10 TERMS YOU’LL LIKELY ENCOUNTER IN A REAL ESTATE PURCHASE CONTRACT

10 TERMS YOU’LL LIKELY ENCOUNTER IN A REAL ESTATE PURCHASE CONTRACT

Purchase offers are legally binding contracts. Every state has its own real estate laws, and local real estate boards use different standard forms.

Ask your Accredited Buyer’s Representative to give you a copy of the standard contract so you can review it before searching for homes. That way, you can get familiar with the legal terminology and ask questions before you find a home you’d like to purchase.

Here are ten of the most common clauses:

1. Price

Of all real estate contract terms, the purchase price may be the easiest to understand and the hardest to agree upon. If the seller is asking too much relative to recent comparable sales, your buyer’s rep may suggest attaching a report that helps defend your offer price.

Also, the seller may be willing to accept a lower price if you include other desirable terms in your offer, like a quick closing date or an all-cash purchase.

2. Closing Date

The closing date (also called settlement date) is the proposed date when ownership will be transferred to the buyer.

It’s an essential contract term that keeps both parties on track to meet their respective obligations. That said, unexpected delays may occur from completing inspection repairs or finalizing your financing, for example.

The purchase agreement includes provisions for situations when the buyer or the seller can’t meet the closing date, potentially including penalties. It’s also possible that the sale could be canceled.

3. Inspection

Typically, buyers have ten days to conduct a professional home inspection once the sellers accept their offer. Your buyer’s agent can provide recommendations, but it’s your responsibility to hire the inspector.

Depending on the findings in the inspection report, you may need to negotiate repairs with the seller or agree to an adjustment in the purchase price.

4. Financing

Your purchase may be contingent upon securing funding with a mortgage company. This section of the real estate contract spells out the key terms of your mortgage commitment, such as the size of your down payment and the type of loan (for example, FHA or conventional).

Typically, sellers prefer buyers with larger down payments or who have already received pre-approval (which is stronger than being pre-qualified). These differences can be particularly significant in situations where you’re competing with other buyers.

5. Attorney Review

Real estate professionals are not licensed to practice law but are allowed to help home buyers (or sellers) enter into real estate contracts. This is why most real estate contracts include an attorney review clause, which gives both parties time (typically three to five days) to secure an attorney’s review and potentially cancel the contract under specific provisions.

6. Disclosures

Sellers are required to complete property disclosures that reveal various defects or improvements that may affect the home’s condition. Required disclosures vary by market, but common examples include revealing the presence of lead-based paint (a federal law), asbestos, or other environmental hazards.

Usually, disclosure documents are given to buyers once the seller has accepted your offer. In some cases, you may receive them before submitting a contract. Either way, buyers must sign off on all disclosures.

For sellers, it’s best to reveal everything about a home upfront because the transaction is less likely to fall apart. Also, if you discover after closing that the sellers lied on their disclosure forms, you may be able to take legal action against them.

7. Escrow of Earnest Money

As a buyer, you’ll need to show the sellers that you’re seriously interested in purchasing their home by depositing earnest money (also called a good faith deposit) into an escrow account.

Your buyer’s representative can advise you on local market conventions, but as a rule, the earnest money is 1% to 2% of the total home purchase and is applied to your down payment at closing.

Your purchase contract should stipulate where your escrow deposit will be held (typically a title company or the real estate broker) and how much you’ll be refunded if the transaction fails to close under various conditions.

8. Adjustments at Closing

This section of a purchase contract outlines any modifications to the property’s purchase price to accommodate the payment of property taxes, utilities, municipal assessments, association fees, etc.

For example, if the seller made a semi-annual property tax payment two months before closing, the buyer will need to “reimburse” the seller for the remaining four months.

9. Title Insurance Affidavit

An affidavit of title is a document that proves the seller owns the property and can legally convey ownership to you. It helps ensure that there are no claims against the property, such as a mechanic’s lien, which might happen if the seller hires someone to complete work on the home but doesn’t pay them.

10. Other Addendums

Additional terms and conditions beyond the general forms can be added to a real estate purchase contract as an addendum.

Typically, this is where you’d spell out requests to include personal property, ask for a home warranty, request information about the property’s Homeowners Association, or make other stipulations.

As a buyer, it’s essential to make sure that you clarify all the terms and conditions of your purchase. At the same time, you’ll need to balance these requests against your desire to successfully negotiate a purchase with a seller.

What Exactly Do Closing Costs Cover?

What Exactly Do Closing Costs Cover?

A home costs more than just the sale price. For example, closing costs—which make up about 2% to 5% of the home’s purchase price—are a major added expense. Michael Hyman, a research data specialist at the National Association of REALTORS®, shares the charges that make up closing costs in a post at the association’s Economists’ Outlook blog so that home buyers can be prepared.

Lenders provide a Closing Disclosure at least three business days prior to closing on a mortgage. But buyers will need to budget for these added costs ahead of time to avoid sticker shock days before closing.

Origination fees. This is the fee charged by lenders for processing the application and underwriting it. The fee typically ranges from about 0.5% to 1% of the borrower’s mortgage. Sometimes, it’s higher for smaller loans because “the fixed costs are a higher percentage of a smaller balance,” Hyman notes.

Service charges. These include items such as the appraisal, credit report, flood determination and certificate, tax status, pest inspection, title search and insurance, and survey fees. Appraisals and surveys can cost anywhere between $300 to $500 each. Title services can add up to about $2,000, so buyers may want to shop around for that.

Transfer taxes and recording fees. Transfer taxes vary by state but can run up to 2.7% in parts of New York. “It does not matter if the buyer or seller pays, as long as the transfer tax is paid to the government, so transfer taxes can be negotiated between the buyer and seller,” Hyman writes.

Escrow items. Homeowners insurance, property taxes, and primary mortgage insurance (if applicable) also are added fees. Buyers moving into a homeowners association may need to pay monthly dues for the upkeep of the community.

Hyman offers the following example for how these costs can add up: A buyer is purchasing a $275,100 home with a 5% down payment. The loan amount is $261,345. Closing costs are estimated at 2.5% of the loan value—so $6,533. The buyer made a $2,000 earnest money deposit, so they would need to bring $4,533 in cash at the time of closing. “Altogether, this means that the potential homeowner will need to have access to approximately $18,300 in cash to pay for the down payment and closing cost net of the earnest money deposit,” Hyman says.

INTERIOR REMODELING: WHICH PROJECTS MAKE HOMEOWNERS HAPPIEST?

According to Harvard’s Joint Center for Housing Studies, Americans spend $400 billion annually on home remodeling projects. Which of those projects bring the most joy? Which ones provide the best value?

To answer these questions, the 2019 Remodeling Impact Report, published by the National Association of REALTORS® (NAR), offers insights from three distinct perspectives—consumers, real estate professionals, and remodeling experts.

First, to calculate a “joy score,” consumers were asked about their satisfaction and happiness with recent remodeling projects.

For perspectives on remodeling priorities and estimates of cost recovery at resale, NAR surveyed members (REALTORS®) who are engaged in residential transactions.

Estimates on the cost of each project were obtained through members of the National Association of the Remodeling Industry (NARI).

Here are the top ten interior remodeling projects, ranked by joy scores:

1. Complete Kitchen Renovation (Joy Score = 10)

For many homeowners, the kitchen is the heart of the home, where meals are prepared and shared with loved ones. It’s a room that invites creativity but also takes a beating over time.

It’s not surprising that a complete kitchen renovation earned the highest joy score. It’s also the most expensive remodeling project, estimated at $68,000 with a 59 percent cost recovery rate ($40,000).

2. Closet Renovation (Joy Score = 10)

A brand new kitchen may top your wish list, but many homeowners were equally satisfied with renovating a closet. Improved functionality, livability, and storage organization are top drivers.

Among remodeling projects, closet renovations are relatively inexpensive, but they also had the lowest cost recovery rate (40 percent).

3. Full Interior Paint Job (Joy Score = 9.8)

Over time, homeowners’ tastes change, especially if they are dialed into HGTVHouzz, and other outlets featuring the latest design trends.

A fresh coat of paint is one of the easiest ways to update rooms. Paint companies are happy to offer suggestions. Each year, for example, Benjamin Moore reveals its latest color trends.

The top reason for tackling a full interior paint job was “time for a change” (49 percent). Upgrading worn-out surfaces, finishes, and materials was another top priority.

4. Individual Room Paint Job (Joy Score = 9.7)

Painting one room brought homeowners nearly as much satisfaction as a complete interior paint job. The top motivating factor was adding individual personality to the home.

5. Kitchen Upgrade (Joy Score = 9.7)

Even if you aren’t ready for a total kitchen overhaul, smaller upgrades are nearly as satisfying, and there are plenty of ways to make budget-friendly updates.

A kitchen upgrade ranked highest among REALTORS®, in terms of tips for successfully marketing a property. One out of five surveyed NAR members said kitchen upgrades helped close a sale.

6. Basement Conversion to Living Area (Joy Score = 9.5)

For homeowners eager to add livable square footage to their home, renovating space in an unfinished basement can be an optimal solution.

Additionally, this upgrade earned one the highest cost recovery estimates, at 64 percent.

7. Refinish Hardwood Flooring (Joy Score = 9.5)

Whether homeowners want to repair worn-out surfaces or update the look of their home, refinishing hardwood floors yielded a 9.5 joy score.

It’s a project that’s also expected to provide full cost recovery.

Over a quarter of REALTORS® (27 percent) have suggested sellers complete this renovation before attempting to sell their home.

8. Bathroom Renovation (Joy Score = 9.3)

Similar to kitchens, bathroom surfaces, finishes, and materials wear out over time or require updates.

Bathroom renovations are also strongly encouraged by REALTORS®, with one in three saying they have suggested sellers tackle this project before listing their home.

9. Insulation Upgrade (Joy Score = 9.3)

When you walk in the door of your home, you may not “see” an insulation upgrade, but you will probably feel it.

Improved energy efficiency is the overwhelming reason to tackle this project. Plus, unlike cosmetic updates, the cost recovery benefits of upgrading insulation improve over time.

10. New Bathroom Addition (Joy Score = 9.2)

If your family’s daily routines get bogged down by bathroom traffic jams, you may be a prime candidate for this renovation project. Bathroom additions are predominately undertaken to add features and improve a home’s livability.

Bathroom additions are also relatively cost-effective, with a 50 percent recovery estimate.

Agency-explained-

DESCRIPTIONS OF AGENCY

There are agents, and then there are agents. Yes, it sounds confusing. That’s because the term “agent” is often used in a casual manner, referring to any real estate practitioner.

But agent also refers to someone with whom you’ve established a formal agency relationship—someone who represents your best interests in a real estate transaction and owes you fiduciary responsibilities. Agency relationships are usually established in writing with buyer agency agreements, and require:

  • loyalty
  • obedience
  • disclosure
  • confidentiality
  • reasonable care and diligence
  • accounting

THE BIRTH OF BUYER AGENCY

For many years, real estate was practiced in such a manner that agency relationships were only extended to sellers. Any real estate agent who brought a buyer to the table was actually working as a sub-agent to the seller.

This all began changing in the 1980s, when buyer agency started gaining momentum in residential transactions. Today, agency laws still vary from state to state. But even if you live in a state that recognizes buyer agency, you can’t assume that you will automatically receive fiduciary responsibilities from the agent you’re working with as a potential home buyer.

That’s why it’s vitally important to talk to the agent or broker early in your working relationship about his/her agency status. You may also want to consult your state association of REALTORS® to gain a better understanding about agency laws in your particular state, or contact the agency charged with regulating real estate professionals in your state, often referred to as the state real estate commission.

Details vary from one state to another, and each brokerage has its own contract terms within these broader guidelines. But for purposes of illustration, this table outlines how your status may affect the level of service to which you are entitled:

Are you a buyer-customer or a buyer-client?
Services will vary, depending on your agency status*
If you are a CUSTOMER (no agency relationship), an agent will: If you are a CLIENT (agency relationship), your agent will:
Maintain loyalty to the seller’s need Pay full attention to your needs
Tell the seller all that they know about you Tell you all that they know about the seller
Keep information about the seller confidential Keep information about you confidential
Focus on the seller-client’s property Focus on choices that satisfy your needs
Provide just the material facts Provide material facts as well as professional advice
Only provide price information that supports the seller’s listing price Provide price counseling based on comparable properties and their professional insights
Protect the seller Protect and guide you
Negotiate on behalf of the seller Negotiate on your behalf
Attempt to solve problems to the seller’s advantage and satisfaction Attempt to solve problems to your advantage and satisfaction

* This chart is for general illustration purposes only. Agency laws vary by state; and specific terms of individual agency contracts will vary from one agent to another.

YOU MAY NOT KNOW IF YOU’RE A CUSTOMER OR A CLIENT.

Depending on the laws in your state, you may find yourself working with someone who is actually negotiating for the seller, not you the buyer. The best way to be certain your interests are being considered and protected is to sign a buyer agency agreement with a trained buyer’s rep, which clearly establishes client-level services and spells out what services you can depend upon.

WHAT ABOUT DUAL AGENCY?

In some cases, it will become necessary for your real estate professional to deviate from the single agency model. For example, a buyer-client may become interested in a house that also happens to be offered for sale by a seller-client of their buyer’s rep, or by the same brokerage firm. How can a buyer’s rep, in this instance, maintain complete loyalty to their buyer if he or she also owes complete loyalty to the seller?

Obviously, they can’t. But, depending on the real estate license laws in your state, and your status with the brokerage firm, the manner in which this situation is handled will vary. To get concrete answers, you should read and discuss the brokerage services disclosure statement, which should reflect your state’s agency law. If your agent hasn’t supplied a disclosure statement, you should ask for it. It spells out the different categories of agency services they provide and how they address dual agency.

Almost all states require disclosure of dual agency and often require that a buyer’s rep (or his or her brokerage firm) only act as a dual agent with the written consent of all parties to the transaction. In such a situation, the brokerage agrees to endeavor to be impartial between both parties and will not represent the interest of either party to the exclusion or detriment of the other party. Neither will they share the confidential information of one party with the other party. This is how brokerage firms and their agents strive to create win-win situations for everyone involved. There are a few states that prohibit dual agency even with disclosure and consent.

OTHER TYPES OF RELATIONSHIPS

Some states also allow different types of relationships beyond agency relationships. For example, a transaction broker assumes responsibility to facilitate the transaction, rather than represent one side over the other. Further obligations may also be set forth in a written contract with a client.

Even though the laws concerning agency can vary from one state to another, one thing that is constant throughout the U.S. is the obligation for all REALTORS® to comply with the National Association of REALTORS® Code of Ethics.

ISSUES TO DISCUSS WITH A BUYER’S REPRESENTATIVE

Real estate agency relationships, like all business relationships, can be formed in a number of ways. In order to help talk through your options, here are several questions to ask your buyer’s rep:

  • Do you represent buyers, sellers or both?
  • What services are provided to (or excluded from) me, based on my status as a buyer-customer or buyer-client?
  • When does representation begin? When does it conclude?
  • If I’m not ready to commit to your normal term, can you offer me a one-day buyer agency agreement or a 24-hour opt-out clause?
  • How is dual agency addressed in your firm?

Top 10 Reasons to Hire a Buyer’s Agent

Why Have a Buyer’s Agent When Purchasing a House?

Buying a house is one of the most significant undertakings you’ll make in your entire life. It’s not simply about finding the right home for you and your family; more than anything, buying a house is about making the right financial investment on a long-term basis.

Before you even put down your earnest money deposit, an exceptional buyer’s agent will have been doing several things for you, including searching for the right property and starting the due diligence process when you do.

There are a plethora of reasons you should turn to a buyer’s agent when you start the house-buying process. Below are some of the most essential reasons to hire a buyer’s agent when purchasing your next house:

1. It’s Free

One of the first things you need to know about hiring a buyer’s agent is that it’s not going to cost you anything. That’s right; 99 percent of the time it won’t cost you a dime!

A buyer’s agent will be paid by the home seller once the home is sold. Not only is it free, but a buyer’s rep will be saving you both time and money. As always, it’s essential to have a good working relationship with an agent. In other words, make sure you find one that you feel comfortable working with.

2. Going to the Listing Agent Isn’t Smart

For some reason, lots of buyers think they’ll get a better deal if they go to the seller’s agent. This is one of the biggest myths in real estate and could cost you considerable money in the long run. Quite often, buyers think if they go to the seller’s agent, they’ll give them back some of the commission. While this may be true, the agent works in the best interests of the seller, not you!

Saving a couple thousand dollars in commission but overpaying on a home by $10,000 works out to a net loss of $8,000! In addition, the agent is going to be doing everything in their power to close the sale, not what’s best for you. Avoiding dual agency is something every smart buyer does. Always have your own designated buyer’s agent.

3. Professional Experience

A buyer’s agent should have the right kind of professional experience in finding the right home for you. Finding the right property is a time-consuming process, and it’s easy to find yourself spending hours viewing properties that are not right for you.

It’s crucial to have a bit of help, especially if you’re a first-time buyer or a very busy person. Having an agent screening the properties for you can save you lots of time. Not only that, but they’ll also view properties to make sure they’re in good order.

A buyer’s agent who has been in the business for a long time will pick up on common problems, such as a damp basement, roofing problems and leaks.

4. How Well Do You Know the Area?

Having a buyer’s agent on board when you move to a new town or part of the country is especially vital. After all, you may not know the area that well. Having someone with local knowledge means that you’re much more likely to end up investing in a property in the “right” part of town. An exceptional agent that services primarily buyers will know their way around the local area well. They’ll know the popular neighborhoods that are appealing to most buyers and those that aren’t.

Also, an agent will make sure the amenities that are important to you are close by. Schools and leisure facilities are often on the top of most homebuyers’ agenda.

5. Valuation and Finance

Valuing a property is not easy when you don’t have a lot of experience. When you’re buying your first or second home, you’ll need all of the help that you can get. Nothing beats turning to a professional to help you purchase a property at fair market value, or less, if you’re lucky. One of the best skills of a buyer’s agent is to be able to evaluate the right purchase price for the home.

Financing can be a nightmare, as well. Sure, you may have your mortgage preapproval, but when it comes to buying a home and financing it, there’s often a mountain of paperwork to work through. A buyer’s agent will help you to do so, and make sure the process stays on track. They explain fundamental real estate terms you might not be familiar with. For example, a significant percentage of buyers don’t know the difference between earnest money and a down payment. Understanding the function of each of these things is crucial for a buyer to understand. There are a myriad of others.

6. How Much Time Do You Have for Your Showings?

Not having a buyer’s agent can mean you end up at a lot of showings or viewings that aren’t right for you. When you contract in a buyer’s agent at the start of the process, they’ll make sure that they schedule everything for you. It’s like having your own personal assistant. Tell them when you’re free, and they’ll do most of the work for you.

7. The Value of Contracts

Never underestimate the value of contracts when it comes to buying a home. Arrangements are not only about money; timelines are established in the purchase contract, as well. A buyer’s agent will make sure you follow through with any necessary responses required under the terms of the contract. This is critical because not doing so could put your escrow funds at risk of loss.

An excellent agent will keep you informed and on track so that you don’t lose any of your escrow funds. There’s also an abundance of smaller details you need to deal with before you sign on the dotted line. Many of them form part of modern-day contract law. Changing regulations are something else a buyer’s agent will help you with.

8. Professional Contacts

Once you’ve bought your first home, you’ll appreciate how many people form part of the buying process. It’s not just you and your bank manager. You’ll also need the help of other professionals, such as a home inspector. What if the home inspector picks up a problem during the inspection, and you need an estimate for work? A buyer’s agent is likely to have the right contacts at their fingertips, and will also be familiar with the process.

9. A Buyer’s Agent: Your Negotiator

Many of us don’t like to negotiate, and we’re not always that good at it. You may like the seller and don’t want to upset them. After all, we’re only human. It’s hard to say “no,” or ask someone you like to drop the price or negotiate a needed repair.

Let’s go back to that home inspection that picked up a slight problem. Ask yourself if you have the skill, and confidence, to renegotiate the price of the property. It takes both to close a deal. Once again, this is something that your buyer’s agent can do for you.

10. Let’s Stay on Schedule

Staying on schedule is an important part of the process of buying a home. You may need to get out of your old house on a specific date, or you may have a starting date for a new job. Trying to pack up your old home and keeping the ball rolling is not easy.

Many buyers don’t realize that a buyer’s agent will keep things going while you focus on moving out of your property or drive across the country to take up that promotion you’re getting.

Final Thoughts

An excellent buyer’s agent will have your back at all times. That is perhaps the best way to look at the relationship. They’re your fiduciary in the strongest sense of the word. Once it’s all over, you’ll be glad that you decided to ask for the help of a buyer’s agent instead of going through the buying process on your own!

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