Contracts

How Home Sale Contracts Fall Through

reallivingathomeblog Arlington, Buyer, Seller , 0 Comment
How Home Sale Contracts Fall Through

Question: We just accepted an offer on our home and wanted to know what can happen to cause a home sale contract to fall through.

Answer: Happy Halloween! In keeping with the Halloween theme, I thought I’d write about something really spooky…home sale contracts falling apart! Now that we’ve returned to more “normal” real estate contracts with standard contingencies, it’s easier for buyers to walk away from a deal without risking their deposit, so let’s talk about some of the common ways buyers and sellers can get out of a deal.

Earnest Money Deposit Seals the Deal

The Earnest Money Deposit (EMD) is a negotiated amount of money that is held in escrow to ensure the Buyer performs their contractual obligations to purchase a property. In the event of Buyer default, some or all of the deposit can be claimed by the Seller for damages. If the Buyer voids the contract using a contingency or other contractual protection, their EMD is protected and returned in full. The amount of EMD is negotiable, but often falls somewhere between 1% and 5% of the purchase price.

For a  more detailed explanation of EMD, you can read my May 2021 article on the topic.

How Can Buyers Back Out?

The sales contract stipulates if, and how, the Buyer can walk away from a home purchase without losing their EMD. I’ll highlight the most common protections Buyers have, which are also the most common ways home sale contracts fall through.

Home Inspection: Home inspections are usually completed within one week of being under contract and are the most common reason for deals to fall through. If your contract has a Home Inspection Contingency, it allows a Buyer to void the contract within a specified number of days (usually 3-10 days) and may also provide for a negotiation period after the inspection for the Buyer to negotiate for repairs and/or credits. The Home Inspection gives the Buyer a unilateral option to void and does not allow a Seller to void, only to reject requests for repair and/or credit.

Financing: The next most common way for a deal to fall through is a Buyer failing to secure financing, which can occur for a wide range of reasons. If a Financing Contingency is included in the contract, Buyers can walk away from the deal if they are legitimately rejected for their loan. Buyers are not protected if they self-sabotage their financing, but this can be a grey area and challenging to verify. Depending on the structure and handling of the financing contingency, Buyers may be protected up to the closing date.

The best way to reduce the risk of a deal collapsing from financing is to ensure the Buyer has a strong pre-approval letter from a Loan Officer who has reviewed critical financial info and documents like credit, proof of income, and tax returns. 

Appraisal: When a Buyer is taking out a loan to purchase a property, the bank will usually require an independent appraisal from their third-party appraiser pool (in other words, the appraiser comes from the bank, not the Buyer or Seller). The Northern Virginia contract requires Buyers with conventional financing to give the Seller the opportunity to lower the sale price to the appraised value before voiding the contract, but allows the Buyer to void in the event the Seller does not agree to the lower price and Buyer and Seller are unable to reach an alternative agreement. The Northern Virginia contract allows Buyers with FHA, VA, or USDA financing to unilaterally void the contract in the event of a low appraisal, or renegotiate the contract price with the Seller.

Association Document Review: Any time a property is sold within an Association, be it a condo association in a large building or a small HOA cluster of single-family homes, Virginia law requires Sellers to provide a resale package with information about the Association ranging from by-laws, to budget, to the reserve study. In Virginia, Buyers receive a three-day review period of these documents and can unilaterally void the contract within those three days.

The intention of the review period is to provide Buyers an opportunity to review the health, standing, and operations of the association they’re buying into. The reality is that this review period can also be used as a way out for a reason that’s not protected by a standard contingency (e.g. Buyer gets cold feet) because voiding within the review period does not require a specific reason or require that the Buyer allow the Seller to rectify the issue. For this reason, it’s in the Seller’s best interest to have their resale package prepared and available before they accept a contract so the three-day review expires early in the contract period.

Title: The Seller is contractually obligated to deliver title (ownership) of the property to the Buyer that is “good, marketable, and insurable” and in the event the Seller is unable to do so by the closing date, they are in default, which gives the Buyer the right to void the contract. Examples of ways a Seller can’t deliver clean title are unreleased liens (e.g. an unpaid debt to a contractor or unresolved bankruptcy) or an improperly recorded deed (can be a simple clerical/administrative error from past transaction).

How Can Sellers Back Out?

Sellers rarely have a legitimate way of backing out of a sales contract unless the Buyer defaults by not delivering their EMD on time, not applying for financing on time, or does not meet some other contractual obligation.

In the event the contract includes a Home Sale Contingency (Buyer does not have to purchase unless they successfully sell a home), Sellers have a kick-out clause which allows them to notify the Buyer of their intent to void the contract within a specified period if the Buyer does not have a ratified contract on the property they’re selling or cannot otherwise remove the Home Sale Contingency. This is the closest most Northern VA contracts get to allowing the Seller to void, and even that is not common.

How Is EMD Handled If Deal Is Voided?

If a Buyer voids under the contractual protections of a contingency, association review period, or seller default they are due 100% of their EMD. If a Buyer walks away from a deal outside the legal protections of the contract, the Seller may make a claim on their EMD.

In any case, whether the Buyer is protected or has defaulted and the Seller has a legitimate claim on the EMD, no money can be released to either party without both parties signing off on the amount(s) to be released to each party.

It’s rare for there to be a conflict over the release of EMD back to the Buyer if they are legally voiding a contract, but there can be conflict when a Buyer defaults/walks without contractual protections and the Seller makes a claim on the EMD. This can turn the EMD release into a negotiation and in the (unusual) scenario that the release cannot be agreed upon by both parties, legal action is required to resolve the distribution of the deposit. The Title Company, the party that often holds the EMD, can be an informal mediator but cannot make any legally binding decisions about how EMD is distributed, no matter how strong or weak the case is for each party.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Most Common Contract Contingencies Explained

reallivingathomeblog Arlington, Buyer , , , 0 Comment
Most Common Contract Contingencies Explained

Questions: We’re making an offer on a home that has been on the market for a few weeks and want to include contingencies, what is normal?

Answer: Contingencies can be used by buyers to reduce their risk in a real estate transaction by allowing them, in specifically defined scenarios, to renegotiate contract terms or cancel a contract without losing their Earnest Money Deposit. The three most common contingencies are the home inspection contingency, financing contingency, and appraisal contingency.

The shift in market conditions over the last 3-4 months has meant adjusting from a market where most winning offers did not include any contingencies to a market where many buyers are able to include at least one or two contingencies, often all three. This week I thought it would be helpful to refresh everybody’s understanding of the three most common contingencies and what protections they provide to buyers.

Home Inspection Contingency

  • Purpose: Allows buyers to hire a licensed home inspector who will provide a detailed assessment of a home’s condition and recommendations for repair, replacement, and maintenance.
  • Structure: The inspection contingency offers two options. One being the ability to void the contract after the inspection and the second being the option to void and the option to negotiate for repairs or credits based on the results of the inspection. 
  • Timeline: In most cases, I see inspection contingencies last 3-10 days and if there is a negotiation period, those often last 2- 5 days.

Financing Contingency

  • Purpose: Protects buyers if they do not get approved for their loan and allows them to void the contract or delay closing without losing their Earnest Money Deposit.
  • Structure: The financing contingency can either automatically expire at the end of the contingency period or extend to the closing date, unless the seller takes formal action to remove it after the contingency period ends.
  • Timeline: In most cases, I see financing contingencies last 10-24 days. It is a good idea to consult your lender on this timeline.

Appraisal Contingency

  • Purpose: Protects buyers in the event the property appraises for less than the contract purchase price. It allows a buyer the option to void, renegotiate, or proceed.
  • Structure: In some cases, through a separate addendum, buyers may agree to waive a specified difference between the appraised value and purchase price and make the appraisal contingency only if the appraisal value is below a certain number.
  • Timeline: In most cases, I see appraisal contingencies last 10-24 days. It is a good idea to consult your lender on this timeline.

As a buyer, it is important to understand that the use of, structure, and timeline of contingencies in your offer play a significant role in how a seller responds to your offer. In some cases, contingencies (or lack of) may have a greater influence on negotiations and a seller’s response than price, so it is important to approach contingencies thoughtfully and strategically based on your interest in a home, days on market, and an assortment of other factors.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Real Estate Customs & Contracts Vary Significantly by Market

elieliresidentialcom Arlington, Buyer, Home Owner, Seller , , , , , 0 Comment
Real Estate Customs & Contracts Vary Significantly by Market

Question: Is it normal for sellers to leave appliances behind for the next owner?

Answer: A friend of mine is moving in Southern California and mentioned having to move his refrigerator to the new house, which I found odd, but apparently, it’s common in California and other parts of the country. My theory is that one day somebody decided to take their coveted refrigerator with them and it created a chain reaction of everybody having to take their appliances with them after that!

Over the years, I’ve picked up on customs and contract terms that differ significantly here from other markets. I thought I’d come up with a list of standard customs and contract terms in Northern VA that often come as a surprise to buyers and homeowners who have transacted in other markets.

I’d love to hear from readers in the comments about other local practices that surprised you if you were used to real estate customs and contracts in another market.

  1. Appliances Convey: All of the appliances, including washer/dryer, have conveyed (transferred to the next owner) in every transaction I’ve been part of. Buyers and sellers have to agree during negotiations what appliances and other items do or do not convey.
  2. No Individual Attorneys: It’s rare for an attorney outside of the Title Company to be involved in a transaction. The same Title Company almost always works on behalf of both parties (without bias).
  3. (Lack of) Seller Disclosures: Virginia is one of the few “Buyer Beware” (Caveat Emptor) states in the country; which essentially means that sellers in Virginia do not have to disclose any property defects, but they can’t hide them or lie about them either. For homes built before 1978, there’s a one-page lead disclosure form for a seller to note if they’re aware of the existence of lead paint on the property. Most states, including DC and MD, have lengthy seller-disclosure forms.
  4. Dual Agency Allowed, Not Common: Dual Agency, as defined in Virginia, is when one agent represents the buyer and seller on the same transaction. While allowed, if both parties sign-off, it is pretty uncommon.
  5. No Response/Counter Deadline: The contract does not require either party to respond to an offer or counter within a certain period of time unless one party writes in their own deadline
  6. Earnest Money Deposits/Escrows: It is customary for the deposit (EMD/Escrow) buyers make to secure the contract to be due within 3-5 days of ratification (terms accepted by both parties) and the deposit is usually 1-5% of the purchase price
  7. Days: Contractual obligations are usually measured in days from ratification. A “day” in Northern VA contracts is any calendar day, no skipping weekends or holidays, and ends at 9PM.

What’s the takeaway here? Even if you have real estate experience in other markets or past experience in our local market, it’s always good to refresh yourself on local customs and contracts.

If you’d like to discuss buying or selling strategies, don’t hesitate to reach out to me at Eli@EliResidential.com.

How to Write a Strong Offer

judson726 Arlington, Buyer , , , , 0 Comment
How to Write a Strong Offer

Question: The last time I bought a house, the market was much more favorable for buyers. I’ve heard so much about competing offers and the need to submit a strong offer, but what exactly does that mean?

Answer: Other than price, there are about a dozen terms included in your offer that will determine its strength — the value/appeal it has to the seller. Of course, every home owner wants to get the most money possible, but they also care about when the sale is executed, the likelihood of getting to settlement, renegotiation periods, risk and more.

Sometimes a seller takes a lower offer price in exchange for better supporting terms. Understanding what type of offer is appropriate/necessary for a property and how certain terms change your (buyer or seller) risk exposure on the transaction is critical.

Let’s take a look at some of the terms included in most contracts that have the biggest impact on the actual or perceived strength of an offer.

Price/Escalation Addendum

This is an obvious one. Higher price = stronger offer. Escalation Addendums are common when there are multiple offers, but how and when to use them is a nuanced, yet critical, decision.

The Escalation Addendum allows you to beat any competing offer by a specified amount, up to the highest amount (ceiling) you’re willing to pay for a property. Used correctly, it prevents you from leaving money on the table, while not paying too far above what the rest of the market is willing to offer.

Contingencies

The three most common contingencies are for the home inspection, appraisal, and loan. Each provide the buyer with a set of protections that allow them to renegotiate and/or terminate the contract, without losing the deposit. Removing a contingency or shortening the contingency timeline increases the strength of an offer.

  • Home Inspection:  It used to be standard for Arlington buyers to include a negotiation period in the home inspection contingency, allowing them to negotiate for repairs or credits based on the results of the inspection or terminate the contract. Now it is much more common for buyers to forego the negotiation period and simply retain the right to void (aka a pass/fail inspection), which is much more attractive for a seller. Even more attractive is when buyers perform a pre-inspection on the property (inspect before submitting an offer) and remove the home inspection contingency altogether.
  • Appraisal: If you’re using a mortgage to purchase a home, your lender will almost always require a property appraisal. The appraisal contingency allows you to renegotiate or terminate the contract in the event the home appraises for less than the purchase price. It is common for buyers to remove the appraisal contingency or agree to cover up to a certain amount on a low appraisal to increase the strength of an offer.
  • Financing: The financing contingency allows you to terminate the contract without losing your deposit if your loan isn’t approved. Many buyers who have undergone a thorough pre-approval process have enough confidence in their ability to secure the mortgage that they remove this protection, thus conveying a strong financial position to the homeowner.

Speed of Sale

Most sellers want to close (executed sale) as quickly as possible so cash-buyers have the biggest advantage here because they can usually close in a week or less. For the more than 80% of Arlington home buyers relying on a mortgage, many choose to work with smaller, local lender who can sometimes close in as little as 2-3 weeks. Offering a quick-close to a seller can give your offer a significant boost.

Financing

If you’re relying on a mortgage, sellers are usually more drawn to higher down payments. That’s not to say that a 3-5% down  payment (or 0% on a VA loan) can’t win in a competitive scenario, but you are at a disadvantage and will often get passed over when all other terms/pricing are relatively equal.

A thorough pre-approval process by a quality/reputable lender can provide the seller with confidence that if they accept your offer, there is very little risk of the deal falling apart due to financial issues. Sometimes sellers take less money work with a buyer they have more confidence in.

Earnest Money Deposit (EMD)

This is money held in escrow (usually by the Title Company) as security for the seller that you’ll perform under the obligations of the contract. It gets applied against what you owe at closing for down payment + closing costs, but is at-risk if you default on the contract (terminate outside the legal means/contingencies).

Traditionally, a reasonable deposit ranged from 1-3% of the purchase price, but some buyers are electing to make substantially larger deposits in an effort to establish financial strength. Instances of buyers offering deposits of 10% or more are becoming more common.

Rent-Back

Oftentimes if the homeowner is still living in the house during the sale, their preference is to close as quickly as possible and then have some time to move out after the sale is complete – this is called a rent-back. It used to be common for the seller to cover the buyer’s daily carrying cost (mortgage + taxes + insurance + HOA fee) for the length of the rent-back, but in this hyper-competitive market, a strong offer often includes a free rent-back for the seller.

The use and structure of each of these terms is dictated by many factors including demand/competition, days on market, seller-preferences, and buyer priorities/risk tolerance. As a buyer, being prepared with the right offer strategy and understanding the risk-benefit tradeoffs for each term can be the difference between landing your dream home or going back to the drawing board.

If you’d like to discuss buying or selling strategies, don’t hesitate to reach out to me at Eli@EliResidential.com.

What To Know Before Buying a House

judson726 Arlington, Buyer , , , , , , , , , , 0 Comment

Question: We are planning to buy a home in the DC area sometime in the next 12-24 months and want to make sure we take that time to prepare. What should we know before buying a house that we can get started with now?

Answer: Whether you’re a first-time buyer, experienced buyer relocating from out-of-state, or moving locally here’s a list of things I review and plan out with clients before getting into the full swing of house hunting:

Local Customs, Requirements, Timelines, and Contracts
The home-buying process varies greatly across and within states. I think the most important thing you can do as a buyer is take an hour at the beginning of your buying process to become educated on the process, timelines, and key contractual terms/obligations in the area(s) you plan to search. This is also a good way to meet and vet different real estate agents early on to get a feel for who is willing to spend time with you up-front on education and planning vs pushing immediately for a sale.

Choose the Right Financing, Get Pre-Approved
Not all lenders offer the same loan products so it’s important to identify a lender who not only provides high quality service, but also has access to loan products that fit your profile (down payment, credit score, job industry, etc). Real estate agents, friends, and co-workers are all great sources of recommendations.

You’ll also want to get a pre-approval from at least one lender, one that actually reviews and verifies your financial documents, income, and employment instead of just running credit and reviewing an information sheet. This will decrease the chances of you being rejected from a loan, allow the lender to provide the most accurate recommendation, increase your leverage in contract negotiations, and reduce the amount of work required of you once you’re under contract.

Don’t Forget A Monthly Budget
I find that most people qualify for more than they actually want to spend, especially dual-income buyers, so budgeting is important. The biggest mistake most buyers make is budgeting strictly around the sale price, which is often driven by the amount you have for a down payment. It’s just as important to set a monthly budget for total housing expenses including mortgage, taxes, insurance and if applicable Association fees and/or mortgage insurance. Your lender can help you project monthly expenses at different price points based on different down payment amounts.

Do You Want Representation?
Determine if you want to have a real estate agent representing you in the transaction (breaking news…I highly recommend it) and, if so, what level of service you’re looking for. In most cases, the seller pays commission to their representing broker and the buyer’s broker, so representation often comes at little or no cost to buyers.

Push Yourself on Your Criteria
It’s very easy to come up with your top 3-5 criteria for a home and rare for most couples to disagree on the short list, but push yourself/yourselves to rank your top 10-12 criteria. This list can and will change as you search for homes, but it pushes you to think about more than bedroom count, schools, commute, and an open kitchen. This is especially valuable for couples. Just because you have the same taste in music, food, and TV shows that brought you together, doesn’t mean you’re on the same page about housing criteria.

Cash Needs + Savings
You need cash savings to pay for your down payment + closing costs of 2.5-3% of the sale price (in the DMV). Within a few days of your offer being accepted, you’ll have to transfer 1-5% (negotiable) of the sale price into an escrow account as deposit to secure the sale. You’ll spend about $1,000 out-of-pocket between contract and closing on inspections and the appraisal. Don’t forget how expensive moving is either, so keep enough savings for incidental moving expenses, new furniture, painting, etc. You should aim to haver 3-6 months of emergency savings tucked away after everything is paid for.

Other Key Providers
Most buyers are familiar with the role real estate agents and lenders play in the transaction, but don’t forget about the importance of working with a quality title attorney and home inspector. Your agent should be able to make a great recommendation.

How Long Will You Live There?
This is probably the most underrated conversation for buyers to have when they’re setting a budget and determining criteria. Your home-buying strategy should look very different if you’re planning to own for 3-5 years vs 10-12 years so give it serious thought and be realistic.

Deadlines and Lease Terms
Figure out if you have any strict deadlines for the move and iuf there are direct or indirect costs of buying before or after that deadline. It can be difficult in a low-inventory market to time a purchase, so make sure you’re aware of the pros and cons of purchasing before or after your deadline. If you’re renting, make sure you find out the cost of early termination or if month-to-month leasing is an option.

Reason for Your Purchase
I still haven’t met somebody who asks for a bad investment when they buy a house, everybody wants their home purchase to be a great investment, but you have to define what a great investment means to you. Does it mean your home appreciates in value well above the market over a certain period of time? If so, you’ll likely be in under-developed areas or in a house nobody else wants. Does a great investment mean you wake up every morning so happy with your home and neighborhood that the money is a secondary concern? I often remind clients that sometimes the best investment is buying a house that allows you to live there longer and eliminates one or more real estate transactions in your lifetime. In other words, the value you get out of being in a home for 10 years vs 3 years far surpasses a small increase in your budget.

I hope this list is helpful not just for local DC Metro readers, but for anybody getting started with their home search and wondering what you should know before buying a house. These are the conversations and steps I take with my clients every day to make sure they’re prepared, educated, and have the right strategy in place before we even step foot in a house together. I’m sure I left a few things off this list, but this should get you 95% of the way there. Feel free to give me a call or send me an email at Eli@EliResidential.com for the 5% I missed.

What It Means To Sell ‘As-Is’

judson726 Buyer, Seller , 0 Comment

Question: This is in response to recent comments on my columns about what it means to sell “as-is.”

Answer: Selling a property “as-is” in Northern Virginia carries a technical definition as stated in the contract and an intended purpose that should be discussed between the buyer and seller.

Technical/Contractual Definition

In Northern Virginia’s Contingencies/Clauses Addendum you’ll find a section for selling “as-is” which contains the following terms that can be individually selected for the contract:

  • Seller will not clean or remove debris. The standard is for the property to be free of trash/debris and broom clean.
  • The seller is not responsible for addressing any wood destroying insect/termite issues. The standard agreement requires the seller to pay for any damage from wood destroying insects.
  • The seller is not required to fix any Homeowners Association violations related to the physical condition of the property.
  • The seller is not responsible for providing working smoke detectors.
  • The seller is not responsible for compliance with notices of violation from local authorities.

Implied Definition

When you market a property as-is, you are implying that you will not negotiate with the buyer to fix anything and the buyer should be prepared to take on the full risk of the property in its current condition. Generally, this means a buyer will agree to take the property in the condition it is in at the time of offer and that the contract is not contingent on a home inspection (buyer withdraws the right to negotiate or void based on home inspection results).

However, you may consider accepting a short pass/fail inspection contingency whereby the buyer does not have a right to negotiate credits or fixes, but does have the right to void the contract if they find any major problems with the home during the inspection.

Who Uses As-Is?

It is common to see estate sales and homes that will be the targeted by investors (tear downs or flips) being sold as-is. In the case of many estate sales, the family member(s) who inherited the property may not live nearby, know anything about the condition of its systems, or want to be bothered by negotiations after a deal has been made. It doesn’t necessarily mean the property has problems.

Understand Your Choice

As a seller, you want to make sure you understand the message you’re sending and buyers you’re targeting when you market a home as-is. You also need to be realistic about how this will impact the sale price (discounted). As a buyer, you want to make sure you understand why a home is being sold as-is, what the seller’s contractual and implied expectations are, and be prepared to handle the risks associated with buying as-is.