offer included the refrigerator, washer and dryer, the seller’s counter offer might simply say, “Refrigerator, washer and dryer not included in sale.”
The buyer could accept that counter offer in which case the buyer and seller have a fully executed, valid contract. Or, the buyer could write a Counter Offer #2, (for example, “Full purchase price shall be $X”) and so on until agreement is reached or the negotiations fail.
If the negotiations succeed, the original offer and all counter offers together become the purchase contract.
Once an agreement is reached, your real estate agent will take the purchase contract, all counter offers and your earnest money check to the escrow company to “open escrow.”
Escrow companies are private companies that act as neutral third-party intermediaries. They represent the buyer and seller equally but their real “boss” is the contract. They look to the contract for their instructions.
Escrow companies also sell title insurance.
Note to Canadians – If you’re borrowing money to buy the home, your lender will require that you buy a title insurance policy that protects the lender if any problems are found in the chain of title in the future.
Most Canadians are unfamiliar with title insurance because western Canadian provinces use the simpler and cheaper Torrens system where you simply register the new owner at some government office. In the archaic American system you have to worry about fraud and unreported deeds. Nevertheless, there’s no way around it in Arizona, your lender will require that you buy them a title insurance policy.
If you’re paying all cash, you won’t need to buy title insurance because you won’t have a lender.
Whether you have a loan or not, the seller will normally buy you, the home buyer, a title insurance policy that pays you if, in the future, any problems (fraud) are found in the chain of title and it turns out you don’t actually own the home after all. This is EXTREMELY rare but would be catastrophic without title insurance.
That is, in a normal sale, the seller buys a title insurance policy for the buyer, and the buyer buys another, separate title insurance policy (on the same house) for the buyer’s mortgage company. (Yeah, the Canadian Torrens system is better.)
NEXT LESSON >> Buyer inspections during escrow