How to Put in an Purchase Offer for an Apartment in NYC
You've been looking for months and months and finally found the perfect place.
You might think that the hardest part is over but purchasing the apartment may be a little bit more complicated than a, "Where do I sign?"
In the simplest circumstance, you decide to purchase the house or condo at the price for what the seller is asking, very much like walking into a shop and buying something.
However, purchasing a property is one of those rare times when you actually have more negotiating ability in a transaction.
Here's some things to think about before you decide to make any offer.
Preparing to Make an Offer
Your Down Payment
Everyone knows that in order to buy a home, one needs a down payment. Traditionally, this is around 20% of the total agreed upon price.
In reality, this number varies considerably from a percentage a seller will require to how little your mortgage lender will allow you to put down.
The number can be as low as 3% (or 0% for a VA loan) in some cases and some properties such as co-ops may require as much as 40% or 50%.
Deciding how much to put down can be tricky. It depends on the funds you have available as well what is going to move the seller to go with your deal.
Why should it matter how much you put down if the seller is getting the same money at the closing table?
Generally, offering at least 20% or more down will give your seller a sense of your determination and seriousness, including your ability to be approved for a loan.
An offer for an apartment for $1 million with 10% down is not the same as an offer an apartment for $1 million with 20% down.
Firstly, the 20% down payment shows you have more liquid assets to make the purchase. Secondly, you only need to be approved for a loan of $800,000, while the 10% buyer must be approved for loan of $900,000.
Another reason you might consider putting more down is that generally a lender will offer you better interest rates you can lock into the life of your loan.
Make sure no matter what percentage you decide to put down, that you have quick access to withdraw these funds whether it's a gift from you parents, or you're withdrawing from an IRA or 401k account.
In order for you to secure your desired home and officially go into contract, you will need to remit an earnest money deposit with the signed contract.
The contract is not valid until the seller's attorney receive the funds in their escrow account.
For those who don't know what an escrow account is, it's basically a holding account.
Earnest money is deposited into this account to hold it for the parties until the deal is closed. The seller does not receive this money until all the papers are signed, and transfer of title is complete to the buyer.
This down payment must always be guaranteed funds (no personal checks).
The earnest money can be a percentage of the down payment or put in the full amount of the down payment depending on the transaction and the agreement.
Once the money goes into escrow, it is calculated into the closing costs at the closing table.
Don't give the seller cold feet by dragging your feet with the down payment deposit, because you had delays withdrawing the funds.
One thing to remember is that if you are withdrawing from an IRA you only 120 days to spend the limit of $10,000 for a down payment or closing costs. So, time it right.
For more information on putting together funds for your down payment and other important details about preparing to buy, be sure to read up on our extensive article about prep and understanding the buying process.
Obtaining a Mortgage Pre-approval Letter
If you're like most Americans, you'll be taking out a mortgage for your home purchase. The pre-approval letter is instrumental in the offer process.
Without this letter, your offer will hardly be taken seriously or won't be considered at all.
Shopping for a Mortgage
You'll need to do your own research on different mortgage products, and the best rates available beforehand.
Shopping around after you found the perfect home could mean you lose your opportunity to purchase it.
For convenience sake, you might go directly to the bank where you regularly doing your banking.
However, don't think that your bank will offer you the best rates just because you've been a loyal customer.
Do your research.
Mortgage brokers can offer you choices by helping you compare different products across a number of lenders. They also generally offer great customer service by walking you through the whole process.
The large financial institutions can vary considerably in customer service. And while rates may not necessarily vary much between the big banks, the amount of credits and grants they can offer you can vary a lot.
This can mean big savings at closing!
This is also true for smaller banks and credit unions, so, shop around.
The Pre-Approval Letter
Getting the pre-approval letter is a critical step for the offering process and also paves the way for opening the door to your mortgage.
While the letter is not the same as a loan commitment, it does show the seller you have a pathway to securing funding for your purchase and already been pre-vetted.
The mortgage broker or agent will typically ask you for a photo ID, proof of income (pay stubs), employment verification, proof of funds (for down payment and closing costs), and your credit score (they will pull your credit).
Once you have submitted all the required documentation, the lender will have a clearer idea of the types of mortgage products available to you, interest rates, and the amount of loan you can afford.
Your pre-approval letter will state the amount that you have been approved for with the down payment you are ready to make.
The letter should be submitted with your formal offer and can be adjusted to any amount within the approved range.
For example, if you've been approved for a loan for $500,000 with 20% down, but have found a property you'd like to make an offer on for $425,000, you can have the letter changed to reflect this amount.
Prequalification Vs. Pre-approval
You might have heard of prequalification. So what's the difference?
Prequalification really doesn't require pulling credit or submitting documentation to prove anything.
It is not useful in the offer process at all as it's not the same as a pre-approval.
What it is useful for is figuring out your home purchasing budget and how much you should be putting down.
If you're serious about buying a home and want to be ready to make an offer, go ahead and get pre-approved. The letter is good for 90 days.
An All-Cash Offer
If you have the luxury of extra assets in place and would like to forgo a potentially long-winded process with the vetting of a property, loan commitment and underwriting, cash is the way to go.
When you submit your offer, it will be helpful to show proof of funds or submit a REBNY Financial Statement.
Many co-op, condos, and brokers in New York City require this statement to be submitted at the time of offer, whether cash or mortgage financing.
The statement clearly outlines your assets and liabilities, in all forms--whether it is liquid, investment, or real estate.
Making the Offer
If you want to be taken seriously in a place like New York City, where no one has time to dilly-dally, you will need to make your offer in writing along with your pre-approval letter (if financing).
Verbal offers, while not defunct, do not carry any gravitas and the feeling is--can be reneged at a moment's notice.
In reality, a written offer also is not a legally binding document and can be reneged upon, but because it is in writing, the offer is more serious with details being outlined.
In your written offer, you should clearly state your interest to purchase the property and include the following:
- The date the offer is being made
- The address of the property in question (may or may not include the asking price)
- The name(s) and contact of the buyer(s)
- The offered price
- Proposed down payment
- Means of payment (whether cash deal or financing)
- Proposed closing date (if there are time constraints)
- Any requested concessions or contingencies
Just be reminded that when making the offer you may need to enclose a REBNY Financial Statement for a co-op purchase.
This is because it will give the listing agent a good idea of who is going to be able to get board approval ahead of time.
To find out more about buying a co-op or a condo, read up on what the difference between the two is.
What Happens After I Submit an Offer?
Typically, you'll submit your offer to the listing agent or if it's a sale by owner, directly to the owner.
Your offer should be reviewed by the listing agent. They have a fiduciary responsibility to submit every offer to their client.
It doesn't mean that sometimes they purposely don't submit offers, but they are required to, and a good ethical agent will do so.
It's important to make an offer that you think is reasonable and would catch the seller's attention.
If you're offer sounds great, you'll have an accepted offer. If not, there might be some negotiation back and forth with counter offers or your offer may be flat out refused with no further negotiations.
Once your offer is accepted, a deal sheet or transaction sheet is usually filled out by any agents involved.
This sheet outlines:
- The property to be purchased
- The seller(s)
- The seller's agent (if any)
- The seller's attorney
- The property manager (if any)
- The buyer(s)
- The buyer's agent (if any
- The buyer's attorney
- The agreed upon price
- The agreed upon down payment
- HOA property fees
- Any agreed upon contingencies
- Any agreed upon concessions
- Agreed upon broker fee and splits
The deal sheet is then distributed to the attorneys. The seller's attorney then uses the details on the transaction to sheet to draft the sales contract.
Once the sales contract is drawn up, it will be sent directly to the buyer's attorney who will review the details with their client. There might be more negotiations on the particulars of the sales contract as well.
Once the sales contract is signed by both parties, and the earnest money deposited, you'll be officially in contract. This is the moment to secure your loan.
Deciding an Offer Price
Figuring out what you want to offer for a property and what you should in order to make an agreement can be tricky.
Often they are not the same.
What the end sales price will be depends on:
- Your budget
- Market conditions
- Seller's motivation
- Negotiation tactics
- Your motivation
Market conditions can many times predict what the agreed sale price will be. If the real estate market is hot in the area, this can benefit the seller.
In practical terms this translates to real estate values going up year after year, quick absorption rate and fewer days on market.
In these circumstances, the seller can demand their price and come out on top (granted that it's not way too above the market value).
If the market is much slower and listings are sitting on the market 100 plus days, this might be a chance to negotiate for better terms.
When there is a lot of inventory that isn't moving despite dropping prices, this can be a perfect situation to win on your terms.
The best way to get an idea of what a reasonable offer would be is to look at other comparable properties. See what they're listed for and if they are indeed selling at those prices.
Some properties even in a slow market can be hot, and vice versa.
Don't forget to work in how badly you want the property. Playing too much with a poker face might interfere with your chances of landing your dream place.
Sometimes just coming in at full ask or just shy of it can mean a resounding "yes".
Be aware, if the apartment or house is hot, you may have to put up extra cash in order to be the winning bid.
Contingencies are the conditions you lay out for the sales contract. The most popular contingency is that the sale be pending on securing a mortgage for the purchase.
This allows the buyers to walk away from the deal if they are not able to get a loan commitment and hence funding for the purchase without penalization.
This makes sense because why would a seller want to sell their property to buyers who don't have the money?
The second most common contingency is the passing of the home inspection. Obviously, not many would want to buy into a property they know has serious structural issues, mold, or a termite infestation.
Having the home inspection, while does not 100% guarantee the soundness of the property, will help lay out the problem areas, a base for renegotiation, or to walk away from a money pit.
In certain properties like co-op buildings or new developments, inspections aren't as common, but not unheard of.
Other common contingencies are repairs to the property (by the seller), a buyer's own sale of a property (using the proceeds from their sale to purchase the second), that the property's sales price meets the appraisal value, and in investment properties the removal of tenants by a certain date.
Concessions are deals that are made between buyer and seller that don't have to do with the sales price directly, but add extra incentive to the deal for either side.
Concessions are a great way of sealing the deal without sacrificing the sales price.
Common points of concessions are transfer taxes, buying down points to a mortgage, attorney fees, and other closing costs.
Other minor niceties can be to pay for brand new appliances, including a furniture package, paying up to a year of common charges/taxes or free parking.
When the market was down, one major condo development in New York was even offering each buyer a brand new Mini-Cooper at closing!
Likewise a buyer can add incentive to a seller by offering to pay for half or all the transfer taxes which are typically paid by the seller at closing.