E-Newsletter Archive

July 2004

A purchase contract primer It's important to ask questions when you're drafting the terms and conditions of your offer in the purchase contract, whether you do it yourself or with an agent or attorney. more Inspection problem option Recently a home buyer in Oakland, Calif., discovered during the home inspection that there were foundation problems. After consulting with an engineer, he learned that the problems would cost approximately $10,000 to repair. more How much work should you do before selling? Recently a couple that owned a home in Berkeley, Calif., decided to move to neighboring Piedmont. They started their search by visiting Sunday open houses. more Creating a home buying strategy If you want to buy a house, start by estimating what you can afford and making a budget to buy. more

A Purchase Contract Primer

It's important to ask questions when you're drafting the terms and conditions of your offer in the purchase contract, whether you do it yourself or with an agent or attorney.

Not sure about contingencies? Wondering about fixtures? Just ask. You don't have to become a real estate expert to craft a good contract, but the more you know about how a contract works, the more effectively you can tailor it to your specifications. You'll also be a much savvier negotiator when the seller comes back with a counteroffer.

Read the Fine (Pre)print

Many residential purchase contracts include standard real estate boilerplate text. Many firms, in fact, use preprinted forms. While preprinted or computerized forms have improved efficiency, they sometimes do so at the expense of the buyer. It pays to get a copy early on of the contract you're likely to use. Read it and don't hesitate to rewrite or delete anything you don't like. If you plan to work with a preprint, get a copy when you start looking for a house and highlight terms or conditions you like or may want to modify when you make an offer. Circle what you dislike, too. This is a good way to catch buyer-unfriendly fine print. After that, you're ready to sit down and write an offer.

Elements Every Contract Should Have

Whether you write your own contract or using a preprinted form, you should always include between 10 and 20 basic elements, such as the address of the property, contingencies, financing terms, purchase price, closing date and others. Also include:

Time to respond. Specify how much time the seller has to answer your offer. Contingencies should also include time limits.

Seller's responsibilities. Include passing clear title to the property, maintaining the property in its present condition until closing, making any agreed-upon repairs and delivering the property clean and free of personal possessions and debris.

Disposition of deposit. Specify who gets your good-faith deposit if the contract is terminated. This can vary. In cases such as failure to get loan approval, the seller should get the deposit. In the case of an unsatisfactory home inspection, the buyer should get the deposit.

What stays. Specify fixtures and personal property to be included in the sale. Make a detailed list. Verbal agreements aren't binding.

Terms of withdrawal. Spell out conditions that allow you or the seller to withdraw from the agreement. You may not think you'll need them, but it's good protection.

Final walk-through. This is your chance to make sure the house is in order just before you close. Your contract should specify the seller's responsibility if the walk-through is unsatisfactory. ü Problem solving. As much as possible, your purchase contract should help you and the seller resolve any issues that crop up. For example, if your lender only guarantees your locked-in interest rate for 60 days and the seller isn't able to close in that time, one solution is to include a provision in your contract that sets a firm closing date and allows the seller to rent back to you at a cost equal to your monthly payment.

Sellers' Contingencies. Occasionally, sellers make the sale of their house contingent on their purchase of another house. If the sellers fail to complete the purchase of the other house, they can cancel the sale. It's much less risky for you to enter into contract with sellers who are already in contract to buy another home.

Be sure to include a kick-out clause in your purchase contract that allows you to withdraw from the contract at some point. A kick-out clause can be structured in several ways. You may give the sellers a time limit to find another home, after which you can void the contract at your option. You may also structure the kick-out clause to let you withdraw from the contract any time until the sellers notify you that they have found another house and will remove their contingency for finding a replacement home. If the sellers' house has been on the market a long time with no offers, you may be able to convince them to waive their contingency

Inspection problem option

Dian Hymer

Recently a home buyer in Oakland, Calif., discovered during the home inspection that there were foundation problems. After consulting with an engineer, he learned that the problems would cost approximately $10,000 to repair.

The buyer was not discouraged by the engineers report, but the new information had not been taken into account when he made his offer to buy the property. So, in consideration for removing his inspection contingency from the contract, the buyer asked the sellers to credit him $10,000 toward his nonrecurring closing costs. The sellers agreed and the transaction closed.

Of course, most sellers would prefer to have a clean inspection contingency removal without any conditions attached. But, when defects are discovered during inspections that the buyers and sellers were unaware of at the time the contract was negotiated, a credit for nonrecurring closing costs can be a relatively easy way to resolve the problem.

HOUSE HUNTING TIP: The benefit of this solution is that its quick. Often defects arent discovered until a few weeks before closing. In the case of a significant problem, like a foundation defect, there probably would not be enough time to get the work done before closing. Using a credit instead passes money from the seller to the buyer.

Heres how it works. The sellers net proceeds are reduced by the amount of the credit. The money is used to offset some of the buyers closing costs. The money the buyers save at closing can be used for repairs. The buyers take responsibility for making the repairs after closing.

Lenders have requirements regarding the amount of money they will allow a seller to credit to a buyer. Most lenders will only permit a credit against the buyers nonrecurring closing costs.

Nonrecurring closing costs are those settlement fees that are paid on a one-time-only basis at closing. These fees include such things as title insurance, fees paid to the person handling the closing, inspection fees, transfer taxes and loan origination fees. Recurring closing costs include homeowners insurance premiums, interest and impound account payments, and property taxes-all of which are paid on a recurring basis.

Before asking the seller for a credit for nonrecurring closing costs, make sure you total the amount of your nonrecurring closing costs. Your real estate or closing agent can help you estimate this figure.

One buyer asked the sellers for a credit of $15,000 for nonrecurring closing costs to cover the cost of a new roof. When it came time to close, the buyer discovered that his nonrecurring closing costs totaled only $11,000. The buyers lender wouldnt allow a credit for more than the amount of the buyers nonrecurring closing costs. The seller felt he shouldnt have to credit more than the $11,000 that the lender allowed. The discrepancy was ultimately resolved, but not easily.

There are pros and cons to using the credit method to resolve inspection issues. The biggest problem is that some buyers never actually get the work done. This can end up costing the buyer much more down later when he decides to sell.

Also, lenders restrict the size of the credit. Many lenders will only allow a credit for 3 percent of the purchase price, or for the actual amount of the nonrecurring closing costs--whichever is less.

THE CLOSING: An alternative to asking the seller for a credit is to ask the seller to lower the purchase price by the amount of the required work. But, if the buyers are short of cash, a credit will generate immediate cash that can be used for repairs.

How much work should you do before selling?

Dian Hymer

Recently a couple that owned a home in Berkeley, Calif., decided to move to neighboring Piedmont. They started their search by visiting Sunday open houses.

It was quite apparent to them which listings had been prepared for sale and which ones had not. They were invariably drawn to listings that were charming, clean, and uncluttered.

Looking at open houses helped this couple realize what they needed to do to their Berkeley home to ensure that it would attract buyers. By the time their home went on the market, it was charming, clean and uncluttered. It sold quickly and the sellers realized a handsome profit.

As a seller, you have several options when considering how much work to do before selling. One option is to do relatively little and sell the property in it's "as is" condition. Another is to invest time, effort and money into fixing the property up before you sell. A third option is to do a combination of the first two approaches.

In making your decision, keep in mind that in general buyers pay more for homes that are in move-in condition. Most buyers would prefer to buy a turnkey listing that doesn't need a lot of work. A home in great condition will usually attract more buyers than will one that doesn't show well and needs a lot of work.

But there is a market for fixer-upper properties, although it is more limited. Fixer buyers will pay more for fixers that have a big upside potential. Fixer listings sell at a discount when compared to listings that are in move-in condition.

HOME SELLER TIP: A higher sale price is not the only benefit to be derived from fixing up your home for sale. If you're doing the fix-up work, rather than the buyer, you have control over the improvements. You can shop the repair work for the best price. This can save you as much as 15 to 30 percent. Just make sure you use licensed contractors who will abide by city building permit requirements.

Often the decision of how much fix-up for sale work to do will depend on how much time you have before marketing your home. The best approach is to plan ahead so that you have as much time as possible. It can take months to get a house ready to sell, depending on what kind of work needs to be done.

No matter what kind of time frame you're working with, consult with your real estate agent before embarking on major fix-up work. Plan to walk through your home with your agent. Make a list of all the items that should be done before you sell. Ask your agent which reports should be ordered and order them as soon as possible.

The next step is to get bids from contractors and trades people for the recommended work. Also find out about availability and how long it will take to complete the work. With this information you can fine-tune your fix-up for sale work.

Some projects may be too costly and some may not be able to be completed within your time frame. Your agent can help you prioritize if necessary. Other projects, like de-cluttering and cleaning cost practically nothing except your time and effort.

THE CLOSING: Even if you decide to sell "as is," it usually helps the sale to present a property that is clean and free of debris. Buyers need to see what you have to sell in an uncluttered state in order to make a decision to buy.

Creating a home buying strategy

Inman News

If you want to buy a house, start by estimating what you can afford and making a budget to buy.

Many prospective buyers find it difficult to accumulate enough cash for a down payment, especially if they are saddled with heavy debt. With some discipline and creative strategies, you can probably come up with more cash than you think. Check your current finances and investigate ways to save and raise extra funds.

Here are some guidelines you way want to follow as you move through the process:

Write down your monthly income, savings, and spending. If you have a lot of high-interest credit debt, try to move your balances to cheaper cards and plan to spend a year paying off as much of that debt as possible.

Identify your long-term financial goals. Owning a house may be one, saving enough for retirement may be another.

Make a home-buying savings plan. Open a savings account just for this purpose and make regular deposits, even if you put asidejust $20 a week.

Look for other sources of down payment funds, such as a Roth Individual Retirement Account (IRA). First-time buyers now have access to $10,000 of these funds penalty-free under certain conditions.

Cut back on non-essential spending. Your friends and relatives will understand that you can't spend $20 to go to dinner and the movies if you say you're saving to buy a house. Your children will understand, too. In fact, saving to buy a house can be a family activity.

Make saving for a house fun. Chart your progress on paper and post it somewhere to remind yourself of your goal.

Ask your parents, other relatives or friends for help. If they can't give or loan any money, perhaps they'll agree to co-sign the loan.

Here are a few more strategies:

1. Sell (or borrow against) other real estate you own.

2. Sell securities you own, or borrow against them through a loan from the stock brokerage.

3. Sell collectibles or heirlooms you own.

4. Cash in (or borrow against) the built-up value of any life insurance you have.

5. Withdraw money from your IRA. If you're a first-time buyer you can pull out $10,000 penalty-free (though you must pay state and federal income tax on it) to put toward your home purchase. If you're not a first-time buyer, pull out the very least amount you must. Otherwise, you will have to pay both the 10 percent penalty and income tax on an early withdrawal.

6. Borrow against your retirement funds. In some cases, the rate on the loan may be as small as 2 percent. If you add too much to your debt burden, however, you may not be approved for a loan.

7. Ask for help from your church, synagogue or other nonprofit organization. Fannie Mae has a "3/2" loan program that allows you to make a 3 percent down payment if a bona fide nonprofit puts down the other 2 percent.

8. Sell a boat, RV or second car you own and use the cash for the down payment.

9. Get a second job. It'll help you raise cash, and the extra income will improve your chances of qualifying for a loan. You can quit later.

10. Look for an investment partner who'll put up some or all of the cash in an equity-sharing partnership. You make the monthly payments and the two of you split the eventual resale profits.

11. Change the withholding taxes, if permitted, on your salary in anticipation of higher deductions when you get a mortgage. Your take-home pay will increase, giving you more funds to put toward a down payment.

12. Look for loan programs such as VA or FHA that require little or nothing down.

14. Use a lease option that lets you rent the house now and buy it after you save.

15. Look for a home with an assumable loan. Instead of buying out the owner's equity, ask the seller to carry back a second mortgage for an equal amount. That way you can buy the home without a down payment.

16. Pawn something you own and use the proceeds for a down payment. You can get the item back after you've moved in and can afford to pay the pawnbroker back.

17. Refinance your car or other vehicles and add the proceeds to your down payment.

18. Offer something other than cash (a car, boat, or collectibles) to the seller in lieu of a cash down payment.

19. Offer your services or expertise to the seller in lieu of a down payment. Some examples include $10,000 worth of auto services if you're a mechanic, dental work if you're a dentist, desktop publishing services if you're a designer, artwork if you're an artist or legal work if you're an attorney.

20. Look for foreclosure properties that require little or no down payment. Some lenders and government agencies will let you buy a foreclosure with no down payment if your credit is good and they're anxious to have the home occupied, or if you have skills (carpentry, landscaping or even painting) that you can use to increase the home's value.