Selling Your Home? Keep Your Eye On the Ball to Get From Contract to Closing
Selling your home is a major undertaking, and there are many tasks required to move from contract to closing. If you take your eye off the ball, a lot that’s preventable can go wrong. Heed these reminders to prevent your home sale from coming to a screeching halt.
It’s All in the Pricing: Make Decisions Logically, Not Emotionally
2020 has been an epic year for the suburban New Jersey real estate market as city dwellers flock to the suburbs, in large part because of COVID-19. The increase in prospective buyers led to bidding wars which in turn led to many houses selling for tens of thousands of dollars (sometimes more!) over the listing price. Higher than normal pricing worked for sellers if their buyers were purchasing without a mortgage but against them when buyers needed to borrow to complete the sale. Because comparable pre-Covid sales could not support the high selling price, in many cases a lender’s appraisal did not match the agreed upon purchase price. This puts the parties in a position of having to scuttle the deal or renegotiate the purchase price if a buyer cannot or is unwilling to pony up the extra cash or restructure the terms of their financing.
It’s important to remember that price is a reflection of market circumstances, past sale performance on comparable properties and what the current lending market will bear. You must temper the excitement of bidding war reality and bring your house to market at a fair and reasonable price. Pricing your home is one situation where following just your pocketbook can get you into trouble and leave you holding the bag on what you thought was a done deal.
Freeze Your Equity Line
Unlike a conventional mortgage, a home equity line is like a credit card that can be used by a homeowner to make purchases that have no relationship to the property. However, the line of credit is secured by the property and the bank that extends the credit has a lien on the property as a means of insuring they are paid back.
Although the proceeds of your sale can be used to pay off your home equity loan balance at closing, the title company and buyer’s attorney will require that the line has been blocked or frozen from future use well in advance of closing. This prevents a seller from making a last minute, high-price purchase which is not reflected in the payoff amount and prevents the release of the bank’s lien. It often takes banks weeks to issue formal confirmation that a home equity line has been frozen. And while your attorney may be able to obtain the payoff amount, she will not be able freeze your home equity line for you. To avoid closing delays, homeowners should request a “freeze letter” well in advance of closing.
Dig out the Paperwork: Poor Recordkeeping Could Get You Into Hot Water
Decreasing interest rates have caused many homeowners to refinance their mortgages, and you may be one of them. In any refinance or lender change, documentation is required at the conclusion of each loan to verify that the loan has been properly discharged. It’s wise to have these documents on hand to move your real estate deal forward. Left undone, a title search may reveal undischarged liens on your property and, once again, prevent your buyer from getting clear title. This is another potential obstacle that can be prevented by keeping records related to all refinancing and associated loan payoffs through your period of ownership.
Cover Your Bases: Get the Necessary Certificates From Your Town
Two key municipal certificates may be required to move your closing to final: the fire inspection certificate that confirms your fire alarm system, carbon monoxide warning system and fire extinguisher are functioning properly; and a certificate of occupancy. Failure to schedule inspections confirming that everything is up to speed can delay your closing. Your realtors typically will arrange these inspections, procure the documents and deliver them to your attorney in advance of closing. If, however, you’ve sold your house on your own, you will be responsible for arranging the inspections and getting the documents. No documents, no closing. So make sure these items are on your closing preparation checklist, and this includes reaching out to your realtor to make sure they’ve taken care of this detail as well.
The Past Can Haunt You: Disclosures and Permits are Necessary to Complete the Sale
If you’re like many homeowners, you’ve likely made improvements to your home during the time you lived there. Relatively minor renovations, like replacing flooring or countertops, can generally be done without obtaining a permit from your local municipality. But major projects like a new roof, an addition or other structural work, electrical or duct work, water heater or HVAC replacement may require a permit prior to getting started. The permit is more than a rubber stamp. The permit means that your town knows that the work is being done and inspected the work upon completion of the project to confirm it has been done to code. You should file an Open Public Records Act (OPRA) request with your town’s building department when you list your home to confirm that all permitted work has been properly closed. If your prospective buyers find an open permit first, it may be difficult for you to schedule the appropriate town inspections to get the permit closed before your scheduled closing.
Be Ready for the Final Walkthrough: Do What You Say
The final walkthrough is the inspection that takes place a day or two before closing. The walkthrough is designed to make sure that repairs negotiated in the original home inspection have been completed, that all major mechanical systems are still working properly, and that the items you committed to leaving for the buyer in the contract (e.g., refrigerator, washing machine, a wall-mounted TV, etc.) are still in the home. Your house must also be in the same condition it was when you signed the contract with the buyer and there can be no physical damage from the move.
During the final walkthrough the buyer makes certain that all repairs negotiated in the original home inspection have been completed. Typically, receipts or other documentation of completed remediations are turned over to your attorney following your receiving an inspection checklist and negotiation on the items that will be completed. Forgetting to actually complete an inspection item or shortcutting the solution by completing it sloppily can cause your buyer to put the brakes on closing. Failure or forgetfulness in doing what has been required in the home inspection can delay closing and how long the delay or whether the deal will be canceled will depend on the magnitude of the issues involved. Alternately, you may have to make a financial concession to the buyer which lessens your profit. Money may also be held in escrow until the appropriate remediations are made. But if you and the buyer can’t reach agreement, your closing stands the risk of delay. And because omissions such as these may interfere with the trust with which your buyer approaches the deal, you risk your sale being terminated.
It’s Not Over Till It’s Over
When it comes to selling your home, no truer words were ever spoken. If you want to get from contract to closing, you need to cover all your bases. Think reasonably. Be on top of every detail. Follow through on everything you say. It’s only then that you can be certain that you have done everything you could to ensure a successful sale experience and enjoy the freedom to move on to your new home.
At Phelan, Frantz, Ohlig & Wegbreit LLC, we understand that selling your home is a huge and important undertaking. We are here to guide you in your decision-making and ensure that you complete all the proper steps that lead to a successful sale.
Call us at 908.232.2244 and enjoy the seamless selling experience that will ready you for your next passage.
Enroute to Your New Home: You Could Be Headed for a Buyside Flop Without the Appropriate Due Diligence
It’s a crazy real estate market right now in large part thanks to COVID-19. In the tristate area, people have been flocking from the city looking for suburban surroundings in which to raise their families. Eager buyers have bid up prices as they vied to land that very special house they were determined to call home. It’s been an exciting, heady time, and for both buyers and sellers, there were many happy outcomes.
It’s always gratifying to see clients achieve what they set out to accomplish. Unfortunately, however, not all the stories have happy endings. Sometimes buyers get so set on a particular house that they’re willing to cut corners to have their offer accepted. But as human nature can sometimes show us, over-eagerness can cause even positive events to turn sour. In matters of the heart, that could lead to a bad marriage. And, in real estate, much like with love between partners, acting too quickly, can cause deals to go south.
There are standard precautions you should take in doing your due diligence on a new home that can prevent a deal breaker from turning up too late. We can’t guarantee that taking these precautions will prevent you from being disappointed if you uncover an undesirable issue that prompts you to withdraw your offer. But thoughtfully approaching what is likely to be one of the biggest purchases of your lifetime will save you from the risk of lost time, lost money and an abrupt end to your transaction that may have steep financial consequences and the lost opportunity to bid on something else.
Here are three instances when moving too quickly and without appropriate due diligence could cause your real estate deal to implode.
Decommissioned Oil Tank: Far From Buried Treasure
Back in the day, the trend was for homeowners to convert from expensive oil heat to gas. To do this, the practice was to decommission the oil tank – most often located underground – by pumping out the oil and filling it with sand. Fifteen years ago, there was no reason to worry—or so it seemed. In most instances, this practice was sanctioned by town inspectors and environmental regulators. We have since learned, however, that many of the decommissioned tanks had holes and had leaked before they were decommissioned. For this reason, industry standard today dictates that even properly decommissioned tanks be removed.
Particularly in and around Union County, it is recommended that every potential home purchaser conduct a scan for underground tanks during the inspection period. Discovery of a tank can derail a transaction, particularly if the parties were intent on a quick close. If the tank is pulled and found to have leaked, soil remediation must take place and the New Jersey Department of Environmental Protection must review the test removal, remediation, and test results in order to issue a No Further Action letter sanctioning the work that was done.
Anxious buyers might be tempted to take a credit for tank removal to allow the sale to go through. But underground oil tanks represent an unknown financial liability. Remediation is costly, and it’s difficult to predetermine the cost without testing. A small leak can cost $5,000.00 to $10,000.00—larger leaks tens of thousands of dollars.
Even worse, you could close on the property and move into a nightmare: discovery of an active spill that has reached the water table. What if traces of the oil get into your new next-door neighbor’s water? Contractors are telling you that you could be spending $120,000 or more to clean it up.
If you’ve set your sights on an older home that weathered the transition from oil to gas, it’s imperative to hire an independent environmental company to test the soil and the tank for leaks and corrosion. A written report certifying that the tank hasn’t leaked and tainted the soil is the only proof that can guarantee that the property has not been compromised by oil.
Waive the Appraisal Contingency: Pay a High Price for a Low Appraisal
The appraisal contingency is very important when you’re financing your purchase, because lenders rely on the value of the home in determining how much money they will loan you. Buyers seeking to borrow 80% of the purchase price need the home to appraise at full value or else they face having to restructure their financing, pay private mortgage insurance, or find ways to come up with additional cash to close. That said, waiving the appraisal contingency has become a trend in a highly competitive market as a way to beat competing bids from other buyers. It is important that you fully understand what you are giving up if you intend to take this tack. Do you have funds to make up the out-of-pocket difference? Or, even if you have the money, would paying extra eat up your cash and/or savings?
Understanding the Importance of the Title Contingency and Title Insurance.
A title search will dig up all kinds of information—things like if there are any liens on the property or, believe it or not, that a third party has an interest in your home. A title search may reveal that the seller has failed to pay their income taxes for a period of time, leading the IRS to put a lien on their home. If the seller also has a mortgage, it may be that the proceeds from the sale are insufficient to cover the amount due on their mortgage and the amount owed to the IRS.
In another troublesome scenario, a title search could reveal that a distant relative, or an ex-spouse, actually has a claim to the home’s ownership. The third party can rightly say that the seller did not have permission to sell the house to you. If that happens, a judge could support the party’s claim.
Part of the title search includes paying for a survey of the property to make sure there are no encroachments (from neighboring fences or sheds) or easements on the property that interfere with its use. Some buyers are reluctant to pay for a survey, feeling it is an unnecessary additional cost among the many expenses of buying a home. Reluctance to obtain a survey to save a few hundred dollars can have a tremendous impact, however, if these issues later are discovered.
The title search gives everyone a chance to eliminate trouble spots before proceeding with the sale—or to call the sale off, if anything too serious is uncovered. The title insurance policy purchased during the transaction provides future protection if these issues arise after closing. The important thing to remember about not cutting corners on the insurance is that you must purchase title insurance to protect you as well as your lender.
Long story short, it is not worth it to cut corners in purchasing a house, even if you believe it to be the home of your dreams. If you waive any of the above protections, and then find an issue that leads you to want to terminate, it can create a dispute with the seller about the legitimacy of your termination and may put your deposit at risk. Trust that there will always be another property if the first one doesn’t work out and protecting yourself is the best path forward.
At Phelan, Frantz, Ohlig and Wegbreit, LLC we want nothing more than for you to have a seamless closing and a purchase that gets you the house you want. But we also know that moving too quickly and without the proper due diligence can result in financial consequences, lost time and the huge disappointment of a transaction that could be abruptly terminated. While ultimately, decisions are yours, we want to remind you that contingencies, inspections, and title insurance are rights to which you’re entitled. Our guidance is always to exercise the due diligence activities appropriate for your transaction and circumstances. Because our goal remains constant: enabling you to purchase the home you want and being in the position to fully enjoy it.
Editor’s Note: This is the first in a two-part series that describes how home buyers and sellers sometimes fail to include important contingencies in their real estate contract and exercise the appropriate due diligence—and they end up with a deal that flops.
Call us at 908.232.2244 to schedule an appointment and turn your homebuying dreams into reality.
THE DEVIL IS IN THE DETAILS OF YOUR REAL ESTATE DEAL
GET AHEAD OF THE SNAGS EVEN IN DIFFICULT TIMES
You’d think with house sales reaching almost six million in the United States over the last few years, the process of buying and selling a home would be commonplace. Perhaps. But real estate contract details are so numerous that they can prove tricky, triggering the well-known adage about best laid plans going awry.
From the moment your real estate attorneys go to work creating and reviewing the contract, you should make sure to understand what you’re signing. A contract is still a contract even in these difficult times— especially if you’re in the middle of a sale. Whether it’s during “normal” times or during our new normal: Ask the right questions. Fully understand your responsibilities. And know your deadlines during the various stages of the buy/sell process. Anything less could throw a monkey wrench into the sales process and delay—even worse, scuttle—your deal.
An important laundry list of real estate contract details
Many state realtor associations have developed a boilerplate contract that features a laundry list of details. These include:
- The names of the parties, a description of the property and the purchase price
- The rights and obligations of the parties
- The condition of the property, including what personal property is and is not included in the sale (e.g., refrigerators, washing machines, smart TV’s, etc.)
- The amount of the earnest money deposit
- The proposed closing date
- The terms under which the buyer can take possession of the property
While our attorney review systems—even closings—may be virtual during this pandemic crisis, the contract requirements will not change.
The big three: common real estate contract contingencies
Typically, real estate contracts include contingencies, actions the parties must perform and complete for the deal to close. Contingencies reduce risks for buyers and sellers and give either party a chance to legally back out of the purchase under certain circumstances that will make it difficult for them to complete the sale.
The three most common contingencies require buyers to initiate certain actions:
- Home Inspection – allows buyers to “kick the tires” by hiring a licensed home inspector to evaluate and provide a full picture of the condition of the interior and exterior of the property and its systems and receive recommendations on repair.
- Financing – gives buyers the time to apply for and be approved for a loan that will combine with their down payment to cover the home’s purchase price; not to be confused with a pre-approval letter which simply starts the mortgage application process, financing requires underwriting during which the lender thoroughly evaluates the buyer’s financial capability to buy the home and confirms that the property appraises at a value that squares with the needed loan amount
- Clear Title – provides buyers with an official ownership history of the purchase property title and ensures it is clear of liens, disputes, or other issues.
During the pandemic, the practices around contingencies may require virtual rather than face-to-face handling. But the resolutions around each contingency remain the same. Following the home inspection, financing and appraisal contingency reports buyers and sellers may have to renegotiate terms. For example, following the home inspection, the buyers may request repairs that sellers refuse to make; the buyers’ loan application may be rejected following the underwriting evaluation; or in the case of the appraisal, the market value of the home may fall below the amount needed to support the buyer’s loan application. If the parties cannot compromise, they may legally walk away from the deal.
As for the title contingency, a title search can reveal unknown situations which make transfer of title to the buyer difficult—and sometimes irresolvable. Overall, according to Homelight, 11 percent of closing delays come from title issues. More startling, they may come as a surprise.
In a typical situation, the title company will review the title on the purchase property and resolve any issues. But there can be worst case scenarios. Say the title reveals that an easement falls on the property line right where a buyer wants to build a fence or put in a pool. Liens or debts can also cloud a title. The title contingency gives buyers a way out of the contract.
A buyer’s favorite
One additional contingency, the home sale contingency, is a favorite among buyers. This contingency allows buyers a specified period to find a buyer for their current home. If they can’t find a buyer within that time, they have the freedom to walk away from the sale.
Unfortunately for buyers, this contingency isn’t loved by sellers who risk taking their home off the market for little-to-no assurance that the buyer will ultimately be able to complete the purchase.
As a buyer, you can still choose to include it but recognize that it can weaken an offer, especially in a hot market.
Meet deadlines and don’t get cold feet
Contract contingencies and the outs they provide are one element to the contract. But buyers—and sellers—can’t simply get cold feet and bail. What’s more, buyers’ feet are held to the fire to meet all target dates. In addition to a timeframe for scheduling the home inspection (typically 14 days from contract signing), this includes deadlines such as:
- The due date for earnest money – This is paid upfront at the time of the offer; earnest money serves as a good faith deposit and signals sellers that buyers will honor the contract and perform on deadline. The earnest money deposit is held in escrow, or kept in custody, by one of the real estate attorneys until the closing. At closing, the title is officially transferred from seller to buyer.
- The due date for a mortgage commitment – This is the date by which a buyer must produce a commitment from a lender to loan money for the purchase of the price. More substantial than a preapproval letter, the commitment typically is issued only after the buyers’ financials have been thoroughly vetted and an appraisal has come back at the right amount.
In worst case scenarios, failure to perform on the contract can result in breach which occasionally can turn into a battle over any earnest money deposit. A seller may seek to retain the deposit to cover any damages, although likely will have to initiate a breach of contract claim to receive any money. Both parties should seek to avoid this result.
Final walk-through surprises
It’s incumbent on sellers to leave their homes in the condition specified in the contract. Buyers verify the sellers’ compliance during the final walk-through. Truly the time when the rubber meets the road, this inspection is an important part of the sales process. It is also one of the most common causes of a delayed closing.
Anything from the home not being empty, to it being damaged from the move or dirty, to property that’s missing but specified in the contract (e.g., a seller promises to leave the washer and dryer but inadvertently takes it), to negotiated repairs left undone…these are among the things that can wreak havoc near the end of the sales process.
Not over till it’s over
In fact, sometimes even closings go awry and, believe it or not, many of them do. For example, the closing can’t go through unless a closing disclosure form is signed by the buyer. If this form is to be signed on time, the title company or mortgage lender must send the document to the buyer no later than three days before closing so that the buyers can review it thoroughly and understand what they’re signing. If your closing is scheduled for Friday, the buyer must have the CD in hand by Tuesday or you’ll have to reschedule the final paperwork.
As crazy as it sounds, sometimes the seller and buyer get their signals crossed about move-in day timing. Realtors have reported that they’ve had moving vans in the driveway and the buyers crying because the sellers have not yet moved out.
And among the worst of situations that can disrupt closing: buyer financing issues. Over a third of closing delays may put your sale at a stalemate. With the business shutdowns of the current pandemic, your buyers could lose their sole source of income abruptly and unexpectedly. Or, in more stable times, the buyers could simply go on a shopping spree to furnish their new home. Either of these scenarios could cause the lender to question the buyer’s ability to keep up with mortgage payments.
ATTORNEYS HELP NAVIGATE CONTRACT DETAILS
From offer to final signature, a home sale requires a million little details to come together without a hitch. By working with your agent and your real estate attorney you will not only come to understand the contract but also anticipate snags. Whether it’s during “normal” times or during our new normal, understanding the contract details will enable you to be proactive rather than reactive, expect the unexpected, over-communicate, and act quickly to address problems. There’s no better path to a no-glitch closing
At Phelan, Frantz, Ohlig & Weqbreit, LLC, we’ll help to provide the education, insight and perspective about your real estate contract and your transaction. Please call us at 908.232.2244 to learn how we can assist you to effectively, efficiently and successfully navigate from offer to closing.
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.