Clean Up That Offer To Purchase - Part II
By:
Jann Swanson
•
An offer which displeases a seller because of its dollar amount will not be improved by equally unacceptable terms. For that reason, every real estate agent prays for a �clean offer,� one that carries neutral or possibly even positive contingencies, deposits, and timelines.
There are five general categories of terms and contingencies (which we are using interchangeably) that are usually included in an offer. There are ways of structuring these that can protect the buyer�s interests while not offending the seller. Done well, they might elevate the offer above the issue of mere price.
Earlier we talked about ways to make inspection contingencies, (home and pest inspections, Radon and lead paint tests) either unnecessary or less objectionable to sellers. One item left outstanding was whether a buyer�s right to a ten day lead paint inspection period was absolute or could be waived. EPA�s press office clarified that on Friday. Here�s the deal.
Under federal regulations, the ten day period for a lead paint inspection can, as we stated, be shortened or extended by mutual agreement of buyer and seller. But, EPA states that this inspection period can be completely waived by the buyer. This, however, may not be true under some state laws, particularly in urban states with old housing stock. Ask your agent about the law in your state.
Lead paint is a bit of a crap shoot. Some houses that look as though they would be loaded with it have none, but with others it is the reverse. There are a number of ways of dealing with the problem, but all involve licensed professionals, and none are cheap. There are tax credits or loan programs available in some states. Contact your state�s equivalent to the Environmental Protection Agency for information.
If you have children under the age of five or if you anticipate having them, you should definitely have a lead paint test. Ditto if you are buying property that in whole or part will be rented to others who may have children. The legal liability in the latter case can be staggering. Also, your mortgage lender may require testing. Even without young children, some buyers still want to know if and where lead paint exists in order to take care of it in the course of long-term maintenance.
Remember you conduct the tests but write the lead paint contingency so as to absolve the current owners from responsibility and waive the right to walk away from the purchase.
Mortgage contingency:
Educated buyers are, more and more, getting pre-qualified or pre-approved for a mortgage before beginning a home search. Mortgage pre-approvals are a terrific innovation and with current technology can be ready in days. Pre-approvals make a buyer look credible to agent and seller and they speed and smooth the whole mortgage process. However, this has resulted in the conventional wisdom that mortgage contingencies are obsolete. Some listing agents in competitive markets get belligerent when a mortgage contingency turns up in an offer and demand that it be removed...
This is just wrong. Any buyer lacking the cash to buy the house outright should never be talked out of a mortgage contingency.
Pre-approvals are not a firm letter of commitment from a lender. For one thing, no matter how approved the buyer, the subject property is suspect until an appraisal is complete. Properties can fall short of expectations, and this can be a real problem if a buyer is skating close to the edges of his loan program.
Consider a buyer who is pre-approved for an 80% mortgage at a maximum of $200,000 and has an accepted offer of $250,000. Unless he has money above and beyond the $50,000 down payment this offer will require, he is skating. If the appraisal comes in at $235,000, the bank is now willing to loan only $188,000, so the buyer needs another $12,000 to meet the required down payment on the purchase price. Without that cash, he must drop down into another program, one requiring only a 15% down payment and probably necessitating Private Mortgage Insurance (PMI) and/or a higher interest rate.
The more lenient the program (there is little maneuvering room in a 5% down payment program), the tighter the parameters become, and the buyer may find he can no longer qualify for the mortgage for which he was pre-approved, or maybe for any mortgage sufficient to purchase the house. With a mortgage contingency, escrow funds will be returned. Without a contingency that money, perhaps representing a substantial part of a buyer�s hard earned down payment, could go to the seller as liquidated damages.
There is also a (slight) possibility that the mortgage lender is inexperienced or unethical. A few years ago I sold a young man a three family home. He was a very serious and organized person with a pre-approval letter in hand and a fairly nonchalant view about inspections. It looked like a done deal. Then I talked to his mortgage officer. And talked, and talked. Six weeks and dozens of conversations later, he admitted that he had never bothered to do the requisite underwriting before issuing the pre-approval. Now the mortgage looked like a bit of a crunch. This happened at 4 p.m. the Friday afternoon that the mortgage contingency was to expire, so the buyer had no choice but to invoke his contingency and withdraw from the purchase. The house was back on the market and other offers were coming in when, a week later, the mortgage commitment finally came through.
So, never relinquish a mortgage contingency.
But, there are still ways to clean up this part of an offer.
Make sure that your pre-approval is based on a final credit report and verification of all other financial information. Get this in writing and make sure you understand what is needed to meet any remaining underwriting conditions. Ask the lending officer how quickly he can schedule the appraisal and how long after that he can produce the iron clad commitment letter. What used to be a six week process should take only two to three weeks and you can rewrite the standard mortgage contingency to reflect this timetable. Since there is probably a week or more allotted for inspections, seven to ten additional days should not be too uncomfortable for the seller.
You might, if you have the assurances suggested above, specify that your offer is contingent only on an appraisal valuing the house at no less than $X. Do this only if you are comfortable with your lender and the pre-approval he has issued.
Condo specific contingencies:
Before you consider waiving any of the contingencies relating to the review of condominium budgets and documents, please consult an attorney. You can, however, clean up your offer if you review documents, minutes, budgets, and balance sheets before preparing an offer.
Listing agents should have all of these materials on hand when they list a condo. Should have doesn�t mean they actually do, but, if you are seriously interested in a condo unit, push your agent to push the listing agent to produce these for your attorney�s and accountant�s review. The listing agent will have to produce these for most buyers eventually so it is not an imposition. If the review is acceptable, you can then remove these condo contingencies from your offer.
There are two more areas where offers can be cleaned and polished, contractual and miscellaneous contingencies. We will talk about these later in the week.
There are five general categories of terms and contingencies (which we are using interchangeably) that are usually included in an offer. There are ways of structuring these that can protect the buyer�s interests while not offending the seller. Done well, they might elevate the offer above the issue of mere price.
Earlier we talked about ways to make inspection contingencies, (home and pest inspections, Radon and lead paint tests) either unnecessary or less objectionable to sellers. One item left outstanding was whether a buyer�s right to a ten day lead paint inspection period was absolute or could be waived. EPA�s press office clarified that on Friday. Here�s the deal.
Under federal regulations, the ten day period for a lead paint inspection can, as we stated, be shortened or extended by mutual agreement of buyer and seller. But, EPA states that this inspection period can be completely waived by the buyer. This, however, may not be true under some state laws, particularly in urban states with old housing stock. Ask your agent about the law in your state.
Lead paint is a bit of a crap shoot. Some houses that look as though they would be loaded with it have none, but with others it is the reverse. There are a number of ways of dealing with the problem, but all involve licensed professionals, and none are cheap. There are tax credits or loan programs available in some states. Contact your state�s equivalent to the Environmental Protection Agency for information.
If you have children under the age of five or if you anticipate having them, you should definitely have a lead paint test. Ditto if you are buying property that in whole or part will be rented to others who may have children. The legal liability in the latter case can be staggering. Also, your mortgage lender may require testing. Even without young children, some buyers still want to know if and where lead paint exists in order to take care of it in the course of long-term maintenance.
Remember you conduct the tests but write the lead paint contingency so as to absolve the current owners from responsibility and waive the right to walk away from the purchase.
Mortgage contingency:
Educated buyers are, more and more, getting pre-qualified or pre-approved for a mortgage before beginning a home search. Mortgage pre-approvals are a terrific innovation and with current technology can be ready in days. Pre-approvals make a buyer look credible to agent and seller and they speed and smooth the whole mortgage process. However, this has resulted in the conventional wisdom that mortgage contingencies are obsolete. Some listing agents in competitive markets get belligerent when a mortgage contingency turns up in an offer and demand that it be removed...
This is just wrong. Any buyer lacking the cash to buy the house outright should never be talked out of a mortgage contingency.
Pre-approvals are not a firm letter of commitment from a lender. For one thing, no matter how approved the buyer, the subject property is suspect until an appraisal is complete. Properties can fall short of expectations, and this can be a real problem if a buyer is skating close to the edges of his loan program.
Consider a buyer who is pre-approved for an 80% mortgage at a maximum of $200,000 and has an accepted offer of $250,000. Unless he has money above and beyond the $50,000 down payment this offer will require, he is skating. If the appraisal comes in at $235,000, the bank is now willing to loan only $188,000, so the buyer needs another $12,000 to meet the required down payment on the purchase price. Without that cash, he must drop down into another program, one requiring only a 15% down payment and probably necessitating Private Mortgage Insurance (PMI) and/or a higher interest rate.
The more lenient the program (there is little maneuvering room in a 5% down payment program), the tighter the parameters become, and the buyer may find he can no longer qualify for the mortgage for which he was pre-approved, or maybe for any mortgage sufficient to purchase the house. With a mortgage contingency, escrow funds will be returned. Without a contingency that money, perhaps representing a substantial part of a buyer�s hard earned down payment, could go to the seller as liquidated damages.
There is also a (slight) possibility that the mortgage lender is inexperienced or unethical. A few years ago I sold a young man a three family home. He was a very serious and organized person with a pre-approval letter in hand and a fairly nonchalant view about inspections. It looked like a done deal. Then I talked to his mortgage officer. And talked, and talked. Six weeks and dozens of conversations later, he admitted that he had never bothered to do the requisite underwriting before issuing the pre-approval. Now the mortgage looked like a bit of a crunch. This happened at 4 p.m. the Friday afternoon that the mortgage contingency was to expire, so the buyer had no choice but to invoke his contingency and withdraw from the purchase. The house was back on the market and other offers were coming in when, a week later, the mortgage commitment finally came through.
So, never relinquish a mortgage contingency.
But, there are still ways to clean up this part of an offer.
Make sure that your pre-approval is based on a final credit report and verification of all other financial information. Get this in writing and make sure you understand what is needed to meet any remaining underwriting conditions. Ask the lending officer how quickly he can schedule the appraisal and how long after that he can produce the iron clad commitment letter. What used to be a six week process should take only two to three weeks and you can rewrite the standard mortgage contingency to reflect this timetable. Since there is probably a week or more allotted for inspections, seven to ten additional days should not be too uncomfortable for the seller.
You might, if you have the assurances suggested above, specify that your offer is contingent only on an appraisal valuing the house at no less than $X. Do this only if you are comfortable with your lender and the pre-approval he has issued.
Condo specific contingencies:
Before you consider waiving any of the contingencies relating to the review of condominium budgets and documents, please consult an attorney. You can, however, clean up your offer if you review documents, minutes, budgets, and balance sheets before preparing an offer.
Listing agents should have all of these materials on hand when they list a condo. Should have doesn�t mean they actually do, but, if you are seriously interested in a condo unit, push your agent to push the listing agent to produce these for your attorney�s and accountant�s review. The listing agent will have to produce these for most buyers eventually so it is not an imposition. If the review is acceptable, you can then remove these condo contingencies from your offer.
There are two more areas where offers can be cleaned and polished, contractual and miscellaneous contingencies. We will talk about these later in the week.