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For Sale by Owner Guide

Guide for Buyers

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Understanding the Agreement

A purchase agreement or offer includes many of the following elements, including some "contingencies." A contingency means that unless that particular thing happens, the transaction won't go through. In other words, if the buyer has a financing contingency and cannot obtain that financing, the buyer can refuse to go through with the purchase.

Offer Components

Sales Price

The full amount for which property is being sold.

Full Names of Buyers & Sellers & Their Martial Status

Full legal names of buyers and sellers and whether they are single or married.

Address and Legal Description of the Property

Complete address and legal description of property.

List of Items Included in the Sale

List of what will go with the house: appliances, lighting fixtures, window treatments, etc.

Earnest Money Deposit

The earnest money deposit, also called the good faith deposit, should accompany the offer. Rule of thumb: the earnest money deposit should be for at least 3-5% of the sales price. It is generally deposited into an escrow account with a real estate attorney or escrow officer after the home and radon inspection contingencies have cleared and all disclosures have been delivered to the buyer and accepted.

Identify Escrow Company

Who chooses the escrow company varies with locality. Generally, the party responsible for paying for the title insurance chooses the escrow attorney or company.

Payment of Closing Costs

The contract should stipulate who will pay the buyer's and seller's closing costs and the various transfer and recordation taxes that most localities and states charge when property is transferred. Who pays these costs is almost always negotiable between buyer and seller, but there are usually common practices in each locality. Contact an escrow officer or real estate attorney  to determine the common practices for your area. It is not unusual for a buyer to ask the seller to pay some of the closing costs, including points on the loan, transfer and recordation taxes, and other closing costs. It is best not to try to list all closing costs that the seller will pay, but simply to agree on a gross amount to be applied to closing costs. Generally, a lender will not allow a seller to contribute more money than the buyer can actually spend in closing costs. In other words, you cannot take cash away from the settlement.

Payment of Commission

If you and the seller have agreed to work with real estate agents, the contract should spell out the amount of commission due and to whom.

Date & Location of Settlement

This is also called closing. You should agree with the seller on a timeframe for closing the transaction.

Date Property is Vacant & Property Condition

It is best to vacate the property on or before the day of closing/settlement if possible. Some sellers will need to stay in the house after closing/settlement for a period of time. If your sellers need to do this, they will generally agree to pay you a pro-rated "rent back." This rent back amount is usually equal to the daily cost for your entire mortgage payment, including taxes and insurance. The property is generally left in "broom clean" condition. You should require a walk-through of the house on the day before or day of settlement to ensure it is in substantially the same condition as when you purchased it.

Pro-ration of Expenses

How real estate taxes, rents, fuel, water bills and utilities are to be adjusted (pro-rated) between buyer and seller.

Offer Contingencies

Financing Contingency

The contract should stipulate the terms and amount of the mortgage and down payment the buyer will make to purchase the house. Under most contracts, if the buyer does not qualify for the specified loan, the buyer is entitled to the earnest money deposit back. That's why it is critical to move the financing along as quickly as possible. The financing contingency should include:

  • The period of time you have to obtain a "pre-approval" letter, complete with credit and source of funds review.
  • The period of time you have to make a formal loan application, which you agree to diligently pursue.
  • The period of time you have to obtain a FULLY approved loan, complete with an appraisal and all other documentation the lender needs. This final approval is called a commitment letter.

Home Inspection Contingency

If you choose to have a home inspection, the contract should indicate how long you have to complete the inspection. The buyer orders and pays for the home inspection. We highly recommend having a home inspection.

There are several ways to handle this contingency. Two popular ways are:

  • The seller has the right to repair all of the deficiencies the inspector finds and hold the buyer to the contract OR the seller has the right to choose not to repair the items and releases the buyer from the contract and returns the earnest money deposit. In other words, the power to move forward to settlement is in the seller's hands.
  • The buyer has the right to walk away from the deal if they are unsatisfied with any aspect of the inspection, in spite of the seller's willingness to repair the deficiencies. In other words, the power to move forward to settlement is in the buyer's hands.

Radon Inspection Contingency

radon inspection is common in many areas of the country. If you choose to have a radon inspection, the contract should stipulate how long you have to complete it. The buyer orders and pays for the radon inspection.

Additional Inspection Contingency

You may want other special inspections , including roof, electric, or plumbing.

Termite Inspection Contingency

The termite inspection is generally required by lenders in many areas of the country. A licensed pest inspector completes a report that indicates the current presence of wood boring insects and/or any past damage caused by them. The inspection must be dated within 30 days prior to settlement and is usually ordered by the buyer and paid for at closing. Generally, the lender will require any past damage to be repaired prior to settlement. Usually the seller pays for these repairs. The seller can limit their exposure and agree to pay only up to a certain amount in prior pest damage repairs, if any are discovered in the inspection and the lender requires repair.

Disclosure Contingency

If you are in a locality that requires certain disclosures, the contract should indicate:

  • When the seller is required to give the disclosure forms to you.
  • How long you have to review the disclosures.

The contract should also advise you IN WRITING whether the information is acceptable. If you are buying a condominium or co-op, the seller will have to provide condo or co-op documents for your approval.

Clear Title Requirement

The seller must provide a clear and marketable title to the property.

Home Purchase Contingency

Use if the seller has to find a house before they can close on their old house. There should be a timeframe for the seller to locate and put a contract on a new house of their choosing, which they agree to diligently pursue. Your deposit should be refunded in full if the seller cannot locate and contract for a new house.

Home Sale Contingency

Use if you must sell another house before purchasing this house. There should be a timeframe for you to find a buyer for your old home and settle on that home, if necessary.

Suggested Timeframes for Completion

Financing Timeframe

The pre-approval letter with credit check should be obtained within 5-7 days after contract ratification, if you weren't pre-approved when the offer was presented. The application should be made within 5-7 days after contract ratification. A fully approved loan should be obtained within 30-45 days from the date of contract ratification.

Inspection & Disclosure Timeframes

Inspections and delivery of any disclosures should be completed within 5-7 days from contract ratification. You should have 2-3 days after completion to indicate to the seller IN WRITING of any problems discovered in the inspection or disclosures. The seller should then have 2-3 days to determine whether and how to fix the problems and respond back to you IN WRITING.

Termite Inspection Timeframe

The termite inspection is to be completed within the 30 days prior to settlement. Lenders generally limit the window to 30 days to ensure the termite inspection is current.

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