Special to The Washington Post
In today’s real–time real estate market, it makes sense for experienced to first-time buyers to carefully weigh contract options and develop contingency plans with their realtors long before it’s time to go to settlement. In addition, home sellers have to keep a keen eye on the process as this is clearly not a version of the “don’t ask, don’t tell” laissez-faire approach taken in the past.
Here are some top contract trends and contingency plans for keeping your home sale on track.
1. Trend: Buying and selling a short sale.
As lenders get more aggressive to remove non-performing assets from their balance sheets, we’ve seen a sizable increase in what’s called a “short sale” -- a transaction in which the proceeds from sale do not meet all of the liens (from mortgages to lines of credit to other legal obligations) recorded against the property title.
With so many homeowners finding themselves in short sale territory (also known as being “underwater”) on their mortgages, many banks have decided that selling the property at a moderate loss is less costly and more rapid than foreclosure, as well as better for the local real estate market. Because the buyer, seller and bank must all agree to acceptable terms – which are often run through a lender’s lagging loss mitigation department – short sale contracts require many levels of approval and may take a long time. One key point here: Remain patient as each lender’s policies and their processing times will likely differ.
Contingency: If you are interested in purchasing a short sale, make sure you do your homework to better understand the ebbs and flows of the process. Make certain you’re comfortable with the timelines and flexibility required. And if you’re focused solely on the short sale approach, ask your agent to see similar properties.
These contracts can be notorious for falling through due to the multiple layers of approvals and new lender requirements so a good back up plan would be to your benefit. This is yet another reason why hiring a real estate professional makes total sense as their skills and contacts can be called upon to help navigate the short-sale jungle.
2. Trend: Default Clause Negotiations.
Default clauses — specific contract sections that define obligations of both the buyer and seller -- were mostly boilerplate additions or the province of litigious commercial real estate contracts in the “go-go” years of real estate. Today, residential buyers and sellers aare paying close attention to contract language, especially as it pertains to earnest money deposits in the event that a deal falls through.
Contingency: Work with your real estate professional and, as applicable, a real estate attorney to ensure that you fully understand your financial obligations if a deal does go south, and work with your real estate professional to negotiate reasonable terms based on your commitment to the property.
3. Trend: Non-Traditional Financing.
As traditional bank loans can sometimes be difficult to procure, home buyers have become creative to bridge the financing gap. A relative or friend (or investor) might provide the down payment, while you might be thinking about taking on extra hours not yet reflected in your income statement to help meet mortgage payments. These complicated arrangements can sometimes break down or run afoul of a lender’s loan underwriting rules regarding borrowed funds for down payments. Lenders typically believe that a buyer’s risk of default is lower if they make sufficient personal financial contributions.
Contingency: First, maintain accurate and organized paperwork to show lenders that you can afford and maintain the home. And take time to think through all the scenarios so that you don’t get in over your head, financially speaking. If you do need bridge or alternative financing, be sure that your real estate attorney and real estate professional are engaged in the drafting and review of these documents.
4. Trend: A Focus on Fixtures.
You may be charmed by chandeliers, window treatments and weathervanes that you assume automatically come with the house, only to find that they were part of the staging process. Tensions can arise if buyers and sellers are unclear about what will stay and what will go when the home changes hands.
Contingency: Decorative fixtures and, depending on local customs, most appliances are considered “realty” and will remain accordingly with the property. To avoid misunderstanding and potential legal hassles, everything should be clearly spelled out in an addendum to the contract. Remember to also address unwanted items in writing, including oil cans, car parts, or backyard debris as environmental rules and regulations are more common these days.
Finding a dream location may cause a potential homeowner to overlook certain aspects of a contract, especially when it may look like boilerplate. Don’t let the gorgeous new kitchen or freshly painted crown molding prevent you from asking questions about the contract process and challenging items you do not agree with or fully understand. The law says “ignorance is not a defense” ... so do your research online, in person and with a real estate professional before settlement – and always have a contingency plan.
Related: Tips for buying and selling in 2012
John L. Heithaus is chief marketing officer at MRIS , the mid-Atlantic region’s multiple listings service. You can follow him on Twitter at@MRIS_CMO.
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