This is the fourth installment of the Adventures in Real Estate series and covers our For Sale by Owner process from evaluating offers through closing on the sale. Future installments of Adventures in Real Estate will cover selecting a buyer’s agent rebate realtor, buying a tear down property, selecting a construction company and building a new home.
Today I’ve organized the post by the salient features of a contract that you will want to examine, and I’ve woven in our personal story of how those features affected our sale. If you’re reading just to see how our relationship with the buyers soured, skip down to “3.b. HOA packet”. Sigh.
Having both been to law school and worked in law firms, neither Kent nor I were intimidated by reviewing contracts. That is not to say we understood everything perfectly. After we reeled in the contracts ourselves, our flat fee realtor Steve was invaluable in answering our questions and helping us understand the ramifications of different clauses.
When you’re evaluating a contract on a home, the first thing you look at is….
That’s all that matters right? Or at least, it’s what matters most. Sometimes that first big number is not the final story.
a. Realtor fees.
We had one offer of $650K with no buyer’s agent realtor commission. That meant that if we accepted that offer, we would not have to pay $19,500 to the buyer’s realtor, so we had to consider that $650k offer as the equivalent of a $669,500 offer.
b. Closing assistance.
Some buyers will request a cash allowance toward their closing costs. In that case, the offer is really the contract price minus whatever closing costs they are asking for.
c. Escalation clauses.
Many of the contracts we received on the house had escalation clauses. That’s an automated bidding war that gives an initial bid which rises by a set amount over any higher bid up to a best and final offer. Our clauses had escalation increments of $1000, $1500, and $2500. In order to trigger the escalation clause when you accept an offer, you must provide information about the other offer so they can verify its existence. The contract price then becomes the second highest bid plus the escalation increment.
Once you accept an offer, you want it to go through. Putting a house on the market twice is twice the energy, effort and expense. Also, a contract falling through for whatever reason can give the impression that there’s something wrong with the house. When a contract falls through, the second contract is often less than the first. Since contacts almost always fail on contingencies, the fewer contingencies in the contract, the better.
Around here, builders and investors might offer all cash with no financing. Most buyers, however, will be getting a mortgage through a lender. Information about their loan will be in the offer. Some red flags to look for are suspect lenders like “Hollywood Upstairs Savings and Loan” or extremely low down payments.
The lender pre approval letter included with the offer will have the top amount the buyers are approved to borrow. If the top of their pre approval is well over their offer price, that might indicate that their financing is secure. Don’t put too much stock in that number though. Buyers often have multiple pre approval letters written with different top approval numbers. They might not want to show their full hand like, “Hey, ask us for more money. We’re approved up to $9 mill!”
We actually went with an offer that was only putting 5% down. They were using a respected local bank we know well and getting a special loan for doctors. We were still concerned about their financing and probed further. They produced evidence of their cash reserves (which they were saving to put on a deck and furnish the place) as well as letters from their parents who were willing to give them cash gifts if necessary. More on this later.
b. Home Inspection
First time buyers will normally want a home inspection. They will hire an inspector to check out all the major systems of the home and make recommendations on what should be fixed. Then the buyers will usually ask the sellers to fix some or all of those things or for the sellers to lower the contract price so the buyers have money to cover the repairs. If the sellers refuse, the buyers can void the contract or suck it up and pay for the repairs–or suck it up and live without the repairs.
Waiving the home inspection was really attractive to us. We knew there would be little things that an inspector would pick up on, so the waiver of the home inspection represented a savings of money and hassle. By the time I put the house on the market, I felt like I was done fixing it up. Done. I was also keen to move my attention to other matters such as finding a rental property, hunting for a tear down lot, and choosing a builder and model for our new construction.
Unfortunately, after we accepted their offer which waived the home inspection, our skittish first time buyers kept trying to slip a home inspection through the back door. Their realtor emailed me to ask for the radon results of the home inspection we had done six years previously. We weren’t obligated, but we did furnish the radon test results. They also asked if they could come look at the house again with all the extended family. We let them do that, too. Then they asked more questions about the fence which I answered and even had the property management write them a letter about. Even though they were buying the house “as is”, there was no end of tire kicking.
During all of this, we started to get the feeling they thought they were doing us a favor by waiving the home inspection and that we were the bad guys for not just allowing them to do it as a courtesy. On our end, we remembered the other buyers who were willing to outbid their offer. We felt that the waiver of the home inspection was priced into their bid. Waiving a home inspection involves some risk and usually some extra money for repairs, but it also got them the house, so get out of my grill.
An appraisal contingency essentially gives the buyers the right to void the contract if the home appraises below the value of the contract price.
A couple of the offers we received did not make the sale contingent upon the appraisal, HOWEVER, even if the contract contains no appraisal contingency, if the buyers are getting a mortgage, there will still be an appraisal and its results could jeopardize the sale through the financing contingency.
If a buyer is getting a mortgage, their lender will order an appraisal of the house. The lender is trying to make sure the property is worth what the buyers are paying for it and generally will not lend more than the appraisal value of the home. When that happens, a) the seller can drop the contract price, b) the buyers can make up the difference from their own assets, c) both parties can move toward the middle, or d) either party can void the contract.
In a case like ours where our house was done up nicer than the average townhouse in the complex or the area, a zombie appraiser could have jeopardized the contract by low-balling the appraisal. I have been to three appraisals. The zombie appraiser walks in, looks around with glazed eyes, leaves, goes back to her office, averages the per-square-foot value of the last three sales in the area, multiplies that by the square footage of the property in question and appraises it at that value–regardless of the exact location, situation, condition, finishes and intangibles of the property.
We knew going in this was a possibility since the contract price reflected the work we’d put into the house not just the square footage, so we confirmed with the realtor and the buyers before accepting their offer that they would make up any difference between the appraisal and the contract price from their assets. Then we reconfirmed it. Then we had The Stever (our remote realtor) call and re-reconfirm it.
Still, I wanted the buyers to get the highest appraisal possible so they wouldn’t have to pay out of pocket or borrow money from mom and dad. So when the appraiser came, I did a couple of things to help the buyers get the highest appraisal possible.
First, I called the owner and realtors for the two properties that had sold in the past couple of weeks in our complex to ask their contract prices. Those sales were still pending, so the appraiser would not have had access to that information otherwise. Second, I printed out a sheet for the appraiser with a list of improvements to the property and their dates. Third, I thought it would be a good idea for the appraiser to know we had six offers on the property in four days and that four were above asking price, so I included information on the listing price and offers in the info sheet. Nothing gives a better idea of what the property is worth than evidence of what people are willing to pay for it, right? The buyers realtor also called the appraiser to tell him about the area including the new Mosaic District down the street.
They didn’t give me the final appraisal value (nor are they obligated to do so), but the buyers were happy with the appraisal. Their realtor said, “Good news! The house appraised at value.”
d. Sale of Home
Some buyers will need to sell their current property in order to purchase your house. If the sale doesn’t go through by a specified date, either party can void the contract.
e. Feasibility Study
If the property is being sold as a tear down, the buyers will ask for a study period usually of 7 to 10 days to have the site surveyed and investigated to make sure it is suitable for the use they intend, i.e. whether they will be able to build the house they want there.
3. Other Stuff, aka, Miscellany
a. Termite Inspection
The buyers may ask for a termite inspection, and they may ask the sellers to pay for it. A termite inspection usually costs a couple hundred bucks, and takes less than 15 minutes.
b. HOA packet
If the property is in a Home Owners Association, like a townhouse or a condo, the sellers must request a copy of all the HOA docs to be furnished to the buyers by a set date. When the docs arrive, the buyers have three days (or whatever is in the contract) to review them. If there is something in there that they just can’t abide, they can void the contract within those three days.
Our buyers got super freaked out by our HOA docs. They asked us to give them a full week to review the documents with the option to void the contract. We signed the addendum to the contract to let them extend the review period (giving them extra time to void the contract) even though we weren’t obligated to and it scared me to death. They still couldn’t get their answers. At this point, I was pretty upset. Did they have some hair-brained idea of building an addition on a townhouse or something? What was their problem?
I asked their realtor a couple times what the issue was. Finally, she told me that the HOA docs showed repairs to the common property that the HOA wanted to do, and the buyers were afraid the HOA would ask for an equal share from all owners to cover those costs. The buyers wanted assurances that this wouldn’t happen. I personally knocked on the door of the HOA president’s house to ask him about the repairs. He wasn’t home, so I went over to the VP’s house. He explained to me in some detail why a “special assessment” (that’s when the HOA asks for money above the usual monthly dues) was highly unlikely. Neither the HOA nor the property management company would ever guarantee there wouldn’t be an assessment because that is their legal right in case of disasters, but there certainly was no reason to expect one in the foreseeable future. I related all this info to the buyers’ realtor, and they were finally mollified.
(c. Home Owner’s Insurance)
This is not directly part of the contract, but it was part of our process, so I’m including it. The buyers have to secure home owners insurance in order to be financed by a lender. The buyers were really unhappy with the rate they were quoted. It turns out there is a national registry of home owners insurance claims that tells insurance companies about any claims on a property in the past five years. Even though we were the owners who put in a claim for water damage in 2010, all the insurance companies saw this claim on the property and jacked up the rate for the new buyers.
The buyers then wanted all sorts of info from me about the claim. They were afraid there was something major wrong with the house. I explained the malfunction of the toilet in the master bedroom to their realtor. She didn’t believe me. I explained in more detail and offered to show her documentation. She spazzed out, raising her voice to me over the phone and started claiming no one would insure them. I produced multiple points of evidence to the contrary including her own previous assertions. Then she let it drop. My guess is the buyers were really giving her hay for advising them to take a house without a home inspection. In truth, the home inspection would have showed nothing from the water damage because all the damage had been thoroughly repaired.
At this point after going above and beyond doing all sorts of things for them that I didn’t have to such as producing our radon test, letting them and their extended family inspect the house an extra time, doing my utmost to get them a high appraisal so they wouldn’t have to pay too much money out of pocket, giving them extra time on the HOA doc review, personally hunting down answers to their HOA questions that they couldn’t hunt down themselves, and now offering more info about our insurance claim, I was affronted that they doubted my veracity about that insurance claim.
They seemed to be making a big deal out of every little thing, and the more information I gave them, the more they nitpicked me. The worst part was that despite repeated requests from me, their realtor refused to cc my realtor on any correspondence or to call him on anything. She seemed to think she could get more out of me because I was the owner, and up until this point, she had been right.
That’s when I quit playing on their team. Which leads us to:
d. Final Walk Through
Not more than 5 days before closing, the buyers and their realtor will walk through the house to make sure it’s in the same state as it was a) at the time of the home inspection, or b) at the date of the contract if there was no home inspection contingency. This is just meant to ensure that the sellers don’t trash the place or stop maintaining it after they accept an offer.
The buyers and realtor went through, and then the realtor sent me a list of things they thought we had broken or misplaced since the open house. She also said the house wasn’t fully cleaned when she was there (which was true as the movers were still hauling out furniture) and asked for a second walk through even though we were supposed to be closing the next day.
This is the message I sent her:
“Hello ______,I am happy to address your questions from the final walk thru.1. The window in the foyer has always been difficult to open, though to my knowledge, has not been sealed. All of the windows in the basement open and have been recently opened. There is no trick other than fully sliding the latches open.2. One screen is in the closet of bedroom three. The other screen frame is in the garage. All of the screens are in the exact location and condition as on the date of contract.3. The floor in the hall bathroom is in precisely the same condition as on the date of contract. Indeed, both the cracks were there and noted in our home inspection five years ago. I cannot say what caused them as they predate our occupancy, but to my knowledge they have not changed in years.4. The one broken shade on the breakfast nook light fixture is in the same condition as on the date of contract.We were advised by our agent that upon the date of final inspection to occur not more than five days before closing, we did not need to be moved out nor have the property in the condition of its ultimate delivery.However, rest assured the house has now been cleaned and emptied with the exclusion of the usual transferable home-maintenance items such as paint, extra flooring materials, etc. We fully intend to deliver the property as per our written agreement, in substantially the same condition as on the date of contract, cleaned and broom swept.Regretfully, we are unable to accommodate a second final walk thru. ____, I have repeatedly asked you to cc my realtor, Steve Toop, , on any and all emails to me and NOT to remove him from the copy list when responding to any of my communications as he represents me in this transaction. Should you have any further inquiries before closing, please contact Steve directly.”
The standard around here is to close five weeks after the contract date. All the lenders out here are overwhelmed though, so don’t be surprised if your closing gets pushed back. Our title company told us on average the lenders are missing 30% of their closing dates. “It seems like every closing is supposed to be morning, then pushed back to evening, then pushed back to the next day.”
b. Title company
The buyer will suggest a title company in their offer, though they are often open to negotiation. It is also common for the buyer and the seller to use different title companies if they prefer.
(c. Title Insurance)
Again, this was not explicitly part of our contract but part of our process. Two weeks before closing, the buyers asked for proof of our title insurance so they could get the reissue rate which would save them $500 or $600. Kent immediately sent them what we had which was the commitment for title insurance not the actual title insurance. They didn’t follow up on getting the written policy from our insurer, but then at the last minute, hassled us over and over to look through our documents for the actual title insurance. And we did look through each sheet of paper of the hundreds and hundreds of pages we had on the house sale. Over and over. The day before closing we said again, “Sorry, this is truly the only info we have”. Immediately after, we got word they weren’t going to be able to close tomorrow.
We had planned to go to closing with the buyers, but after the to-do with the final walk-through, the title insurance, and our closing date being pushed back twice, we decided to go in ahead of time and sign separately. We left the keys and garage door opener with the title company. There had been times when I had thought of getting the new owners a house warming gift like a potted orchid or even leaving them $500 worth of drapes in Fluffy’s room that they had so admired, but by the end, I was tapped out emotionally. I just wrote them a couple of nice lines in an email. I had so wanted to be able to shake hands with them and wish them the best in this house that we have loved, but it didn’t turn out that way.
Even after they’ve bought the place, if they have your contact info, the new owners can be up your butt forever. I’ve since fielded requests from their realtor for more garage openers and different mail keys, as well as questions about the flooring company we had do the hardwoods on the main level. Next week, they’ll ask me for something else, I’m sure. (I wrote that sentence last night, and this morning, I have an email in my inbox from their realtor asking us to buy them a new fireplace remote control which was never in any contract. Eyeroll.)
Every time the new owners had an issue, my realtor, Steve would say, “They are doctors aren’t they? I used to be an accountant in a former life, and in my experience, the doctors are always the problem clients. They never understand the simplest financial matters or have any common sense.”
Since my exceptionally bright brother and exceptionally bright brother-in-law are both doctors, I have to disagree. But it did comfort me every time Steve said it. And there were times I needed comforting.