The housing market boom has resulted in some selling their houses sooner than initially planned. An exciting new start for you our your family can come at a heavy price if you don’t have the right expectations or are not properly advised or educated about the home selling process. Lack of knowledge will not only certainly cause a lot of waste of time, energy, stress and anxiety. But also liability, which it’s a risk that you should avoid at all cost.
Whether it’s a seller or a buyer’s market, before you agree to sign a real estate purchase agreement you must avoid these five pitfalls during your home selling process:
1.- Unqualified Buyer
There are essentially five kinds of buyers: A Cash Buyer, a Buyer with financing, a buyer that needs to sell a home in order to buy yours, a buyer who needs to sell their home and needs financing & a buyer obtaining seller financing.
For a cash buyer: you will want to make sure that your realtor obtains the following proof of funds documentation and provides it to you for review: This can be a bank statement showing that the buyer has a least the amount needed to purchase your home. Or a 401K, stock or other equity investments showing the buyer has the amount to buy your house AND a written letter from the funds manager stating when the funds will become available for the purchase. The latest is very important, because a buyer may have the funds but may not be able to get them before the agreed date in the purchase agreement.
- A Buyer with Financing: Your realtor should obtain a buyer loan pre approval letter from a reputable licensed lender. Often times, buyers go through several lenders to obtain a loan pre approval and to shop for the lowest fees. Unbeknown to the buyer who is looking for the best mortgage deal out there may choose a lender who may not necessarily do his/her job. Resulting in long delays or cancellation of the agreement. Often times because the buyer could not have been pre approved in the first place and lender didn’t do the due diligence during the pre approval process and you only find out three days before closing and have had your house tied up and off the market for months. This scenario happens a lot. A realtor will typically advise a buyer to obtain a pre approval from well- known lenders, but sometimes buyers either don’t follow the advice or think they should choose someone other than what is recommended.
- Accepting an Offer with an open ended buyer’s contingency to sell a home. Often times a buyer needs to sell a home in order to buy another home. If you get an offer with this kind of scenario; make sure that there are deadlines (also known as contingencies) on the agreement stating when the buyer is supposed to be in contract with the sale of the home and when it will close. This can be tricky because the buyer’s sell of a home can have other contingencies as well. I have represented sellers whose buyers needed to sell their home, and their buyers’ buyers also needed to sell their home. It can be a chain reaction of delays and cancellations. You will certainly need an experienced realtor handling all ends and working with other agents and buyers involved as it can get very complex.
- A buyer who needs to sell a home AND with financing: For this one, a buyer uses part or all of the proceeds from the sale of a home AND also gets a mortgage loan to buy a house. Your real estate agreement will close only if the buyer can accomplish both of these tasks successfully. There is a lot that can go wrong with this scenario, but in a sellers’ market is generally ok, as long as your buyer is good for the loan. You will want to make sure that there are deadlines or “contingencies” to be met by your buyer. For example: Buyer needs to get his home under contract by xyz date, and buyer’s sell of his home will be completed by xyz date or buyer’s loan to be fully approve within 21 days from agreement. If you have these contingencies, your buyer will have a clear understanding of what is expected. Otherwise, you will be lost in limbo and waste an enormous amount of precious time and energy.
- A buyer obtaining seller financing: If you as the seller decide to do seller financing, you will want to avoid a buyer only willing to give a small downpayment. Typically 30% of the purchase price is what sellers collect for downpayment. You will also want to make sure you have a clause on the agreement stating the length of time you will want to hold the note and the interest rate. You will also want to do a background and credit check to make sure you know whether you buyer is capable of repaying the loan. The recourse in the state of California for a buyer who doesn’t pay a mortgage can be a lengthy process. So you will want to make sure you get legal advice from an attorney.
2. – Not Removing Buyer Contingencies
In real estate, a contingency is basically something that must be met in order for an event to continue. You may think of it as a deadline. For example: buyer has 17 days to remove inspection contingency, if buyer does not remove it you may ask them to remove it in writing, the same for the appraisal, loan and other contingencies. Failure to remove buyer contingencies through the proper channels can result in buyer forfeiting the good faith deposit to the seller and purchase agreement been cancelled.
However, if contingencies are not removed at the right times, and seller doesn’t request the removal in writing, the agreement will remain in effect. Often times, seller does not want to upset the buyer by asking for contingencies to be removed. Other times buyer and seller agree to keep extending contingencies, which cause delays and can often result in waste of time for the seller. In a shifting or declining market this can be detrimental.
Before you agree to extend a contingency, make sure that there is a very good reason behind it and you obtain an explanation in writing from the parties involved (lender, contractors, etc) as to why the time needs to be extended.
3.- No Having a Place to Move To After Closing
Often times a seller needs to buy a replacement home or a home to move to after closing. If you are replacing an investment property, you will definitely want to look into doing a 1031 exchange. There are tax rules involved and you should check with your tax advisor and 1031 exchange company.
If you are downsizing or wanting to move to a different area, you don’t want to wait until the last minute to start looking. You will want to narrow down your search into the area that you want to move and if possible make an offer prior to accepting an offer in the home that you are selling.
You must have a contingency in both real estate purchase agreements: 1) for the house that you are selling; you will want to have a contingency (clause) stating that close of escrow (purchase of the home) is contingent (depends) on seller’s ability to find and close escrow on replacement property. 2)for the house that you are buying; a contingency (clause) stating that purchase of the home is contingent on the ability to close escrow (sell) your current home.
Your realtor may even advice a rent-back situation for a short time after close of escrow to allow for some extra time for the seller to make the move.
Again, it can become very complex. Specially when multiple parties have a lot of contingencies. There are a lot of emotions involved as well. That is the reason you need a competent and experienced realtor assist you.
4.- No Disclosing ALL KNOWN Material Facts Affecting the Property
Before your property goes on the market. Your realtor should have you complete the disclosure package. Where you will have the opportunity to disclose all the known material facts affecting the property. Don’t rush through this part, because you will want to make sure that you go step by step through every form and complete every piece of disclosure thoroughly.
You are not obligated to disclose what you don’t know. That is why the buyer has the right to perform any and all investigations deemed appropriate. But you will want to make sure that you write down anything that you are aware of. If you are not sure whether to disclose something, just disclose it.
So many sellers become liable and end up in court even after the purchase has taken place for not disclosing something ahead of time. Disclosure should be your number #1 priority. If you get done at the beginning, it will be out of the way and the buyer will be informed before an offer is even on the table.
I often advise clients to get some inspections done ahead of time. Health & safety hazards are issues you will definitely want to try to address ahead of time.
Even if the sale is “as is.” You are still required to disclose all material facts.
5.- No Hiring A Realtor
After reading the first four pitfalls, you are probably thinking it’s a good idea to have an excellent realtor.
The fact is that the job of a realtor doesn’t end when a buyer makes an offer. Sometimes sellers have the misconception that the house is sold once an offer if accepted. The truth is that signing a purchase agreement with a buyer is only the beginning of the real journey. Having a realtor will certainly provide you with some protection against the risk of liability as well.
A realtor’s job starts with telling you how to get your home ready so it showcased well for prospective buyers, pricing recommendation, professional photographs/video tours, caravans, open houses, brochures, lots of online marketing. Also, making sure your home is shown to pre qualified buyers, presenting offers, negotiating, making sure that the legally bound agreement is complete, keeping track of deadlines, renegotiating terms on the agreements, making sure all disclosures are completed and signed by all parties, obtains inspection reports, working with lenders, title co, 1031 exchange co, attorneys and other agents.
Maria Horat.
Real Estate Broker. Realtor.
Serving Northern California, from the S.F East Bay to the foothills of the Sierra Nevada Mountains.
www.MariaHorat.com.
Cell: 209.985.0822.
CA DRE Lic # 01805707
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