Nolo's Essential Guide to Buying Your First Home (51 page)

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Authors: Ilona Bray,Alayna Schroeder,Marcia Stewart

Tags: #Law, #Business & Economics, #House buying, #Property, #Real Estate

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Usually, the financing contingency requires you to submit a loan application within a reasonable time period, such as five days. You can protect yourself from having to accept any old loan by specifying not only how much money you must succeed in borrowing (on one or more loans), but at what interest rate and with how many points, or other terms.

Your financing contingency should be realistic. If the going interest rate is around 6%, and you condition your offer on getting a 5% loan, you’re not likely to be able to meet that contingency, and you’ll look less attractive to the seller.

TIP

If you pay all cash, add an appraisal contingency.
Your lender usually requires a property appraisal, which you can avoid by buying with cash. But as real estate attorney Richard Leshnower notes, “You still want to make sure the house is worth the price. Include a contingency allowing you to have the house appraised and back out if the appraised value is less than the negotiated price.”

Inspections

Most homebuyers have their potential home examined by at least one, and more likely two or more, inspectors. You’ll want a general inspector to find any defects that can affect the property’s value; a pest inspector to check for termites, dry rot, and more; and possibly other inspectors to check for things like soil stability or environmental hazards like lead-based paint or radon gas.

Your contract should include a contingency allowing you to conduct inspections and to back out of the agreement if you don’t like the results or you and the seller can’t agree on how to deal with needed repairs. Some contracts will also allow you to ask for approval of a survey of the property boundaries. If you’re buying a newly built home, ask that several inspections be done over the course of construction.

TIP

In some states, buyers routinely do a precontract inspection.
For example, in New York, after submitting an offer, the buyer has some time before the seller drafts the contract—and may use this time to schedule an inspection, so that by the time the contract is signed, there’s no need for this contingency. Attorney Richard Leshnower notes, “The advantage is that you know what you’re getting into, and the seller knows you won’t be pulling out of the deal based on a defect found during an inspection.”

Co-op buyers are an exception: If you’re buying a co-op, you probably don’t need an inspection, because you’re not buying the property itself—you’re buying shares in a corporation, and the corporation bears responsibility for the physical property. However, you will want to make sure the building is well-maintained and in good condition, by checking the co-op records and talking to the property manager, board of directors, and residents.

Attorney Review

If anyone other than your attorney drafts the final contract, you can include a contingency giving your attorney time to review it and requiring that you be satisfied with the results. You’ll ordinarily set a time limit of several days after the seller accepts the offer. Being able to call in your legal eagle is especially useful when the deal is complicated or you need help understanding legal terms.

Review of the Preliminary Title Report

When you purchase a property, you normally assume that the seller has good title—meaning full ownership and the right to sell it to you, without any debts (technically called liens or encumbrances) against it. To be certain, your contract should give you the right to hire a title officer or attorney to review the title history (if a problem turns up, you can back out) and to obtain actual title insurance in case of later surprises.

Review of CC&Rs or Other Documents

If you’re buying in a common interest development, you need the time and opportunity to review documents like the CC&Rs (if you haven’t already), master deed, bylaws, rules and regulations, meeting minutes, and budget. If you’re buying a co-op, you’ll want to examine the proprietary lease as well.

These documents will tell you how well funded and well run the association or co-op is, affecting how much you can expect to pay in fees and special assessments. You’ll also see what the rules are, whether you can live with them, and how they’ve been applied. For example, a co-op’s proprietary lease may specify who can live in the unit or whether rooms can be subleased, while the minutes from a board meeting may tell you that a former owner tried unsuccessfully to challenge the sublease provision. If you don’t like what you see, this contingency allows you to back out.

Board Approval

If you purchase a co-op, the transaction will have to be approved by the co-op’s board of directors, which will want to make sure you can afford to make maintenance payments. If you’re unable or unwilling to pay your fair share, the others in the co-op will be financially responsible. This contingency says that the board must accept you, or the deal is off.

Appraisal

Sometimes part of the financing contingency, an appraisal contingency says that you’ll buy the home only if its professionally appraised value is at least as much as the amount you’ve contracted to pay for it. This both protects your lender and ensures you don’t overpay.

Obtaining Homeowners’ Insurance

You’ll be required by your lender to get hazard insurance. Making the sale contingent on actually getting it protects you if the property is uninsurable. You can also require the seller to provide a CLUE (“comprehensive loss underwriting”) report. Drawn from an insurance industry database, it details the house’s history of claims and damage awards. The more claims, especially serious or water-related ones, the harder it will be for you to get insurance. Even if an insurance company initially agrees to insure you, it can rescind that promise
after the closing
if it investigates a prior claim and discovers a significant risk.

Reviewing the Seller’s Disclosure Report

In most states, you don’t need this contingency—state law itself will condition the sale on the seller filling out a form disclosing property conditions, defects, environmental hazards, and more, and on your being satisfied with what you read before closing the sale. But in a few states, no such laws exist, or they make an exception for certain properties such as condos. One way to protect yourself is by asking the seller to provide written disclosures about the property’s condition. (The other way is to get a thorough inspection.)

Final Walk-Through

Also called the buyer inspection, this allows you to take a last look at the house, usually a day or two before the closing. If it’s an existing house, the purpose is for you to make sure the seller has made any agreed-upon repairs and left the place in good condition. If it’s a new house, it’s your opportunity to make sure the place is finished and meets your specifications. We discuss this in Chapter 14.

What About Home Warranties?

Some offers are contingent on the seller purchasing a home warranty for the buyer (a service contract mostly covering repairs to major appliances). Don’t let this become a sticking point; home warranties are of questionable value, anyway (see Chapter 12).

Other Contingencies

Although we’ve discussed the typical contingencies, others may be included in preprinted offer forms, or you can draft your own (with the help of your agent or attorney). You may, for example, want to make your offer contingent on verifying that zoning laws allow you to convert the detached garage into a small apartment. We’ve even heard of cases where buyers made offers after having viewed the house only through an online, virtual tour—then added a contingency giving them a chance to see, and like, the house in person!

Keep in mind that the more contingencies you have and the less reasonable they are, the less attractive your offer becomes. If the seller has multiple offers, particularly at similar prices, the ones with the most contingencies usually lose.

Putting Your Money Where Your Mouth Is: The Earnest Money Deposit

Once you’ve gone to the trouble of making an offer, you want to show the seller that you’re really committed to buying the property. Traditionally, you do this by putting up a cash deposit called an “earnest money” or “good faith” deposit or a “binder.” If all goes well, that money is either returned to you or is applied toward your down payment or closing costs (you’ll specify which in advance).

But if you inexplicably back out after you have a contract, you forfeit your earnest money (or you may have to negotiate with the seller, or even go to court, to get it back). The rationale is that the seller may have lost other opportunities to sell to other buyers by relying on your deal.

The amount of the deposit will vary depending on where you’re buying; your real estate agent can advise you. For example, if local practice is to draft only a brief offer, you might submit only a small earnest money deposit offer, but then submit a larger amount when the contract is signed.

From your perspective, it’s best to keep this amount as small as possible while still showing good faith and remaining competitive for your market—just in case you do end up not going through with the deal. (Even if it’s for a valid reason laid out in the contract, if the seller contests it the money could be inaccessible to you until the dispute is resolved.) You’ll normally place the earnest money with your escrow agent or attorney, who will hold it in a special account, inaccessible to the seller.

TIP

Know your state’s laws regarding earnest money.
For example, in California, a maximum of 3% of the purchase price can be kept as a nonrefundable deposit.

Divvy It Up: Who Pays What Fees

An inspection fee here, an insurance premium there. Your purchase contract should deal with who pays every dollar of every charge involved in buying the house. Common ones include: