[Sellers] You're Under Contract... Now What?
Here is my step-by-step to get you through the transaction:
MOST IMPORTANTLY: READ THE CONTRACT
The contract is organized in an understandable manner with headings for each section. For example: If you are looking for a date/deadline go to Section 3: Dates and Deadlines. Within the chart, the corresponding paragraph in the contract is identified in the column titled: Reference.
DATES & DEADLINES CALENDAR
A calendar will be created with the actual date and day specified in Section 3 of the contract. (Reminder: days are counted from MEC … Mutual Execution of Contract.) The number of days is converted to an actual calendar. Typically, the calendar is created by the Listing Agent, with agreement from the Selling Agent and attorneys (if needed.)
TITLE COMMITMENT
Ordered by the listing agent on behalf of the seller. The Title Commitment not only verifies the seller has the right to sell the property, but also shows all liens and encumbrances (mortgages, etc.) as well as Requirements needed to close and Exceptions to title insurance.
DISCLOSURES
Unless otherwise stipulated, the Seller completes the Seller’s Property Disclosure. It is completed to the “best of the Seller’s knowledge.”
Both the Seller and the Real Estate Brokers are obligated to disclose any known faults with the property.
Other disclosures include the Source of Water Addendum and the Square Footage Disclosure.
SURVEY
Surveys are typically paid for by the Seller. The survey is ordered by the listing agent. It cannot be completed until the Surveyor has a copy of the Title Commitment.
INSPECTION
The Buyer has a right to inspect the property. The property is inspected by a licensed home inspection agent. The Inspection Report goes to the Buyer. The Buyer may also request inspection by a professional from one of the various trades (plumber, electrician, engineer, etc.) If the Buyer intends a remodel, other inspections may also be requested such as an architect, building contractor, interior designer. This process may involve multiple visits to the property. All will take place prior to the Inspection Objection Deadline. The Buyer may attend the inspection. However, I do not recommend that the Seller be there. The Seller may open the property, but should leave during the inspection to avoid any appearance of conflict or influence.
INSPECTION OBJECTION
Per Section 10.2 of the contract, the Seller is selling the property “as is”. In practice, this section of the contract is not followed as literally as one might expect. The reason is simple, the Buyer has the right to inspect and object. The Inspection Objection often includes the Inspection Report (which contains photos) so that the Seller can see the items of concern. The Buyer will either ask to have all the items repaired. Or Buyer may ask for a credit at closing for the cost of the repairs.
INSPECTION RESOLUTION
The Seller may reject, agree or counter the Inspection Objection. Because of the Section 10.2 of the contract, Seller may reject the Inspection Objection with the understanding the Buyer may terminate the contract. Because termination is the option, most Sellers will try to reach a resolution. Resolutions come in many different forms. For example, if the Buyer asks for items to be repaired, the Seller may agree to fix the simplest items, then gets bids for the larger repairs and offer a credit at closing. In some cases, the Buyer provides those estimates (and Sellers verify them). Sometimes the resolution comes as an adjustment in the purchase price.
INSPECTION OBJECTION WHEN A LOAN IS INVOLVED
In today’s lending climate, Inspection Objections become a red flag. Because objections may be interpreted as a renegotiation of the purchase price, lenders are wary. A lender may ask for a new appraisal (to include the objections) or they may deny the loan. The solution depends on the recommendation of the Buyer’s lender.
TITLE COMMITMENT
If the Buyer objects to the title commitment, the Seller needs advice from the Title Company and/or an attorney. Very often the objection comes from a simple mistake and is recognized once the title commitment is received and corrected quickly. Other times, it may be a major problem. It needs to be resolved or closing will not occur.
SURVEY OBJECTION
Survey objections can usually be resolved. Again, an attorney may be involved. Typical objections have to do with fence or landscape encroachments. Sometimes the improvement is outside the building envelope and variance has to be obtained. Survey objections also need to be resolved prior to closing.
LOAN APPROVAL
The dates pertaining to the loan are specified in the calendar. The approval occurs after the Loan Application has been submitted and after the appraisal is completed. Sometimes extensions may be requested because Appraisers are very busy or because parts of the loan application are hard to complete … or simply because the Lender requests it.
APPRAISAL
If a lender is involved, the lender arranges for the appraisal. Neither Buyer or Seller or Real Estate Agent(s) are involved in the selection of the Appraiser. In my experience, none of the parties involved should attend the appraisal inspection.
If an appraisal condition is in the contract and no loan is needed, the Buyer arranges for the appraisal.
APPRAISAL OBJECTION
An objection occurs when the amount of the appraisal is less than the purchase price. When the Appraiser makes an error that can be verified, lenders have been known to seek an additional appraisal, but not always.
If the Buyer requests the appraisal, the resolution is contained in Section 6.2.1.
CLOSING
The closing occurs after all objections have been resolved and after loan approval has been obtained. Or in others words, after the Due Diligence is satisfied.