“I Have a Binding Contract…Now What?”

March 31st, 2015

Business-woman-thinkingAdvice to a New Agent…

You have a binding contract, what’s next?  There are two sides to every transaction…the buying side and the listing side.  What’s next will depend on your role, whether you are representing the buyer or the seller.  A normal transaction will take around 30 days to complete or close.  Let’s take a look at the elements in a basic contract.

A contract will have terms that include all the relevant information that have been agreed to. The purchase price is just one.  More often than not the purchase will be financed, so the purchase will be contingent upon financing using a specific type of loan.  For some loans this means the property must be in good condition and for all loans it must appraise at an amount where the lender feels comfortable making the loan.  Most buyers want a home inspection and other types of inspections like termite, etc. and continuing with the purchase will be dependent upon the results of these inspections.  Some buyers ask for the added protection from the seller  to provide a Home warranty.  Buyers are usually asking for the sellers to pay for and provide a title insurance policy.  Buyers may also ask for the sellers to help pay some of their closing and other costs involved with the purchase.  If the seller occupies or lives in the home the time of possession may also be negotiated.  There are other terms that may be part of the agreement like conveyance of personal property, etc. but those are not as common.  Let’s take a detailed look at the sequence of events and steps on both sides of the transaction that lead up to closing.

Buying side:  a buyer’s agent must pay attention to all the deadlines of the contract and make sure the buyer moves forward to meet these “timelines” all the way through the transaction. You are like a conductor leading the orchestra, making sure the different players come into the performance at just the right time.  Once the contract is accepted and bound the clock begins.              Every purchase and sale agreement (TAR form) contains two built-in deadlines or “timelines” as we call them in real estate.  The first one is that the buyer must formally apply for the loan within 5 days of binding agreement.  The buyer probably has already chosen a lender and spoken with them as is evidenced by the fact that they were pre-approved.  The lender will need a copy of the contract to submit to the application to underwriting for approval.  You, as the buyer’s agent, will need to email the lender these on behalf of your buyer.  The buyer will provide you with the lender’s contact information so you can do this.  This is a good time to add both the lender and the closing agent who will be handling your buyer’s side of the closing to your loop so you can share these documents with them.  Always send the following:  a copy of the MLS, the tax record, the Purchase and Sale Agreement, any counters and final bound counter, any Addendums or Amendments affecting the terms, the Property Condition Disclosure, the Confirmation of Agency, The TAR Disclaimer, the Compensation Agreement, KWSH Disclosure, Lead Base Paint Disclosure if applicable, Septic information if applicable, Personal Interest Disclosure if applicable.

Always summarize the terms of the agreement and/or include your pre-filled Transaction Summary Page for the lender and closing agent.  The summary page has important contact information so that the lender and closing agent will know who and how to contact parties to the transaction as needed.   It’s a good idea at this time to email the listing agent and confirm what lender and closing company your buyer is using and that this step of sharing the contract with them has been completed.

The next built-in timeline is to make sure the appraisal has been prepaid by the buyer so that the lender can order it around day 14 after the binding agreement date…more about this later.

If earnest money is to be submitted, remind your buyer to make the check out to the listing firm or escrow firm that will be the holder.  Have them make a copy for you if the buyer mails it directly.   You will need a copy for your file.  Whatever timeline was written in on the purchase agreement is the deadline for submission of the earnest money.  May I suggest a 5 day timeline on submitting earnest money…this gives you time to get it mailed and to the holder without being late.  If this timeline is missed or the check bounces, the contract can be voided at the seller’s discretion.

Next is the home inspection timeline.  Most agents write in that they will have a home inspection around day 7 or day 10 of binding and have the inspection repair requests or acceptance of the property as is (resolution time) within 5 days of the inspection.  It is important to do a home inspection right away so that if something is discovered that would cause the buyer to want to terminate the agreement, this can be done before the appraisal is ordered, saving the buyer the additional appraisal fee of $450.  No point in ordering the appraisal if the buyer no longer wants to proceed!  Provide your buyer with around 3 recommendations of home inspectors for them to choose from.  Advise them the home inspection is paid for the day it is performed, and they will sign an agreement with the home inspector before he will do the inspection.  A home inspection will vary in price from $350 and up depending on the square footage of the home and if they add optional inspections such as radon it can add another $150.  The inspection timeline is for completing all inspections so remind your buyers to order the termite inspection to be during the same time, if possible.  A normal termite inspection will take around 15 to 20 minutes and prices range from $45 to $85.  The termite company will check for evidence of termites or other wood destroying insects and provide a letter stating the property is “clear”; or if evidence found, make a note and recommendations for treatment.  If termites are found, this has to be addressed right away and treated or the lender will not approve the loan.  Once the inspection is scheduled, show up, meet your clients at the property, introduce them to the inspector, then do not help point out items or interfere with the inspection.  I sit outside or even leave.  A normal home inspection takes around 3 hours so tell your buyers this is a good time to watch and learn, and to get measurements and bids on improvements from vendors such as new carpeting, painting, etc.  Access to the property is limited to inspections and due diligence so remind them they may not be able to gain access to do this later until after closing!  When the home inspection is completed ask the buyers to have the home inspector share the  report with you so that you can assist in negotiating repairs if needed.  Set the expectation with your clients that only safety, structural, electrical, plumbing, health issues are asked for; not cosmetic items such as changing the paint color or laying new carpet.  A good home inspector will help guide your clients through this process and make recommendations.  Be specific in the repair requests and ask for help if unsure.  Use the Repair/Replacement Proposal form (RF654) to make the repair requests and once the agreement is reached, use the Repair/Replacement Amendment form (RF655), the latter is signed by both the buyer and seller and becomes a part of the contract.

Once the inspections are completed and resolved it’s time to order the appraisal.  The lender orders the appraisal and the buyer does not get to pick who appraises the property.  Even if the seller has already had an appraisal the lender orders a new one.  $450 is the usual fee that is charged to the buyer’s credit card.  It is paid “outside of closing” or “POC” in real estate terms.  An appraisal can take 7 to 14 days (or longer) so that’s why it’s important to order no later than 14 days of binding, and is why this is a built-in timeline in the purchase and sale agreement.  Confirm with the lender that this has been ordered and have the listing agent contact you when they get the call from the appraiser to schedule so that you will know when it is being performed.  When the appraisal is completed the lender will notify your buyer that it was good, or if it was too low to make the loan.  If all ok then just let the listing agent know the appraisal came back ok, you are not required to tell them the exact amount it came in, only that it was sufficient to continue with the loan process.  You do not have a “clear to close” at this time and the loan can still be turned down, even at this stage, if something detrimental is discovered with the buyer’s credit.  At this point caution your buyers not to do anything to change their credit.  Some buyers in their excitement buy new furniture to use in their new house, and if financed or a drastic change in their bank account it can delay or change their credit and make them unable to close!

While waiting this last week to 10 days remind your buyer to shop for and purchase homeowner’s insurance.  The insurance policy will have to be supplied to the lender in order to complete the loan.  Go ahead and request the utility information from the listing agent so that your buyers can order their basic electric, gas, phone, cable, etc. If any repairs were requested and agreed to, make sure to go back and inspect them when completed, at least 5 days before closing; make sure they are correct and done to a your buyer’s satisfaction.  Don’t wait until your final walk through because if not acceptable it could delay the closing.

Walk through again one last time before closing.  If all ok then have your buyer sign the Buyer’s Final Inspection Amendment  (form RF 660) and email a copy to your closing company and also to the listing agent.  The sellers will need to sign this, also.  Advise your buyers to coordinate with their closing company and lender to make sure all is ready for their closing.  In preparation for the closing the lender will complete the loan process and give the “clear to close.”  The lender emails the closing instructions or closing package to the buyer’s closing company.  The closing company takes those instructions and creates the HUD1 settlement statement.  A rough draft of the HUD1 is sent to the lender for approval, then when the lender approves it, it is shared with your buyer.  Have the closing company send you a copy also.  Check to make sure the purchase price is correct, that they have been given credit for the earnest money, and look to see that the seller has been charged for any concessions agreed to such as closing costs assistance, title, home warranty for the buyer, etc.  Then check the commission and make sure the statement is as accurate as possible.  Call the closing company immediately if you see an error or have a question.  Make sure your buyer knows wiring instructions for his downpayment if applicable.  Your closing company can give this to your buyer, make sure they have communicated a couple of days before closing if money needs to be wired.  Tell your buyers to bring a photo ID such as drivers license and arrange to meet them there at the closing.  Arrive early and bring the file or access to the file with you in case a document is needed or a question should arise.

It’s closing day!  Don’t forget to get a gift for your clients, ask a seasoned agent for gift ideas.

Listing side:  the listing agent has timelines they must pay attention to also in order to protect their seller.  You will want to make sure the buyer is not dragging their feet and has formally applied for the loan and the buyer’s agent has confirmed what lender the buyer is using.

If earnest money is to be submitted, it must be within the timelines as laid out in the purchase and sale agreement and needs to be deposited immediately upon receipt.  Make a copy of the check, fill out the earnest money deposit form supplied by your office, and turn into your office.  Let the buyer’s agent know you have received the earnest money check and email them a copy for their files out of courtesy.  They will appreciate that.

Coordinate with your seller on the date the home inspection has been requested and make sure the seller knows it is best of he is not there during the inspection.  Prepare them for what will probably be found during the inspection, with normal wear and tear on a home is good condition that has been well maintained, they can expect $1500 worth of repairs requested unless a major system such as the central heat and air or the roof is involved.  Ask if the home is on a termite contract (where the termite company has the home insured in case termites are found) and if so, notify the buyer’s agent of the warranty.  If termites are found the purchase and sale agreement already has addressed that the seller will pay for treating the property but is not responsible for repairing any damage.  Treatment can costs $800 and above depending on the size of the home.

Once the inspection and resolution have been resolved, coordinate with your seller and assist as needed in helping the seller as he is getting the repairs performed.  You can offer recommendations of contractors and vendors that our agents have used successfully to perform repairs in the past.  Remind the seller the repairs have to be completed the week before closing so the buyer can walk through and inspect the repairs in time to adjust if needed without delaying the closing.

The buyer’s agent should notify you that the lender is moving forward with the appraisal around day 14 of the binding agreement.  If you cannot get confirmation that the appraisal has at least been ordered and you are concerned the buyer or lender are dragging their feet, ask for confirmation using the Notification (RF 656) form and mark the box “seller’s demand for confirmation that buyer has paid for and ordered appraisal.”  Don’t send the notification without just cause…only if you cannot get a response.  (Don’t stir the pot unless absolutely necessary.)

During the week to 10 days before closing, assist the sellers as much as you can with communication between the closing agent, etc. and help them be ready for closing.  Get a list of utilities to provide to the buyer’s agent.  Remind them to keep their homeowner’s insurance and utilities on until after closing.  Alarms and other services will need to be notified that the sellers are moving.

Drop moving boxes by and wrapping paper if you have extra to help with the packing process. I usually buy 10 new moving boxes at Home Depot and a stack of paper and drop it off for them sometime during this process, they really appreciate it.  These can be recycled for the next seller if you ask them to let you know as they unpack and you’ll come pick them up (if local).

When you receive a copy of the HUD1 settlement statement, review it with your seller to make sure everything is correct.  Tell your seller to coordinate with the closing company if they need to bring money to closing, best to have it wired.  They will also need to bring their drivers license or photo ID with them to closing.

Encourage the sellers to leave the home in great condition. If summer, they should mow the yard and trim one last time to make the home as appealing to the new buyers as it was when they offered it for sale.  They should thoroughly clean the interior and remove all trash.  Some sellers hire a cleaning service to come in and clean after everything is moved out.  Remind the sellers to leave the garage door openers, paperwork and warranties that convey on appliances, etc. in the kitchen drawer.  They will need to write down the alarm codes for the new owners with instructions on how to contact the alarm company to set up their own alarm code.

It’s closing day!  Don’t forget to get a gift for your clients, ask a seasoned agent or google for creative gift ideas.