Advertiser Disclosure

advertising disclaimer
Skip to main content
real estate contract

How Does an Offer to Purchase Work?

May 06, 2020 by Aly J. Yale

If you're considering buying a piece of real estate, then an "offer to purchase" is likely in your future. These documents help you reach an agreement with the property's seller, and they eventually function as the final binding contract, too.

Are you on the hunt for a home or your next investment property? Here's what you need to know about purchase offers.

What is an offer to purchase?

An offer to purchase is often called a purchase agreement, purchase contract, a sale agreement, or a purchase and sale agreement, depending on where you live and what type of property you're buying. (Some states require different forms, and new construction might require a different contract as well.)

Regardless of its name, an offer to purchase generally includes the following points of information:

  • The names of both the buyer making the offer and the home's seller.
  • The proposed purchase price of the home.
  • The property's address.
  • The method of financing (cash, mortgage loan, etc.).
  • The proposed closing date.
  • A list of fixtures, appliances, etc., that are included and excluded.
  • Contingencies to allow for inspections and other conditions.
  • The deadline for acceptance of the offer.
  • The amount of any earnest money deposit the buyer is offering.

It should also contain the legal description for the property in question. This can be found in local property records and usually includes your lot or parcel number.

Submitting an offer to purchase

You'll submit an offer to purchase when you're ready to buy a particular property. If you're using a real estate agent, they should be able to put the document together on your behalf, and they'll submit it to the seller or their listing agent, too.

Once the offer has been submitted, the seller can review it and either accept or reject it. They might also submit a counteroffer -- which is essentially just a new offer to purchase with slightly different terms and conditions. You can choose to accept this or make a counteroffer yourself.

Only after both parties have agreed to the terms -- and signed the document -- does the purchase offer become an actual contract.

It's not over yet

Just because an offer to purchase has been signed doesn't mean its terms are set in stone. If contingencies are included in the contract, there are still ways the deal can change or even fall through.

Both the buyer and seller can include contingencies in the agreement. Some common contingencies include:

  • The financing contingency: This allows the buyer to pull out of the transaction if their loan falls through or they're unable to secure another type of financing for the property.
  • The sale contingency: This one is for buyers who need to sell their current home before they can purchase a new one. If this contingency is in place, there is usually a set timeline for the buyer's home sale. If they're unable to sell the property in that timeframe, they can back out of the deal.
  • The inspection contingency: With an inspection contingency, buyers are allowed a certain period in which they can have the home professionally inspected. If the inspection reveals issues with the home, they can ask the seller to make repairs or provide repair credits, or they can cancel the deal entirely.
  • The appraisal contingency: Mortgage lenders won't loan you more money than a home is worth. With the appraisal contingency in place, buyers can back out of a transaction if the home fails to appraise for the full value of their offer.
  • The title contingency: This contingency concerns the actual title to the home. If the title company finds any liens or legal judgments against the property, the buyer can back out of the sale.

As a buyer, including contingencies can help protect you -- and your investment dollars -- big time. But they also might make it hard to strike a deal -- especially in hotter real estate markets where competition is stiff. If you're not sure whether a contingency is right in your specific case, consider talking to a real estate agent about local market conditions. They should be able to point you in the right direction.

Making your offer more appealing

If you do find yourself in a seller's market or involved in a bidding war, there are several ways you can make your offer to purchase more appealing to sellers.

For one, you can waive contingencies. Though this can be risky, it can get you a leg up on other buyers who may be including one or more contingencies in their offers. You can also:

  • Offer more earnest money: The seller gets to keep any earnest money you offer if you pull out of the deal without due cause. And the bigger the check? The more serious it shows you are about that home.
  • Get preapproved: A mortgage preapproval can give sellers more confidence in your bid and help you stand out from others. It shows you're serious about your purchase and that your financing is likely to go through hassle-free.
  • Be flexible about the closing date: Unless you absolutely need to be in the home by a certain date (when your lease expires, for example), then be flexible about the closing timeline. You might even offer the sellers a lease-back, which allows them to rent the home back from you for a set period of time after closing. This can help if they need to buy a new home or find other living arrangements before leaving the property.
  • Offer all cash: If you can swing one, all-cash offers are extremely appealing to sellers. They mean a much faster sale (no mortgage loan to wait on), and that large chunk of cash could come in handy when moving or buying their next home.
  • Consider an escalator clause: Escalator clauses automatically increase your offer any time another buyer outbids you. As long as you set a threshold that works for your budget, they can help you be more successful in a competitive market. (Just be sure to consult a buyer's agent before employing this strategy.)

You can also include a personal letter with your offer to purchase. Address the sellers directly and let them know exactly what you love about the home and your plans for it. Pulling at their heartstrings a bit may just be enough to put your offer ahead of another's.

The bottom line

If you're looking to purchase real estate in the near future, then understanding how an offer to purchase works, as well as what makes one appealing to a seller, is critical. And if you need more guidance in crafting yours, be sure to consult a real estate agent in your area. They can help make your offer the best it can be.

Better Returns - half the volatility. Join Mogul Today

Whether over the 21st century, the past 50 years... Or all the way back to more than 100 years... Real estate returns exceed stocks with SIGNIFICANTLY less volatility! In fact, since the early 1970's real estate has beat the stock market nearly 2:1.

That's why we launched Mogul, a breakthrough service designed to help you take advantage of this critical asset class. With volatility spiking, Mogul members have been receiving investing alerts with projected rates of return of 16.1%, 19.4%, even 23.9%, and cash yields of up to 12%! And these aren't in some 'moonshot' penny stocks or biotechs, but more stable multi-year real estate developments that don't see their value swing on a daily basis like the stock market.

Join the waitlist for Mogul here and receive a complimentary 40-page guide on a NEW way to build wealth. Join waitlist now.

The Motley Fool has a disclosure policy.

Popular Articles On Millionacres