You’re Under Contract!

Architect Checking Insulation During House ConstructionOnce we are able to come to agreeable terms with the seller and everyone has signed the appropriate paperwork showing it, we are under contract. This means that as long as you abide by the terms of the contract and we continue forward to closing, no one else can come in and offer more or give the seller better terms and buy the house out from under you without breach of contract and legal and financial consequences to the seller.

The next step is Seller’s Disclosures and performing your Due Diligence. Both of these things are things that are discussed in the contract and have a specific date attached to them to allow for completion.

Seller’s Disclosures are a form that sellers are required to fill out where they can disclose to the buyer any and all known defects or major issues that have been part of the history of the house during their period of ownership. This can be things like; the roof leaked, the basement flooded, the furnace was replaced last year, the light in the hallway doesn’t work etc. Most Sellers Disclosures forms are fairly basic and only have check marks and small blanks to fill in, so anything of significance is going to have to be added in on separate form. Hopefully the sellers do a thorough job when filling them out. Once you have had a chance to review them, you have the opportunity to ask questions about anything that you see there and any other questions that arise. Another part of the Disclosures is getting a copy of the Preliminary Title report. This is usually sent over from either the seller’s title company or yours. Either way, it is an opportunity to make sure that there aren’t any liens, judgments or any other encumbrances on the title of the property. It is fairly rare to have anything of concern on there since the seller’s usually get an opportunity to view this and clear up any issues when they list the house, but just in case, it is good for the buyers to have a chance to review things.

The Due Diligence period is the time that you as a buyer are allowed to do any and all inspections that you feel are necessary in order to feel completely comfortable with purchasing the house. For most buyers this involves hiring a home inspector to perform a thorough inspection of the house. See my “Business Partners” page for great inspectors that many of my clients have used. Most inspectors will check all the main systems of the house such as heating/cooling systems, plumbing and electrical as well as the roof, foundation, attic and much more. Many inspectors can do additional tests at your request such as; meth, radon, lead base paint, mold, rodents and others. It is up to you what you have done. This is also the time for you to check things like crime statistics, area schools, commute time and talking to the neighbors if you are up for it.

Once you do the inspections, the inspector will usually give you a full report of their findings. It is not uncommon for there to be a decent list of items that may or may not need attention. Keep in mind, it is the inspector’s job to find anything in the house that may or may not need attention at any point. That includes things like the furnace filter that typically needs to be replaced every 3 months, to lightbulbs or batteries in the smoke detectors or the wax ring under the toilet or a GFCI plug that is not grounded. It is their job to cover it all and make sure you know exactly what you are getting into. Having said that, almost every single inspection I have participated in with buyers over the years has had a healthy list of things in the report. Every house has something. Unless you are buying a brand new home that has just been built and hasn’t even been lived in yet, you are going to have something that will show up on an inspection report. Now, does that mean that the house you are looking at is in bad shape? Absolutely not! Remember, every house has something. The trick is to go through the list, ask questions of your inspector if you need to and decide which things are things that you can either live with, or take care of on your own later and which things worry you or are things that you simply cannot purchase the house with in their current condition. Once you have established that list, talk with your realtor about it and go from there. If there are things that you simply can’t live with, as your realtor, I will take those items to the seller and see if they are willing to take care of any of them in order to continue forward with the purchase. Most seller’s are reasonable and if your request is reasonable, they will be willing to work with you on your concerns. If for some reason, they are not, like in the case of a foreclosure or short sale where they are often unwilling to even see your list of your concerns and pretty much have a take it or leave it attitude, then you have the right as the buyer to withdraw your offer to purchase the home based on inspection, receive a refund of your earnest money (as long as it is before your due diligence deadline) and you can move on to find another house. This is how it works and if you are represented by a good realtor they will often be able to negotiate on your behalf and come out with an outcome that you are happy with.

Once you have gotten past the inspection and are comfortable moving forward with the purchase, your lender will typically be talking to you about ordering an appraisal. This is where the company that is doing your mortgage will call an appraiser, schedule an appointment and the appraiser will go out to the house, walk through it, take measurements, make notes of the upgrades and improvement and general condition of the house and then go back to their office, pull up all the comparable sales that they can find that fit the houses criteria and then go to work to establish value. Keep in mind that the appraiser is hired for the purpose of supporting the value of the contract that is in place, so often times all they are trying to do is find comparable sales that support the value of the sales price that you have established. If they can’t support the price, they will appraise it at the price that they feel is appropriate. As long as they can support the price, the value usually comes in at or right around the sales price of the contract. It isn’t very often that you see an appraisal that is ordered for the purpose of getting a mortgage come in much above the contract price. That is why I tell people not to rely on that for value if they end up having to sell their house soon after purchasing.

Typically the appraisal is done and you move on pretty quickly, but occasionally an appraisal has a hard time finding comparable sales to support the value and the appraisal comes in too low. When this happens, as a buyer, you have 3 choices; 1) you can go back to the seller and ask them to lower the price to match the value. Mortgage lenders will only give a loan for a house in the amount of what it appraises for, so if the value comes in low, the price on the contract needs to be adjusted or 2) you as a buyer need to come up with the difference out of your own pocket, verify to the lender that you have it and are willing to bring it to closing and then once that is stipulated in an addendum to the contract you can move forward. Or 3) if the seller is not willing to adjust the price and you do not have or do not want to come up with the difference yourself, then you may cancel the contract to purchase and received a refund of your earnest money (as long as it is before your appraisal/financing deadline) and move on to find another house. As I said before, this is uncommon, but it does happen occasionally and you need to be prepared for it just in case. It isn’t fun, but I have cancelled contracts for buyers based on these reasons and my job is then to hustle back out there and find them another house asap.

Once you have gotten past the inspection and the appraisal and everything is still clear sailing, we are then in a holding pattern and waiting for the mortgage company to finalize the final details of your mortgage and get documents to the title company and ready for you to sign. This stage can sometimes take a few weeks or it can take only a few days. It all depends on your lender. At this point, you want to make sure that you are in close contact with your mortgage officer and get them any additional documentation that they need as quickly as possible. There are almost always last minute requests from an underwriter, totally normal. Just be ready to jump and the quicker you get through it, the quicker you are sitting at the closing table signing paperwork for your new house.