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For The Sale




Advice topics regarding the sale of the home


 - Closing
 - Escrow accounts
 - Essential terms of the contract

 - Inspections
 - Insurance
 - Making an offer
 - Negotiation basics
 - Seller clauses


Technically, the sale of a house is the exchange of a very large chunk of money for a piece of real estate and a building or two. But the process goes far beyond just cash for keys.

Everyone involved -- the seller, the buyer and the lender -- must be protected from losing something of tremendous value. For the buyer, it's the house; for the others, the money. That means tons of paperwork at closing, with documents that may be unfamiliar to first-time buyers.

The closing is the formal sale transaction, and includes a pile of paperwork and forms to be signed, including a deed transfer, mortgage papers, settlements sheets and insurance forms. The closing is usually held at the title company or at an attorney's office. Usually present are the buyer, the seller, real estate agents for both sides, and real estate attorneys if they've been hired by either or both sides. The person who runs the closing is the closing agent, an independent person who gets a fee. That person's job is to make people feel comfy in a scary event, much like a flight attendant.

Here are some of the key terms you'll hear during the process of buying a house and closing:

The good-faith estimate
This is the estimate the real estate agent makes on the cost of the house weeks before the closing. It usually includes estimates for most fees and costs you can expect, including survey, appraisal, escrow account pre-payments (for taxes, insurance, etc.), research and copying fees, private mortgage insurance; and prepayment of interest for the month in which you close.

Because all the fees and costs can vary and fluctuate depending on actual circumstances, sometimes the actual cost is hundreds of dollars more than the good-faith estimate.

The settlement statement
This is the final price tag and conditions of sale. It's usually not delivered to the buyer and seller until between two and four days before sale -- sometimes less. Sometimes, the bottom line is different from what is expected because actual costs for certain things turned out to be higher or lower than estimated.

Title insurance
This insurance protects the lender from anyone challenging ownership of the property.
First, an owner's title insurance policy protects homeowners against loss of their interest in property due to legal defects in title. This is typically paid for by the seller to verify marketable title to the property. Second, lenders require that the borrower purchase a mortgagee's title policy to protect the lender's interest.  This ensures the lender is in a first lien position.

The abstract of title
This is a history of all transactions affecting the property, researched from public records.

The deed
This is the bill of sale for real estate.

The uniform statement
The federal Real Estate Settlement Procedures Act requires that the buyer be informed with a detailed purchase statement that is the same everywhere in the country.

All these documents -- and possibly more -- amount to a mound of paperwork. Realtors say you won't want to try to read the fine print. Instead, trust the closing agent to give you a brief description of what each document means before you sign.

There's a lot of good faith trust that takes place at a closing.  If you tried to read every document, you'd be there 20 hours.

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Little understood 'escrow' accounts can tie up your money

How often have you heard a new homebuyer say, "I had to put money into an escrow account"? Do you know what that means, or how these accounts work when you buy a house?

If you don't, you're not alone. Most folks don't have the foggiest idea.

An escrow account is a special savings account that's set up when you take out a mortgage. The money in the account (or accounts) covers your estimated real estate taxes and home insurance when they come due. But the account protects the lender's hide, not yours, because you're paying all that money in advance. To make matters worse, most lenders don't pay you any interest on that money.

By law, one month each year your escrow account should contain no more than one-sixth of your total insurance and tax bills. For example, if the annual total comes to $3,900, then there has to be a month during the year when your account has no more than $650 in it.

Two tips:

  • If you believe you're paying too much into the escrow account, have a chat with your lender. If that doesn't remedy the situation, call your state government by starting with the state attorney general's office.
  • If you've paid off at least 20 percent of your mortgage and have a squeaky-clean payment record, you might be eligible to stop paying escrow. Or, if your down payment on the home was more than 20 percent and your credit record is very good, you may be able to escape escrow altogether.

Start planning your escrow account by jotting down the payment due dates and amounts on items such as your insurance premium, local and county taxes, and any special assessments such as a schools tax. Figure out which bills the seller has already paid for the year and which ones are still owed. Then determine what you'll need to shell out for escrow on a month-by-month basis.

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Essential terms in a real estate contract

1. Names of the buyer(s) and seller(s)
The first line of most printed residential purchase contracts asks for the name of the buyer(s). If you think you might be adding a co-owner, such as a parent, to help you qualify for a mortgage, add the magic words "and/or assignee."

2. Property description
The next blank on most forms is for the street address, legal description, tax assessor's parcel number or other description of the property. Be as specific as possible, especially with rural properties. Attach a property description addendum, if necessary. Unless you are buying a recorded urban lot, be sure to specify the offer is subject to your approval of a survey.

Be careful when filling in the blanks for the county and city. If you are not certain the property is within the city limits, don't specify it is. When the school district is important, verify the home is within the boundaries of the school district you want before making a purchase offer.

3. The good faith earnest money deposit
Legally, you don't need to make any deposit with your home purchase offer. All that is required is the buyer and seller sign the sales contract. However, few home sellers will agree to sell unless the buyer makes a modest good faith deposit. When making a purchase offer that is substantially below the asking price, a large good faith earnest money deposit will often convince the home seller to accept.

There is no right or wrong amount for the earnest money deposit. Some real estate agents aim to get their homebuyers to put up a big 10 percent deposit. But most buyers consider this too high. A popular alternative is to make a modest deposit to accompany your purchase offer, such as $1000 or 1 percent of the sales price, but include a provision to increase the deposit to 5 percent of the home's sales price upon removal of the contingencies such as mortgage financing and a professional inspection.

Don't let the seller hold the deposit. I prefer to have my deposits held by a neutral escrow holder, such as a title insurance or escrow firm. Local custom may determine your deposit should be held in the realty broker's trust account, by an attorney or at a bank or S&L. After your purchase offer has been accepted, the deposit legally belongs to the seller. But the buyer usually specifies where the deposit will be held until the sale closes.

4. Specify the purchase price and exact terms of the sale
Before making a home purchase offer, be sure your real estate agent prepares a written CMA for you. This form will show recent sales prices of comparable nearby homes as well as the asking prices of neighborhood homes currently listed for sale. With the help of your realty agent, add or subtract values for the features and drawbacks of the recent sales as compared to the market value of the home you want to buy.

When describing the purchase terms, don't specify "All cash to seller" if you require a new mortgage to provide that cash. Be sure your offer contains a clause making your offer contingent on approval of the mortgage. Even if you got pre-approved for a mortgage, the lender can avoid making the loan by low-balling the appraisal.

The mortgage you want to obtain should be specified with detail, such as a new 30-year fixed interest rate mortgage of at least $100,000 with interest not exceeding 8 percent, a loan fee of not more than 2 percent, and a monthly payment not exceeding $733.76. If you want the seller to help finance the sale, by carrying back either a first or second mortgage, here is where you specify the terms you want.

5. Personal property
If you want any personal property included in the home sale, such as the kitchen appliances, be sure to specifically itemize them in your purchase offer. For example, specify the "General Electric side-by-side refrigerator with electronic monitor now on the premises." This stops the seller from substituting inferior replacement personal property at the last minute.

6. Time for acceptance of your purchase offer
Your purchase offer should contain a short time for the seller's acceptance. Twenty-four hours is usually sufficient unless the seller is out-of-town. Don't make your offer valid for a long time period because then it will be "shopped" by the realty agent to see if a better offer from another buyer can be obtained.

7. Additional items to consider
Try to keep your home purchase offer as clean as possible to increase its probability of acceptance by the seller. The fewer contingencies and conditions the better. Here are some additional purchase terms to consider:

  • A professional inspection
    The buyer should pay for the professional inspection because it's for the buyer's benefit. Accompany the professional inspector. When a defect discovered is serious, such as a cracked chimney, expect the seller to pay for the repair. If the seller refuses to pay for major necessary repairs, disapprove the report and get your good faith deposit refunded.
  • Seller's disclosure of known defects
    Texas now requires home sellers and their realty agents to disclose in writing any known defects in the residence. If your state requires seller disclosure of defects, your purchase offer should be contingent upon your approval of the seller's disclosure
  • Liquidated damages clause
    This clauses specifies maximum damages a defaulting buyer must pay to the home seller if the buyer doesn't complete the purchase as agreed. Some state laws set maximum liquidated damages. As a buyer, you may want to agree to liquidated damages so you can't be held liable for more than the specified sum if you default.
  • Arbitration of disputes clause
    Most printed real estate purchase contracts now contain an optional clause whereby the buyer and seller agree to arbitrate disputes. Misguided real estate agents, blindly following recommendations from their real estate trade groups, often suggest signing the arbitration clause. I strongly disagree. Too many uncontrollable things can go wrong with arbitration of disputes. My recommendation is don't agree to arbitration. If a dispute arises later, at that time you can decide if you prefer to go to arbitration or mediation rather than become involved in a lawsuit.

An all-inclusive weasel clause
Although the professional inspection contingency clause is sufficient, you might want to also include an all-inclusive weasel clause such as "This purchase offer is contingent upon buyer's attorney satisfactory inspection and approval of the purchase contract within 10 business days." This gives you a "free look" while your attorney; CPA or other trusted business advisor reviews the agreement.


Home inspections

You've walked through a house half a dozen times. You've checked the faucets, toilets, electrical outlets, lawn sprinklers and garage door opener. You've been up on the roof and in the attic and everything checks out.

Then you tell yourself: I don't need a professional home inspection.

Or do you? Did you check for radon contamination, which is said to kill thousands of homeowners each year? How about leaded paint, a cause of mental retardation when ingested by young children? Did you watch for "red flags" that signal a need for further investigation? (These might include large cracks that have been plastered over and painted; barely visible leakage stains on ceilings, sagging floors and support beams or exposed electrical wiring.)

Buyers often rely on the formal appraisal for reassurance about the house's condition, but keep in mind that appraisers often overlook mechanical and structural defects that are not readily apparent. This is where an inspector comes in. Hire one, especially if the building is more than 10 years old. This home is probably the largest single expenditure of your life. It's worth a few hundred dollars to learn all you can about it.

Finding an inspector
Check the Yellow Pages under "Building Inspection," or check in our directory of inspectors. Try to use a firm that belongs to a recognized association, such as the American Society of Home Inspectors (ASHI) or the Florida Association of Building Inspectors. Ask in advance about the fee and exactly what the inspection will include; this is a competitive business. The ASHI specifies minimum requirements one should expect from a professional inspector.

Finally, insist on tagging along during the inspection. You'll learn much about the maintenance and repair of what could be your new home.

When problems are found
Inspectors commonly find problems in the homes they scrutinize, though they are most often minor. The buyer and seller usually negotiate through these developments, aided by lawyers and real estate agents, and the sale goes through. The seller might agree to fix the problem before closing, or to pay the cost of any necessary repairs. At closing, the escrow company holds back sufficient proceeds to guarantee payment. Often the players agree on a lower sale price to avoid the red tape.

Most sale contracts are contingent upon attorney approval and inspection. If seller and buyer can't agree on a resolution to problems revealed by an inspection, the deal may fall through.

Doing it yourself
The best professional home inspectors carry with them years of experience and an assortment of specialized tools. Many buyers who choose the do-it-yourself route later wish they hadn't. If you insist on being your own home inspector, you must turn a skeptical eye upon some seemingly innocuous facets of the structure. Use a checklist (available from real estate agents, libraries and real estate publications). If your inspection is less than professional, try to secure some protection; ask the seller to disclose known defects and to certify the condition of the premises. If in doubt, go with a pro.

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Types of insurance

Now that you have your house, you will need to protect it (and your belongings!) There are several types of insurance available, and how much coverage you need depends largely on the house's location and your financial situation.

The most common type of insurance -- and the one many mortgage companies require -- is homeowner's insurance.

Homeowner's insurance covers your house, its surrounding property, its belongings and any liabilities resulting from fire, wind or other destructive force. However, there are several types of homeowner's policies, and each covers your house to a different extent.

To buy your house, your lender may require two types of insurance:

Private mortgage insurance (also known as PMI) protects the lender from you defaulting. Most lenders require it, and the cost will be added to your mortgage, or will be required at closing. PMI is required if you have less than 20 percent equity in the home. So if you are putting down more than 20 percent in a down payment, then you may not have to purchase PMI. When your equity (the difference between the market value of the house and the amount owed on the mortgage) reaches 20 percent, you can contact your lender about canceling PMI.

Title Insurance protects against any disputes over ownership of the property. Lender's title insurance covers the lender should there be any questions about ownership or liens against the property. Owner's title insurance protects the owner. Title insurance is paid as a one-time fee at closing.

Other types of insurance cover specific types of natural disasters:

Flood insurance is offered through the federal government under the National Flood Insurance Program (NFIP). The government manages the program because flood losses tend to be catastrophic, and private insurance companies cannot adequately measure the risk involved, according to the National Association of Independent Insurers. The policies are administered by the Federal Emergency Management Agency (FEMA), and are available only in communities that have met certain requirements. Even though it is a federal program, insurance agents are qualified to sell flood policies.

Earthquake Insurance is most popular in California but is available to all homeowners regardless of location. Rates are set according to your home's proximity to a known earthquake fault, the house's condition and the amount of coverage.

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Making an offer

The real fun begins by making a written purchase offer.

The Statute of Frauds requires real estate purchase contracts be in writing. Oral realty contracts are unenforceable in court. Written agreements prevent misunderstandings, which can occur with oral "handshake" sales contracts.

Real estate purchase contract forms are not "standard;" each one is unique. A few states have required forms or terms which must be included in residential sales contracts, but that doesn't stop home buyers and sellers from including essential terms they want.

Study the purchase contract form you will be asked to sign. When you find something in the form you don't understand, discuss that item with your realty agent. Equally important, check the form to be sure it includes the essentials. A few tips:

  • Consider who wrote the form.
    Many of the forms prepared by the National Association of Realtors have hidden clauses, which are anti-seller, anti-buyer or both. They are written with the primary goal of getting the sale closed.
  • Don't be afraid to cross out the printing you don't like.
    Just because something is printed on a purchase contract doesn't mean you must accept it. Either cross it out or modify and initial the change to meet your wishes. Don't hesitate to take the form to your attorney -- preferably an experienced real estate attorney -- for advice.
  • A confused mind says "no."
    Buying a home is confusing enough, but reading and understanding the purchase contract plus other required paperwork can be overwhelming. That's why many homebuyers (and sellers) say "I want to think it over." They are really saying they are either overwhelmed by the complexity of the forms or they don't understand something and are reluctant to admit it.
  • Start with a good printed residential contract.
    Virtually any printed residential purchase contract can be easily adapted to include all the essentials of a fair agreement for both buyer and seller.

    Watch out for forms with the printed name of the realty brokerage in the contract. Read these forms especially carefully because they may be very pro-agent. Some of these contracts obligate the parties to use brokerage-affiliated services such as for mortgages, homeowners insurance, termite and/or professional inspections, legal, title insurance and escrow services. Look for hidden fees in these brokerage-prepared agreements, such as a fee to the broker for "document preparation" in addition to the sales commission!

- Essential terms in a real estate contract
- Potential counteroffer clauses

Writing a home purchase contract that includes all the essentials is not difficult. Start with filling in the blanks on a well-written printed purchase contract, but don't hesitate to delete unwanted items and add essential terms.

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Clauses to anticipate from the seller

If the home seller does not accept your purchase offer, you should anticipate some counteroffer clauses from the seller:

  • Contingency release clause
    If you have not specified a deadline for your contingencies, such as five or 10 days for a professional inspection, or 30 days for mortgage approval, you can expect a well-advised home seller to set a time limit on your contingencies. Or, if you make your home purchase contract contingent on the sale of your current residence (which few home sellers will accept), expect the seller to counteroffer, giving you 24 or 48 hours after an acceptable second purchase offer is received from a second buyer to remove your contingency clause for sale of your old home. This is reasonable and fair to both buyer and seller.
  • An "As Is" clause
    Some home sellers insist on selling their homes "as is." That means the seller and realty agent make no representations or warranties and won't pay for any repairs. However, the seller and realty agents must still disclose any known home defects to the buyer. Avoid agreeing to an "as is" clause if you want the seller to pay for repairs of known serious defects.

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Negotiating Basics

The eight rules of negotiating:
1. Learn as much as you can to prepare for the negotiation.
2. Understand the importance of time in the negotiations.
3. Learn the other party's motivation.
4. Watch out for a negotiator who needs 'higher authority' approval.
5. Use the "He who cares least wins" theory.
6. Watch out for the non-stop negotiator
7. Look for the bad guy-good guy negotiation strategy.
8. Avoid an auction situation.

Negotiating to buy or sell a home, or other real estate, is much like buying or selling a used car. But real estate agents and their clients have become much more sophisticated in recent years, thanks primarily to more information available through computers. Subsequently, negotiation strategy plays a major role in home sales.

If the asking price for a home is correctly set close to its market value, as determined by recent sales prices of comparable nearby homes, that home should sell within 90 days for close to its asking price.

Even if a home is overpriced, it may sell quickly if the seller is motivated to sell and the buyer is anxious to buy. Where negotiations often break down, however, is when one or both parties really don't want to make a sale except at a very advantageous price. Here are the simple rules to help you win this real estate negotiation game:

1. Learn as much as you can to prepare for the negotiation.
Knowledge is power in negotiations. If you are selling your home, your best preparation steps are to (a) get your home into tip-top condition so buyers won't have any serious physical objections and (b) have the facts on recent sales prices of comparable nearby homes.

Make price adjustments for the pros and cons of your home compared to the recent neighborhood home sales. Also consider the asking prices of other competitive homes currently listed for sale.

If you are buying a home, don't be in a hurry. You may find the perfect home at the first weekend open house, or it might take you six months to buy a home. When you find a home you want to offer to buy, insist your realty agent prepare a written CMA (comparative market analysis). This is the same form the seller used when setting the asking price. You may be shocked to realize the asking price is a bargain. Or, it might be grossly overpriced.

As a homebuyer, you are in the driver's seat. You can always raise your offer price, but you can't lower it. Don't be afraid to make your first offer, if justified by the CMA, five percent below the asking price.

Unless the asking price is grossly out of line, a very low first offer insults the seller, who might not even make a counteroffer. Use your superior knowledge of the market to negotiate back and forth until a mutually acceptable price and terms are agreed upon.

2. Understand the importance of time in the negotiations.
If you are the buyer, don't hesitate to ask why the seller is selling. A job transfer, pending foreclosure, illness, unemployment or other motivating factor might be motivating the seller. However, if you learn the sellers are a retired couple that will sell if they can get their price, they probably won't be motivated to accept your low offer.

But no matter how desperate your time deadline might be, with the possible exception if you are a seller facing immediate foreclosure loss of the house if you can't get it sold, don't let the other party know your motivation. The reason is they will try to take advantage of your time weakness.

3. Learn the other party's motivation.
Closely related to time in the negotiation game is the importance of the other party's motivation. For example, if you learn the seller is selling because they just purchased a larger home, you know they are motivated both by a time deadline and a need to sell their old home to provide the down payment cash.

However, if you learn the seller wants to buy a larger home, but has not yet done so, that seller is not yet highly motivated to sell and might not accept your low purchase offer.

The biggest obstacle to learning the seller's motivation is often a listing agent who refuses to tell why the seller is selling. You or your agent should courteously reply, "Well, we would like to know so we can make a purchase offer which meets the seller's needs." That is usually enough to melt even the toughest, meanest listing agent you will ever encounter.

4. Watch out for a negotiator who needs 'higher authority' approval.
Most real estate agents have encountered the homebuyer or seller who needs approval from a "higher authority." This might be a spouse who is out of town or a parent who is supplying the buyer's down payment.

Realty agents can anticipate this negotiation roadblock by holding off until all necessary parties can be present to either make the offer or accept it. An offer, which is contingent on the approval of a third-party, is often doomed to fail. The reason is the third-party will often reject the negotiated offer because (1) they aren't aware how and why the offer was crafted and (2) if they approve, but something goes wrong, they will be blamed.

A variation of this situation is whether the buyer or seller agrees to the offer "contingent on my attorney's approval." This places the attorney in the "deal killer" hot seat. A better approach is to get the attorney's approval first or, if that is not possible, set a one- or two-day deadline for the attorney's approval of the legal aspects of the transaction.

5. Use the "He who cares least wins" theory.
When buying or selling a home, probably the most effective strategy to take the emotion out of your important decision is to act as if it doesn't really matter whether or not you make the sale. This tactic usually makes the other party realize they can't be too demanding or they will lose out.

Sellers and their realty agents can usually detect when a prospective buyer has fallen in love with a home and must buy it. The result is sellers usually hold out for top dollar. But the smartest buyers never let the seller or the realty agents know they really love the home and absolutely must buy it.

This same negotiation tactic is also used in business to make the other party offer their very best terms. Variations of this method are (a) if you are the seller, telling the buyer there is another serious buyer preparing a purchase offer and (b) if you are the buyer, informing the seller you are considering buying another house. Use of either alternative minimizes the bargaining advantage of the other party if emotions are kept under control.

6. Watch out for the non-stop negotiator
Real estate buyers often use the non-stop negotiation strategy. They make a decent purchase offer that, often after a few counteroffers back and forth, results in a home sale with both parties signing a firm sales contract. However, for the non-stop negotiator, this is just the start of negotiations.

For example, a non-stop negotiator buyer will insist on coming back to the home, usually with a pretense such as measuring the rooms for furniture or carpets. The truth is the non-stop negotiator is looking for real or imagined defects in the property, which can be used to negotiate the price downward or obtain a repair credit.

The truly professional non-stop negotiators save up their requests until a few days before the scheduled closing of the sale. Then they notify the seller of all the alleged defects or problems, demanding a price reduction. At this point the home seller has usually moved out or incurred obligations for the sales proceeds and is very vulnerable.

Unless the home seller is desperate and will agree to outrageous buyer demands, it is appropriate to remind the buyer the purchase contract is firm, the seller has fully disclosed all known defects, and the seller will hold the buyer liable for breach of contract damages.  In difficult situations, the seller's attorney might be called in to reinforce the seller's position.

7. Look for the bad guy-good guy negotiation strategy.
This is another name for the "bad cop, good cop" tactic we have all seen on TV. First, the tough guy tries to get the best possible deal. The husband usually plays this role. Second, the good guy steps in to make the bad guy be more reasonable. The wife often plays this role.

If the other side to the negotiation uses this strategy on you, often without knowledge they are doing so, just patiently listen, nod your head to indicate understanding rather than agreement, and let the bad guy and good guy talk themselves out.

Be sure all parties to the negotiation are in the room at the same time. When the bad guy and good guy have calmed down, then you can negotiate a reasonable transaction. But don't be in a hurry to conclude the negotiations because these negotiators often take hours to wear down.

8. Avoid an auction situation.
Home sellers love to get into the auction strategy. But this is not an intentional or formal auction. For homebuyers, it is a very dangerous situation, which should be avoided.

Just like a formal auction, where bidders often get carried away by "auction fever" and pay too much for an item being auctioned, the real estate auction strategy involves either (a) pitting one buyer against another or (b) a buyer considering purchasing one of two homes. These situations often happen in a seller's market where there are more buyers than homes for sale or in a buyer's market where there are more homes for sale than there are buyers.

The best way to combat an auction situation is to drop out of the bidding. If the home seller says there is another prospective buyer interested in the home, hold back making a purchase offer. Or, if the buyer is considering two houses for possible purchase, don't be over-eager unless you are desperate to sell and must give price or terms concessions.

The real estate negotiation game is a challenge, which smart buyers and sellers can win by following the rules and understanding the key negotiation strategies. If you want to be a successful realty negotiator, a thorough knowledge of how to use the negotiation techniques is essential.

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