September 01, 2022 3 Minute Read
Home Buying with Bitcoin (Part 3): Deal Terms and Contingencies
This post is the third in a multi-part series detailing the home buying process for bitcoin investors. The goal for each article is to provide basic information on each step of the homebuying process tailored for the bitcoin community.
Read the rest of the series here:
Up to this point, the “Home Buying with Bitcoin” series has covered the initial steps of the home buying process with an emphasis on Bitcoin investors as prospective buyers. Part 3 of this series explains critical deal terms that every buyer should pay attention to when instructing a realtor to write an offer. Readers should keep in mind that this is not intended to be an exhaustive list of every deal point to consider when writing an offer. Instead, this blog post is meant to help readers pay special attention to the deal terms highlighted here to better equip a home buyer with the right questions to ask and to help avoid common pitfalls.
Real estate market dynamics often change very quickly. The best way to ensure a buyer maximizes their leverage and gets the best possible deal is to understand the current climate. This is where having an experienced realtor can be extremely helpful. The most obvious deal point to consider is, of course, the offer amount. How much a buyer offers can be delicate.
The goal of finding the right offer amount is to strike a balance between what is attractive as a buyer and what could be in the range of what is reasonable for the seller. This means offering an amount that elicits a counteroffer, ideally somewhere in between the list price and the offer amount. For example, if a home is listed for $600,000 and a buyer is willing to pay $585,000, it may make sense to start the offer at $575,000. Aggressive negotiators can become overzealous and make an initial offer too low which risks offending a seller. In the same scenario, for example, offering $525,000 may signal to the seller that the buyer is not serious and does not even warrant a counter offer. On the flip side, if a seller accepts the first offer that is likely an indication that the buyer was not aggressive enough.
Beyond the offer amount, which is affected by a myriad of factors, the other key deal terms are:
- Earnest Money
- Appraisal, Inspection and Financing Contingencies
- Closing Date
- Loan Terms
The following sections explain the first two in order. The last two will be explained in a subsequent post.
Earnest Money: In the hopeful event that an offer is accepted, meaning a buyer and seller reach Mutual Acceptance, the earnest money serves as a type of insurance policy for the seller to hold the buyer accountable for closing the transaction. Typically the earnest money is held by a neutral third party in the transaction such as the escrow company. The standard expectation for earnest money usually hovers around 1% of the offer amount, but in a seller’s market where multiple offers are expected, increasing the earnest money is a strategic way to make an offer more attractive. If the transaction closes as expected, the Earnest Money is returned to the buyer and everyone is happy. If something goes wrong during the course of the transaction, however, it becomes critical to understand the contingencies which give the seller the right to retain a buyer’s Earnest Money if those contingencies are not met.
Appraisal Contingency: Mortgage lenders require an acceptable appraisal to be completed before they will extend financing on a property. The main aspect of an appraisal is the final valuation provided by the appraiser. The appraised value must be equal to or greater than the purchase price otherwise the lender will require the buyer to come up with the difference. The appraiser may also flag other aspects of the property such as an incomplete kitchen or a safety hazard which the lender requires to be remedied before extending financing for the property. The appraisal contingency protects the buyer from these scenarios and allows them to rescind the transaction without losing their earnest money. While a low appraisal can be a stressful development, it can also provide the buyer with additional leverage to renegotiate the purchase price or threaten to walk away.
Inspection Contingency: While the lender requires an appraisal, it is up to the buyer whether or not they want to obtain an inspection. Again, whether or not the buyer will allow for an inspection contingency depends on market conditions. But for the most part, this is a standard inclusion that all parties anticipate as a part of the transaction. The contingency is an additional layer of protection for the buyer to perform further due diligence on the property without risking the loss of their earnest money if they discover something they did not expect. For example, a property inspection may uncover water damage in the basement of a property which was not disclosed by the seller. This is once again an opportunity to renegotiate with the seller to either remedy the deficiency or compensate the buyer to perform these repairs after closing.
Financing Contingency: Often the most flexible trigger, the financing contingency, allows the buyer to rescind (cancel) the offer in the event their financing falls through and they do not qualify for the mortgage to obtain the property. This is important because if the loan fails for any reason, the buyer can walk away from the transaction without losing their earnest money.
All three of these contingencies are tied to specific deadlines that must be satisfied within the due diligence period. The buyer is required to waive these contingencies at the negotiated intervals in order to proceed with the transaction. Once all contingencies are waived, if the buyer still fails to perform and close the transaction, then the seller is entitled to keep the earnest money.
If the buyer successfully completes their appraisal, inspection and financing, however, it’s time to head to the closing table and finalize the transaction which we’ll explore in depth in the next part of the series.
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