Real Estate FAQ’s
Question: How do you begin negotiating for a home?
Answer: It depends on where you live. The most common starting point for the negotiations is the price of the home. A buyer will contact their real estate agent that will provide them with a form that is called a contract to purchase. This form allows you to put the specifics of your offer into writing. It not only includes the price you want to pay for the home, it includes other contingencies, such as a home inspection, financing contingencies, and an attorney approval contingency. The idea is to make sure that all of things the buyer wants are included in the offer.
The contract to purchase will specify the amount of time that a seller has to respond to the offer. In many cases this is as short as 24 hours. The offer will not be valid after the time has expired. Good faith money is included in the offer. This is usually $500-$1000 and is held in escrow. The seller will usually respond to the offer in different ways. They can accept it, reject it outright, or most commonly counter the offer with their own. The offer can go back and forth until a consensus agreement is reached. All of the changes that are made in the offers have to be initialed by all parties. After the offer is accepted, the home inspection process is undertaken and a lawyer can review the document for any problems. Once that is done and everything is deemed acceptable, the financing can be applied for. The final purchase document may include all of the provisions agreed upon by both parties or they can be included in a separate document. Either way, a lawyer should review all of the final documents to make sure they are correct and accurate.
Question: How many people are involved in the real estate transaction?
Answer: There may be some real estate deals that involve only a buyer and seller, but the reality of today is that there are many more people that are usually in the room when a deal is being made. The parties that are involved can include:
- The buyer and the seller
- Real estate agents for both parties
- Lawyers for both parties
- Mortgage lenders
- Title companies
Buyers can also use home inspectors and financial planners to help them with the purchase. An insurance agent will also be needed to purchase homeowner’s and other types of insurance for a property. It is always important to have a lawyer on your side and a person that helps you make the necessary financial decisions involving the property.
Question: What is involved financially during the closing of the sale?
Answer: There will be plenty of numbers involved. The cost of the deal involves much more than just how much is being paid for the property. During closing, the buyer and seller will get a list of credits and debits pertaining to the costs of the deal.
The seller typically gets credits for:
- Any fuel on hand for the property, such as heating oil
- Insurance premiums that have been paid ahead of time
- Prepaid interest
- Escrow deposits that have been collected for insurance, taxes and other fees
- Other things that have been paid for by the seller that will benefit the buyer
The buyer will receive credits for:
- Good faith money that was put into escrow at the start of the offer process
- Any taxes or special assessments that the seller has not paid at time of closing
In addition to the credits and the debits, the settlement sheet includes other information about what the buyer and the seller are responsible for paying related to the deal. These can include:
- Title searches
- Recording fees
- Transaction taxes
- Loan origination fees or the cost of preparing the loan documents
- Credit report fee
- Lender’s appraisal fee
- Mortgage insurance application fee
- Mortgage insurance premium
- Hazard insurance premium
It may also be necessary to set money into an escrow account to cover any future payments such as insurance and property taxes. Fees can also be charged for any other documents that have to be prepared for the closing.
Questions: What is meant by the term Purchase Contract?
Answer: This is a legal document that covers all aspects of the proposed real estate transaction. It is also known as:
- Real estate contract
- Sales contract
- Sales agreement
- Purchase agreement
- Purchase and sale agreement
Because it is a legally binding document, it should be reviewed by a real estate lawyer to make sure it is done correctly.
Question: What makes up the purchase contract?
Answer: Each purchase contract can be unique, but they will have many similarities. It is common to see standardized forms used for purchase contracts, although they can be amended. In general, a good purchase contract will include these:
- Date of the contract
- Price of the home
- Size of down payment
- Everything that is to be included in the purchase, including appliances, furniture and other items
- Everything that is not included in the purchase
- The closing date
- Financing contingency. This should also include a time frame for obtaining the financing and what happens if the financing does not go through. Information about the amount, type and interest rate of the loan can be included
- Inspection clause. The buyer can have the home inspected within a certain amount of time. If the home inspection comes back as unsatisfactory, the potential buyer can usually back out of the deal. The buyer can also ask the seller to perform the repairs or to provide the buyer with credits for the repairs to keep the deal alive. An attorney-approved rider to cover both buyers and sellers should be one or both sign the legal contract prior to it being reviewed by the respective attorney
- A legal and full description of the entire property, including land
- Good title contingency. The seller will provide a clear title to the home. It shows that the seller has the right to sell the home and that the buyer will be able to get a title to the home. Problems can arise if there are other owners to the property or if there are liens on the property. IT is possible that a buyer can back out of the deal if clear title cannot be shown
- Any type of restriction or confine that could potentially affect the title
- Agreements about any bills that occur for the property until closing is completed, including utility bills and taxes
- Agreement about what happens to good faith money if the deal does not go through to completion
- Date for taking possession of the property. There also needs to be an agreement about what the seller has to pay if they do not turn the property over on the agreed upon date
- Agreement that both parties shall perform a walk-through, personal inspection before the closing to make sure that all contingencies of the purchase agreement have been met
- Escrow agreement terms
- Agreement about who has to make sure the insurance on the property is paid for until closing is complete. The laws about this requirement will vary from one state to another
- Signatures of all of the parties
Question: What is the Mortgage Contingency Rider?
Answer: The purchase agreement will often include this provision. It is also known as a financing contingency. If the buyer is obtaining a mortgage for the purchase of the property, they will include this. It will state that they have a certain amount of time to get the financing they want to buy the home. The amount of time will vary but is normally, 30 to 60 days. The buyer will also include the terms they have to get for their financing. They may want to be able to obtain a mortgage that has an interest rate below 6%. If they cannot get it, they can cancel the contract.
This clause is for the buyer. Sellers will often want buyers to get pre-qualified for a mortgage before they sign the purchase agreement. While a pre-qualification is not an actual approval, it is a good step to let the buyer know what type of mortgage they can get.
Because pre-qualification does not guarantee approval, the buyer will want to have this contingency in place to protect them legally. It allows them to get out of the deal without penalty. The seller may not agree to this provision because the deal can fall apart due to no fault of their own. It is not always easy to reach an agreement between the buyer and seller on this issue because of its possible effect on both sides.
Question: What is the inspection contingency for?
Answer: Most homes are typically sold as-is. The buyer accepts the home and anything that is wrong with it. A home inspection allows a buyer to have a professional come in to make sure the home is what the buyer expects it to be. The inspector does not go in and fix anything wrong on their home. They provide a report of any issues they may find and they may give estimates on how much it will cost to fix them properly.
There are two types of inspection contingencies that can be done. A buyer can have the inspection done and if there is anything wrong that they think makes the deal unfavorable, they can back out of the deal. Another type allows a buyer and seller to negotiate the issues that are found in the inspection. The seller can agree to have the issues fixed before closing or within a certain time frame at their expense, or they can offer to give the buyer money for the repairs that need to be done. The amount for money can be negotiated. Once they have agreed upon the amount, the buyer is responsible for making and paying for the repairs. It may be important to use a lawyer to make sure that this contingency is properly worded to protect both the buyer and the seller.
An inspection clause does not guarantee that there is nothing wrong with the property. The seller is not responsible for the work that the home inspector does. If they do not notice a problem, the seller does not have to do anything to fix it. It is not only important for the buyer to have a home inspection clause, they also need to find a good home inspector to do a thorough job.
Question: What is the attorney approval contingency?
Answer: It is a good idea to consult a lawyer to review the purchase contract. One of the provisions in that contract gives the buyer and seller the right to review the agreement. There is
usually a short amount of time for this. Generally, 3 days are given after the offer has been accepted. If this contingency is not included, the buyer and the seller are locked into the terms of the agreement, even if the agreement is not what the two parties think it is. A common way to state this provision is by saying: Subject to approval of an attorney within three days.
Question: What is earnest or good faith money?
Answer: When a buyer makes an offer on a property, they usually include good faith money. This money is held by the seller, the seller’s real estate agent or the seller’s attorney. The offer should include the amount of good faith money that is being paid, and that it should be placed in an interest bearing account. Any interest earned will be credited to the buyer at closing.
Earnest money is not a partial payment on the home. It is to show the buyers commitment to actually purchasing the property they are making an offer on. It shows they will do what it takes to close the deal. If the buyer does not take the steps to complete the process, they risk losing the earnest money that they have put up.