The terms of a purchase are spelled out in a legal contract the buyer and seller sign.
Getting Expert Advice
It’s important that you hire an experienced real estate attorney to review the sales contract before you sign. The document’s language is specialized, and may include some conditions that favor the seller rather than you. You don’t want to agree to anything that could cost you extra time or money, or that might limit your rights. You may want to ask your financial adviser, real estate agent, or lender to recommend a real estate attorney. Or if you’ve worked with an attorney in a different capacity, you may want to ask him or her for a recommendation. An attorney may charge an hourly rate or a set fee calculated as a percentage of the purchase price. Generally, one or the other approach is standard in the area where you’re looking, and the amount may not be negotiable. You may also have to pay for the services of your financing provider’s attorney, again depending on local custom. Using the provider’s attorney may be a cost-saving alternative, but hiring your own legal representative is a better idea and worth the added cost.
The market value of a property is the amount you’re willing to pay to buy it. The appraised value, on the other hand, is what a real estate appraiser working for a lender believes it is worth, based on comparable houses in the community and his or her judgment and experience. The appraised value determines the size of the mortgage loan a lender will provide. If it’s less than you need to buy the home, you may need to increase your down payment, find another lender, or change your plans.
Setting the Rules
Buyers or sellers can add contingencies, or conditions, to a real estate contract that must be met if the agreement is to be finalized. Buyers may demand that certain repairs or improvements be made. Sellers may want the right to sell to another bidder after a specific date if financing is not final.
Finalizing the Contract
When representatives for you and the seller have agreed to the terms of the contract, you both sign the document. You typically make a cash down payment to the seller’s agent, which is held in reserve in an escrow account until the sale is finalized. The amount of the required payment is stated in the contract, and varies based on local custom. The maximum is rarely more than 10% of the purchase price and may be less. The balance of the down payment is due at the closing. If the sale falls through, you may or may not get the deposit back, depending on whether or not there is a contingency clause to this effect in the contract. Unless contingency is standard practice, such as one voiding the contract if the buyer can’t find a mortgage, one or the other party may not be willing to agree to including it. There’s no way to predict how long contract negotiations may take. They can move along briskly, but they can also be stalled if you, the seller, or your representatives can’t agree on all the details. And since there are a number of people involved—the seller, the seller’s agent, the seller’s attorney, you, your agent, and your attorney—making even minor changes to the agreement and getting them approved can take time. One risk you face is that until the contract is signed, the seller may receive a higher offer and reject yours. The period before you sign is probably the last opportunity you’ll have to revise your offer if the inspection has turned up any problems with the home. This means you’ll want to have the report in your hands before the contract discussions end.
Sellers may be willing to accept a reduced price or to hold part of the mortgage if you’re unable to borrow the full amount, especially if they’re eager to sell. Real estate brokers may agree to a reduced commission if a sale is stalled over price, especially if a representative from the listing firm is handling the transaction.
Free and Clear Title
You, as the buyer, must be able to obtain a free and clear title to the property. The title provides assurance that no other person, organization, or government has any legal or financial claim that would limit ownership rights. Without this title, you take the risk of losing the money invested in the property should there ever be a court-imposed settlement requiring the new owner to make good on a claim. To obtain this title, you pay a title company or title attorney to examine the public record for any outstanding claims against the property and provide title insurance to protect your lender’s interest in the property. You can also protect your equity by buying owner’s coverage for an extra charge.