Your Real Estate Contract: Let Reason Be Your Guide for a Successful Transaction
There’s more than meets the eye when it comes to your real estate contract. Its well-laid out terms may seem concrete, but, in reality, they can lend themselves to differences that make for a potentially tumultuous deal.
The contract that governs the transaction assumes a standard of objective reasonableness. Objectivity is hard to define when you are buying your first home or selling the home where you raised your kids. Accordingly, the success of a deal relies heavily on the buyers’ and sellers’ ability to appreciate and understand the other side’s point of view. Ridiculous demands or senseless obstinacy will get in the way of your sale or purchase. Buyers and sellers should approach the transaction with a view towards reasonable negotiations to achieve a successful closing.
A lot of human nature
The contract protects buyers and sellers by laying out the parameters of the transaction. It earmarks the timelines, conditions, and action items that must be met and performed by both parties prior to closing. Still, there’s a lot of movement underneath, around and in the middle of these three categories. With a whole lot of human nature in the mix, plus the involvement of lenders with their independent timeframes, the combination can be deadly.
Learning about the process before entering into a transaction can prevent you from being blindsided by any unexpected pitfalls. Increased awareness also gives you the time to prep and plan some strategic responses if and when the going gets tough.
Your real estate broker and attorney are the perfect partners to help educate you and to guide you as you navigate the process. Seek out professionals who put your interests first. Ideally, they’ve already represented both buyers and sellers. Because they’ve viewed real estate deals from both sides, they bring a broad perspective to your transaction and can share helpful insights from both sides.
They can also prepare you for some unexpected pitfalls you may encounter along the way. Of the three primary contract contingencies—the home inspection, financing, and title—the inspection and financing are the areas in which emotions run high and people can get stuck in the weeds.
Potential Snag 1: Inspections bruhahas – the negotiation within the negotiation
Purchase agreements are typically contingent on the buyer’s satisfaction with a third-party home inspection, which is requested and paid for by the buyer. Following the inspection report’s findings, buyers and their attorneys may request remedies from their seller. Sellers must respond to the buyer requests and can agree to make the repairs, legally refuse to make them, or agree to make some and not others. If the seller refuses some or all of the repairs, the buyer can withdraw from the sale. Alternately, they can compromise.
The dance between the buyer and seller in this regard centers around the question of whether the repair being requested constitutes a “material defect” under the contract. Typically, material defects involve issues with a system or component of a residential property—think furnace, HVAC system or roof—that may have a significant, adverse impact on the value of the property. It may also pose an unreasonable safety risk to residents. Faulty plumbing, a leaky roof, mold, the presence of radon or insect infestation are among the items that are considered material. Paint colors, bathtub drains or unappealing light fixtures, for example, are not.
The debate about the materiality of a defect in the gray area in between these examples is where the dance is most intense. Sometimes buyers don’t understand they are buying a used home and not a new one that’s free of flaws. In turn, sellers view the buyers as unreasonable with too-high expectations. But no matter how mad they get about the buyers’ demands, they need to weigh the cost and hassle of making the repairs against the ultimate outcome of selling their current home. Experienced brokers and attorneys can help the parties navigate these conversations and offer perspective that can save a transaction.
Potential Snag 2: issues with your lender
Many buyers submit a pre-approval with their purchase offer, leading some sellers to believe the proposed purchasers are rock solid financially. It is critical, however, for both parties to recognize that a mortgage pre-approval, typically issued after a cursory review of finances by a lender, is not a commitment to lend money and never guarantees the buyer’s ability to obtain financing.
Banks tend to move at their own pace in the commitment process rather than focusing on the on or about dates detailed in the contract. The wait time can cause buyers and sellers to be on pins and needles. The deafening silence can make sellers think the worst and lose trust, because they wonder if something is going on that is either troublesome or less than transparent—or both.
Part of the process also includes a determination by the lender of the value of the sale property. The appraisal’s failure to equal or exceed the listed value of the home can create an additional obstacle to closing. The buyers can make up the difference by ponying up more money. Or, they can try to negotiate a lower purchase price with the sellers. While this may be a more appealing option than having to relist the property, incur additional carrying costs, and look for new buyers, sellers often have their hearts set on a dollar amount they want or need to take out of the sale. They also can get hung up on the emotions attached to their home.
As a protection for buyers, most contracts include a financing contingency which allows buyers to back out of the deal if they cannot obtain necessary funding. Contract clauses such as these are designed to protect buyers and sellers. Though they do indeed offer protections, backing out because of an inability to compromise could be considered a needlessly self-destructive reaction to a problem. In the end, nobody wins.
So a lot can go wrong
A lot can go wrong if buyers and sellers fail to act with reason.
There are no guarantees that your experience on the road to closing will be hassle free. Still education, preparation and alliance with trustworthy experts along with a strong dose of self-discipline can keep you thinking on your feet. At the end of the day, if you approach your deal with reason, you’ll stay on course to closing and the exciting passage beyond.
At Phelan, Frantz, Ohlig & Weqbreit, LLC, we’ll help to provide education, insight and perspective in your real estate transaction. Please call us at 908.232.2244 to learn how we can assist you to effectively, efficiently and successfully navigate to closing.
BUYING OR SELLING A HOME: CURB YOUR EMOTIONS
Use These 6 Tips to Sail Smoothly to the American Dream
Homeownership is often dubbed as the symbol of the American Dream. Those words pack a whole lot of emotion into the act of buying or selling a home …whether it’s your first house, a bigger house, or the house to which you right-size when you want to pare down the logistics of your life.
There’s no denying that a real estate transaction is one of the biggest financial transactions you’ll make in your life. Keeping your emotions in check is important. Clear-headedness pays off. And part of that clear-headedness is partnering with the right professionals, to help you set sail, navigate effectively and finish the race with as little stress as possible.
Choose the right real estate broker or go solo
Real estate brokers and real estate attorneys are knowledgeable about the ins-and-outs of real estate transactions. To say the least, it’s helpful to have these professionals in your corner.
Choosing the right realtor, for example, can make a big difference in the outcome of your purchase or sale. You want to work with a realtor who’s experienced and knowledgeable of the area in which you’re buying or selling. You want to partner with a realtor who actively listens to you and focuses on your needs first, not their commission.
While the majority of residential real estate deals are done with the help of a realtor, some transactions, termed FSBOs (for sale by owner), are executed without realtors, leaving buyers and sellers to negotiate the terms of the sale first, on their own, and then, with the assistance of a real estate attorney who can put the agreement into a binding contract.
Select an experienced real estate attorney
Almost all real estate transactions begin with signing a real estate contract. This legal document is the most important document in the entire transaction, because it establishes the rights and obligations of the buyer and the seller. Once the contract is finalized, the buyer and seller are bound by its terms. Surely, either party will regret if they did not understand all the terms of the contract or if the language in the contract describes something other than what you intended.
That’s why it’s always important to have an attorney experienced in real estate transactions review your contract and the terms of your purchase or sale. It’s also advisable to choose a legal professional who works in the town or immediate area in which you are buying or selling a home. Knowledge of local issues can protect against issues that could affect the sale price or create problems down the road.
Although real estate brokers use a “standard” contract, one “size” does not always fit all situations. A given provision in a contract may be appropriate for one transaction, but not for another. An experienced real estate attorney can identify any potential problems and ensure that your interests are adequately protected.
Understand the attorney review process
New Jersey is unique in that each standard broker’s contract contains a provision to allow for an attorney review of the contract. This three-day attorney review period is the time when both the buyer and seller have the right to consult with an attorney, to review the terms of the form contract, and make changes to protect each side of the distinctive transaction. Part of this process is making sure that the parties preserve the right to terminate the contract under certain circumstances and walk away without any further obligation to each other.
Granted, the thought of cancelling a transaction you have your heart set on may seem disturbing. But getting involved in a purchase or sale in which your best interests are not protected is even more troubling, because that contract could have financial or other ramifications down the road.
Turning to the professionals, however, does not free you of responsibility in the process.
Be proactive. Even if your agent is scouting out homes for you, scan the listings and attend open houses on your own—even listings that are FSBOs. These activities will help you clarify your thinking and communicate your wants and needs more clearly to your broker.
You may or may not start out knowing exactly where you want to live. There are many factors that will influence your decision. Proximity to work, quality of schools, access to transportation and the amenities of a community if you’re in a downsizing mode. Ask around among friends and colleagues and search the internet. Drive around to get familiar with places that interest you. Eat lunch in local restaurants and shop in the supermarkets to get a sense of the environment.
Learning as much as you can about the home-buying process is also important. Turn to the internet to become familiar with the market values of area homes that meet your requirements. Acquaint yourself with real estate documents as well as the various steps in the process such as attorney review, home inspections, title search and closing.
Sometimes what you wish for can exceed the money you have to comfortably spend for a new home. It can also prevent you from establishing a realistic sale price. If you’re a buyer, get real by establishing a budget and sticking to that budget by looking at homes you can afford when you begin your search.
Typically, you’ll have to apply for a mortgage to buy a home. Your credit score will be a prime factor in determining how much money a bank or mortgage lender will let you borrow—even more, if they will provide you with a mortgage approval. There are many sites that will allow you to review your credit score for free without lowering your score. Do your homework beforehand. Engage in the mortgage application process knowing your score.
Plus, watch your debt. Pay off as much as you can before you apply for a mortgage. Above all, avoid making huge or outlandish purchases before or during the mortgage approval process. Finally, engage with a mortgage professional before you’ve made an offer on a home – having a mortgage commitment (as opposed to just a pre-approval) makes you a much more attractive buyer in a competitive market.
Your perspective will, of course, be different as a seller. You love your home and the memories and stories it holds for you. Again check your emotions. Your memories and stories do not have a dollar value. You must price to sell. Establish a sale price that compares with homes in your market that are similar to yours and have recently sold. Your realtor can provide these comps (prices of comparable homes) and use them to advise you on a realistic sale price that will attract buyers.
Prep and communicate to manage the nerve-wracking moments
Knowing what to expect and the potential pitfalls will prevent you from being blindsided. A buyer is contentious, a seller is intractable. The home inspection may leave a seller with too many changes or a buyer dissatisfied with the response of a seller to desired fixes. An even worse nightmare: things could go wrong at the 11th hour and interfere with your closing. If and when glitches arise, be measured in your reactions. Communicate your opinions and wishes thoughtfully and intentionally to your broker and lawyer and end every conversation with the certainty that they totally understand your viewpoint.
While there are no guarantees that you will experience a totally stress-free transaction, following the above guidelines will help to make for smoother sailing. Partner with experts and stay on top of the details of the transaction so that monies are exchanged, and the ink is totally dry on your designated closing date.
That way, post-closing when you turn the key in the lock of you new home or say good-bye to the house where you’ve lived and set off on a new adventure, you can take a huge sigh of relief, finally get emotional and luxuriate in the American dream.
At Phelan, Frantz, Ohlig & Weqbreit, LLC, we take our responsibility to be your advocate when you’re buying or selling a home seriously. Please contact us if we can be of assistance in helping you effectively and efficiently navigate your real estate transaction.