Know What is in The Real Estate Purchase Contract
It is a good time to purchase a home as rent is increasing. Your interest is deductible from your tax return and rent is not. The market is getting better overall and several markets have gone up already. Other markets are expected to go up in value. It is a good idea to select a buyer’s agent to represent you that has contract knowledge. Before you start to look at homes you need to talk to a lender to get pre-approved. That is important because you want to know how much a bank or Mortgage Company is willing to loan you to buy a home. They will also let you know whether your credit is good to get pre-approved and or if you need to fix some things to improve your credit scores. Once you are ready and have found your Dream Home and you are ready to write an offer. Now you will need that pre-approval letter from a lender and an Earnest Money Check to go with the offer.
Your agent should discuss with you money needed to close which includes Pre Paids: 1st year home owners insurance (Hazard Insurance), Escrow for taxes and Insurance, Interim Interest as well as Mortgage Insurance if you don’t qualify for a loan without mortgage insurance. There are many different loans available.
Buyers have closing cost to you to obtain their loan. They include Loan Origination, Appraisal, Title Search and Title Insurance + Owners Title Insurance and more. The lender will let you know the closest amount you need for the closing. You need to know all this because you may ask the seller for assistance and finance that into your loan if you do not have enough money for the down payment and closing cost saved.
Once you have the contract written up that creates an offer to the seller. If the seller accepts your offer your Contract will be contingent on:
- Loan Approval
- Negotiations of needed repairs possibly
If the seller counters your offer that creates a new offer. You can walk away, accept or counter back. Every counter creates a new offer. In general a deal gets worked out. Personally I have had very few contracts that did not get worked out in my 23+ years of selling real estate. Also know that every state handles things different. I have lived in many different states and it was always different. What I write here is for South Carolina, also things/laws change. 2008 brought a lot of change and we still find more changes from time to time.
A seller wants to sell and will look at an offer seriously, but as a buyer you do not want to insult a seller with a too low offer. I have had sellers that refused to sell their house to buyers that presented them with “insulting” offer. The listing agents in general prepare a CMA Comprehensive Market Analysis based on the most recently SOLD similar properties. A Buyer’s Agent will do the same for you to give you, the buyer, to give you an idea if the house is priced competitively.
Some things have to be clearly stated. Address, Lot and Block number, Phase, Tax Map Number.
If you want/need seller’s assistance for closing cost that needs to be in the contract. The seller can agree to it or counter or not agree to pay for the buyer’s closing cost.
Once the contract has been worked out and accepted by all parties the buyer has to make application for his loan within 5 business days after acceptance in SC. Some other states may have a different time frame. This is important because the closing and occupancy of buyer are all dependent on timely process of the loan and documentation. Seller is planning his move and is dependent on this as well. If the loan gets rejected by one or more lenders then the seller needs a written letter from the lenders stating that so that the buyer can be released out of the agreement and received his earnest money back. Buyer agrees to not make any financial changes per contract that could affect his ability to buy the house.
I recommend that the buyer asks the lender when he gets pre-approved how long it will take to close the loan once he has found the right house. Depending what kind of loan he/she qualifies for that can vary. In general 30-45 days has been my experience, sometimes longer, especially with new construction.
If a loan gets denied and the buyer makes an application with a different lender the seller has to be notified. This can create a delay from the original agreement. If the loan gets denied and the buyer cannot purchase the home he needs to provide the seller with a written letter from the lender of the denial and can be released out of the contract. In this case he will receive the earnest money back. Timing is important when it comes to Loan Application and Inspections, Everything in the contract is about timing to close on time.
I can only speak of how real estate business is handled in the Columbia SC area and not in other states. Buyers that get 100% financing in general don’t want to put much money down for earnest money. Buyers need to remember that this is a promise to purchase a home and shows their ability and strength to perform. Depending on the price of the house buyers should put down more money to show their “strength” to buy but at least 1 - 2% of the sales price. A check is made out to the Buyer’s Agents Firm or sometimes the seller’s agent’s firm or attorney if it is a Foreclosure. Buyer can pay check or Cashier’s Check. This money becomes part of the down payment and is credited at closing.
The contract is contingent on Inspections and they have to be performed within 10 business days after contract acceptance. In general a buyer orders at his/her expense a Home Inspection, Termite Inspection, Heating & Air Inspection, Mold and other inspections desired. These should be performed but licensed professionals. If the buyer obtains a VA loan then the seller can pay for the Termite Letter. In my opinion the buyer should obtain the inspections as they want to buy the house. If there are repairs needed the buyer has to provide reports and a written request (Repair Addendum) to the seller. The seller can agree, partially agree or not agree to do any repairs. That gives the buyer an opportunity to walk away and receive his earnest money back. To receive the earnest money back there is a release that needs to be signed by all parties before the Earnest Money can be release to the Buyer. Timing is very important. If the inspections are not done within 10 business days the buyer has agreed in the contract to buy the house “as is”.
There is also an AS IS clause in the contract. That happens many times to foreclosures where the seller will not do any repairs.
Before the seller starts with repairs they want to know the loan is going as it should and will ask for a clear to close letter from the lender, especially if the repairs are costly. Another reason the buyer should get the loan application and inspections done as agreed to. The seller is making plans to move because in most cases the buyer requests occupancy the day of closing. The seller is counting on the buyer working on everything in a timely manner.
Finally the contract expires the day of closing. If there is a delay to get loan approval then the buyer’s agent should get an extension signed by all parties.
In SC we have in the contract that the buyers should verify all information: Read the Seller’s Property Condition Disclosure, Obtain a survey, read the Covenants and Restrictions, Obtain Title Search and Insurance, Obtain Owners Title Insurance, Obtain Hazard, Hail & Wind, Flood and Earthquake Insurance effective at the time of closing.
The HOA fees are going to be prorated at closing and the buyer needs to make him/herself familiar with the CCR’s.
Sometimes a contract is contingent on the closing of the purchaser’s home. That will be in the contract as well. If a contract is contingent on sale and closing of the buyer’s property in general the seller will request his home to remain active on the market until the buyer’s house has a contract on it and request a copy of the contract.
There are many other things in a contract. It is important to have a knowledgeable buyer’s agent for advice and guidance.
Rosemarie Averhoff, CRS
REMAX Metro Associates