Your Contract May Be More Flexible Than You Think
Your search is nearly over. You’ve finally found just the right property to buy. Before you actually make a bid, however, take the time to read the fine print on the offer form. And keep in mind that you can amend the offer contract form to suit your needs.
“These contracts have all kinds of variables,” said Harriet Clune, manager of Jon Douglas Co.’s Woodland Hills office. “Some people read every paragraph and ask lots of questions. Others glance through it and take it on faith.”
Douglas has its own six-page purchase contract that buyers use to make an offer to sellers. While this and similar contracts used by other real estate brokerages or the California Assn. of Realtors seem to cover everything, there are many contingencies that need to be filled in properly, and buyers can add all sorts of conditions that may not be a part of the usual offer form.
Some of the more common contingencies are bank financing, satisfactory inspection by the buyer or the completion of certain repair work by the seller. The buyer may also be demanding some seller financing, reimbursement by the seller of all closing costs or some furniture and appliances that might not otherwise be a part of the home sale.
Deciding how much time each of the parties has to complete various phases of the purchase is also crucial. The contract should spell out exactly how much time the buyer has to inspect the property, obtain financing and close the deal. The contract also should be clear on the dates by which the seller must provide a disclosure statement of any problems in the property and the date by which the property will be vacant and ready for the new owners.
“If you want something, ask for it specifically, never assume that something is included,” Clune said. “You have to be very specific and be careful with the wording that you use.” Chandeliers, for example, may or may not be part of the sale, Clune explained. Almost anything that isn’t nailed down may also disappear by the end of escrow if the buyer doesn’t clearly ask for and receive it in the purchase contract.
Many real estate agents advise asking for all sorts of concessions in the initial offer and giving in a little bit later. The effectiveness of this strategy, though, depends on how motivated the buyer and the seller are, Clune said. “If the property is extremely well-priced, you may not want to risk losing it by asking for too much,” she added.
“At the time a buyer is making an offer, all the contingencies should be contained in that offer,” advised Bobbi Miller, vice president and manager of the Woodland Hills office of Fred Sands Realtors. The offer should also include a deposit or “earnest money.” This deposit is usually in the form of a personal check made out to the real estate firm or an escrow company for about 3% of the offer.
Some prospective buyers, however, write a check for as little as a few hundred dollars. It’s up to the seller, Miller said, to decide whether the deposit is enough to show that the buyer is serious about the transaction. If the buyer fails to satisfy his or her obligations under the contract, the buyer can lose the deposit or get sued by the seller--although the latter situation rarely occurs.
To avoid losing a deposit, buyers need to know how to write up a deal that they can get out of. If the deal is contingent on financing and the financing doesn’t come through, the buyer hasn’t breached the contract--unless that buyer never went out and looked for financing at all. Buyers are advised to write into the contract a 30-to-45-day period in which to obtain financing, along with the maximum interest rate they are willing to accept.
Making the deal contingent on inspection is another way out of the contract. Once the seller accepts the contract, escrow opens within a few days. The first inspection comes in the form of a look at the preliminary title report. The buyer will want to reserve a right to withdraw if there are unsatisfactory liens or other encumbrances on the property. Next, within a few days, the seller will provide the buyer with a disclosure statement detailing potential defects in the property. If any of these defects is a problem, the buyer should be sure he or she has a right to get out of the deal.
Within about 10 days from the date escrow opens, the buyer should also be sure to inspect the property. Some contracts allow the seller to make any corrections called for by an inspector. The buyer, however, should reserve the right to reject the property for any reason at all pursuant to the inspection--even if the seller agrees to make any and all repairs. If the buyer wants to go ahead with the transaction, the inspection may be a good reason to approach the seller for more concessions.
“There are always ways to get out of a deal if you don’t really want to stay in the deal,” Miller said. “If you get a buyer who gets cold feet, somehow the transaction isn’t going to happen.” It’s important, she said, that all parties deal with each other in good faith.
“It is important that any buyer go over everything in a contract more than once,” said Dana Potter, owner of Pinnacle Estate Properties in Northridge. “I question how many buyers give it as much serious consideration as it deserves.”
Some of the items Potter suggests that buyers should consider including in a contract are:
If the seller is going to do certain repair work, the buyer should get copies of the bids for the work and insist that everything is done with a building permit by licensed and bonded workers.
The buyer should consider more than one inspection. Besides a regular inspection, buyers may want to get a geological survey and a report about possible health hazards from asbestos, lead paint or contaminated soil.
The buyer should ask the seller to help pay for the cost of a home warranty that will protect the buyer for a year after buying a home.
If there are termite problems, buyers should get the seller to pay not only for needed repairs but also for recommended work, which otherwise would be the buyer’s responsibility.
Spell out in the contract any non-recurring closing costs being refunded to the buyer by the seller. This can mean thousands of dollars back to the buyer at the end of the transaction. Buyers should know that many lenders are wary of this practice.
If the property is a rental property, the contract must deal with what happens to tenants and their deposits.
Finally, Potter advised, all parties should be certain that any agreement reached in the initial contract or in negotiations or amendments should also be spelled out in the escrow instructions.
