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Wednesday, October 23, 2013

You’re Under Contract — Now What Should You Do & Expect?

[As published on Oct. 24, 2013, in the Jeffco editions of the Denver Post's YourHub section --and expanded on here]

Getting under contract is the beginning of a process that imposes different demands on the seller and buyer.

If you’re the seller, the property disclosures you filled out at listing time need to be delivered to the buyer's agent, but between then and closing you’ll mostly be responding to actions by the buyer.

First up, you’ll probably need to respond to an Inspection Objection Notice submitted by the buyer.  Here are some “big ticket” inspection items that you might face:
 
1) Cleaning and servicing of your forced air furnace or, worst case, replacement if the inspector detects carbon monoxide emissions from a cracked heat exchanger.  A good idea is to change your furnace filter and vacuum any loose dirt in the furnace prior to inspection.
 
2) Mitigation of radon, if a radon test produced an average reading over the EPA action level of 4.0 piC/L.  
 
3) Cleaning or repair of your sewer line if the sewer scope shows root intrusion or, worse, partial collapse of your sewer line.  If your house is over 20 years old, there's a strong likelihood that your sewer line (from house to sewer main) has clay pipe which is prone to roots and breakage, and the buyer will order a sewer scope.  If you have not done so recently, you might want to forestall any problem by having $99 Rooter (my favorite) clean your sewer line in advance of putting your home on the market and certainly before inspection.
 
4) Roof replacement, especially likely if you have a wood shake roof or had hail damage but pocketed the insurance money instead of replacing the roof.  Insurance companies now charge extra if your home has a shake roof and, worse, will only pay the depreciated value of the roof if it needs replacing after a hail storm.  Thus, if your roof is destroyed in a hail storm, you may get virtually nothing for a 20-year-old wood shake roof even though you've been paying a premium for having it!  Any seller would be smart to replace a shake roof before putting their home on the market, and any smart buyer would demand that it be replaced as an inspection item.
 
If there are big-ticket items agreed to in your Inspection Resolution document, the buyer may ask you to reduce the purchase price or pay some of his closing costs as an alternative to making the requested repairs.  However, the lender is going to get a copy of this document and may not allow this approach.  If you were the lender, would you fund a closing on a house with a bad roof, broken sewer line and furnace emitting carbon monoxide?  Probably not! Some agents get around this by signing an amendment to the contract reducing the purchase price or creating a seller paid concession for closing costs without explaining why, and this does work, but it sure feels like mortgage fraud to me, so I try to avoid that.  Expect to fix such issues before closing (or better, before putting your home on the market).

Furnace replacement can cost $3,000 and up, radon mitigation $800 and up, and sewer replacement can cost several thousand dollars — you’ll want to view the sewer scope and get your own quotes before your listing agent prepares an “Inspection Resolution” in which both parties agree to what the seller will do or pay for.  (Some listing agents compose an Inspection Resolution which lists both what the seller will do and what the seller will not do.  This is silly, because this document stands alone, so it should only list what the seller will do.  Besides, why do you want the lender to see all the things you're not fixing?)

There are other opportunities for the buyer to make demands of the seller or terminate the contract — title problems, HOA documents, etc. — but the only one you’re likely to face after inspection is the Appraisal Objection if the home fails to appraise for the contract price. This is when you want a good Realtor on your side, because you could well hold firm and get the buyer to pay full price anyway. (I’ve been quite successful at this.)  If you think your house could sell for more than comparable sales because of the hot market, but that it may not appraise for the contract price, and if you have competing buyers, you'll want to select the buyer who specifies the largest down payment.  This makes it easier for you to stand firm for your contract price if the appraisal is lower.  You won't be able to do that with a FHA buyer putting only 3.5% down or a VA borrower obtaining 100% financing.

If you’re the buyer, here are your big to-do’s:

1) Deliver the earnest money to the listing brokerage or title company, as spelled out in the contract. Your check will be deposited immediately and credited toward your cash at closing.

2) Select and schedule a good inspector. Your inspection deadline is probably a week to 10 days after going under contract, but do not wait. Schedule your inspection ASAP.  This way you'll have time to schedule additional inspections suggested by your inspector. Examples would include having an electrical or mold inspection done if the inspector sees questionable wiring or evidence of water intrusion.  Another example would be bringing in a structural engineer if your inspector sees evidence of structural problems.  Your buyer’s agent will give you several proven inspectors to choose from, but they are generalists and can only suspect problems which other licensed specialists (like an engineer) can clearly identify.  Before hiring your inspector, ask him if his tools include a carbon monoxide detector and a moisture detector.  Not all inspectors have these essential tools.  Read the seller's property disclosure looking for items you and your inspector might want to pay particular attention to. Your inspector can probably handle the radon test ($100 to $125 extra), but you’ll need to schedule a separate sewer scope.  A radon test requires 48 hours to complete, so keep your inspection objection deadline in mind when scheduling your inspection. You don't want to prepare your inspection notice until you have those results.  You can learn more about radon at http://www.epa.gov/radon/.

3) Attend the inspection to learn first-hand as much as you can about the house you expect to own. Your agent needn’t attend the full 3-hour inspection, but he’ll receive a PDF of the inspector’s report and work with you to prepare your inspection demands. Note: the inspector will detail every little thing he finds wrong with the house.  This is both a liability issue for him, and he wants you to think that the $350 you paid him was the best investment you ever made -- which it is.  However, resist the temptation to demand that all those things be fixed by the seller!  Ideally you can expect that every “health & safety” item be handled — radon, electrical, plumbing, sewer, cracked heat exchanger on furnace, etc. — but the seller has no obligation to do anything. If he has a better offer in back-up position, he may well refuse to fix anything, hoping you’ll terminate the contract. Again, having a skilled agent on your side helps.

4) Make note of all the other deadlines in the contract.  Many of them are your deadlines, not the seller's.  Notice that to the left of each date and deadline is the number of the section in the contract which explains that deadline.  Put them on your calendar and hope that your agent did so too!  If no date or deadline is inserted, that section is considered not applicable or deleted.

Lastly, do NOT do anything to change your credit score, such as buying a new car or new furniture on credit.  Your lender will be checking your credit again before releasing the funds for closing, and this could cause them to withdraw loan approval. If this happens, you not only don't get the house, you'll lose your earnest money!
 
Here's a pitfall to be aware of: if the funds have not arrived at the time of closing (either yours or the lender's), the seller can, according to the contract, declare you in default, terminate the contract, keep your earnest money deposit and sell the home to a back-up buyer he didn't tell you about!  I've never seen this happen (please tell me if you know of a time it did!), but it could happen, especially in this time of multiple offers on listings.  This is why I advise buyers and their agents to put in their contracts that the time and place of closing will be chosen by the buyer's agent, not the listing agent, and not by "mutual agreement."  This way, if the funds aren't at the closing table, the buyer's agent can say, "I'm postponing this closing until 4 pm" (or whenever), thus preventing the seller from declaring you in default until as late as midnight on the closing date. If your contract says the listing agent will determine the time and place of closing and that agent selects a closing before 11 a.m., make sure any wired funds are wired the day before, not on the day of closing to avoid this scenario befalling you!

If you have any questions about the above, feel free to call me at 303-525-1851 or email jim@goldenrealestate.com.

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