In my , we left off with open escrow. An escrow number was assigned, and the contract detailed out. Let’s pick up here, as there’s a long way to go before the house is sold!
The first thing a buyer does is to secure the loan he was pre-approved for by filling out the application and beginning the process of credit checking, etc. Buyers must demand and review all disclosures about the home immediately to ensure that there are no surprises, such as the flood that occurred last year resulting in that beautiful new flooring. While that is happening, the termite and home inspections are ordered and any needed work is identified on a Request for Repair. These three items are longer lead items, and can be deal breakers.
Imagine if you have negotiated and accepted a price, then, as a result of the inspections, a demand is made for thousands of dollars worth or repairs! You may have already taken the home off of the market. A week or two of marketing may be lost. A reminder here: Negotiating a ceiling on those repairs as an initial part of the contract can help avoid this latter problem.
As the above activity is occurring, the Home Warranty Insurance may be ordered by whichever side is paying for it. The buyer will need to secure home insurance such as liability, fire and contents. Likewise, homeowner documents can be ordered. Increasingly, these need to be paid for in advance by whichever side agreed to do so. Wherever there is a Home Owners Association, the buyer is entitled to the minutes of the previous year’s meetings, budgets and all the business of the HOA that involves the homeowners. Why? Because there may be facts about the home, neighborhood, or community, that should be disclosed, which the sellers have not. It could be that they forgot, do not know, or deliberately kept it from the buyer. Those items might include dues increases, assessments such as to put new roofs on the complex, or the new status as a High Fire Zone. Many, many items are discussed by the HOA regarding the well-being of the community; that’s their job. As much as possible, those details are required by law to be conveyed to prospective buyers. Be sure to read those documents as soon as you get them.
If there is a well or septic tank, special tests may be performed, such as a Perc Test. A roofer may be brought in to inspect a tired looking roof. A structural engineer may be contracted to inspect a suspicious crack in the foundation. A chimney sweep can inspect cracks in the fireplace. A mold expert investigates a previous roof or dishwasher leak. Usually, the first 17 days is the period when the buyers must try to learn as much as possible about the home they are considering, to support the purchase decision. That is the default, but some contracts reduce those 17 days to 10 or some other number, for a quick transaction—often foreclosures and short sales.
As the others have so many special circumstances, we will focus primarily on traditional equity sales. Likewise, VA and FHA loans, which are increasingly common, have a few special requirements as well but are usually manageable. An example might be that the home must be habitable, so that septic tank that was removed to install a pool would have to be replaced if there is no sewer hook up.
Early in the transaction, the title company performs a Preliminary Title search, and generates a report that alerts the participants to the contract of any irregularities. These might include another person on the title, say grandma whom the house was inherited from, but who never signed off on the title. There could be liens on the home from contractors, back taxes, a car you turned back to the lease company but they never cleared, all kinds of “clouds” on the title. Each of these can be addressed early in the transaction, rather than in the final report which comes in before closing, and which might not give the parties time to reverse. The final report should then be clear and show the sellers as the lawful owners with full rights to sell the property. Title insurance is purchased against the event that someone shows up with a claim of title, unforeseen at the time of the sale.
So, the loan is percolating, the work is being done as a result of the inspections, you’ve ordered your insurance, you’re taking bids from movers, you’ve alerted the utilities about the expected date to transfer to the new owners.
Ah, here comes the appraiser.
Keep in mind, the appraisal is ordered by the bank providing the buyer a loan. If it is an all-cash purchase, there often is not an appraisal. But, a bank wants to be assured that what the house is worth to you, is what it would be worth should you default, and they have to take back the asset. Also important to consider, the bank usually is only concerned with the money they are lending, not what the home will sell for in ideal circumstances.
For example, you are buying a $500,000 home, and putting down a deposit of $300,000 from the sale of your previous home. The bank has agreed to lend you $200,000, so they want to be sure the home is worth at least that much. Should be no problem. Conversely, you just love that home so much, and it is priced low to increase competition, say $450,000, and stimulates many competitive offers. You offer $550,000 with 3.5 percent down and an FHA loan. This final scenario probably will not result in an appraisal value of $550,000 on a home offered for $450,000, no matter how much you love it.
When the appraisal comes in for less than the contract price, there are usually four alternatives:
1. The seller can add more cash to the transaction to make up the difference.
2. The buyer can reduce the price.
3. They can each compromise on the price.
4. Or, one or both parties can decide to get out of the transaction.
So, with that out of the way, escrow may schedule for you to sign documents. These will be notarized, including the deed to your home, which they will hold until all of the contract items have been met. If this is a trust, a copy of that agreement will be demanded. Essentially, all the items of the contract have to be completed before closing. The Verification of Final Walkthrough is done within five days of closing to ensure that the house is in the same condition as when the buyer agreed to purchase it. If there is a leak, it has to be fixed. If the inspector identified work for Termite Clearance to be issued, that must be done and certified. If the pool was sparkling blue and now there’s green algae growing, that has to be reversed.
Once all items of the contract are met, the money funded with the lender and the purchaser, the title company clears the title for purchase, and records the deed. There are many other minor steps that have to happen, but this is the general flow of the transaction. Everything must be done correctly and completely as once the loan funds and the deed records, changes can only be made legally.
Next week, we’ll address that huge topic of short sales and foreclosures!