Tuesday, October 26, 2004
On this day:

Buy With Care, Not With Speed by Benny L. Kass

Question: In the past two months, we have bid on -- but lost -- three separate houses which we really would have liked to buy. The brokers told us that we had too many contingencies, and that the sellers took other offers which were "cleaner". Exactly what is a "clean" contract, and how can we be assured that we will be successful with our next offer.

Answer: My definition of a "clean contract" is, I suspect, quite different from that of these particular real estate brokers.

Sellers -- and their agents and brokers -- would like a buyer to submit an offer which has no contingencies. In other words, when the offer is accepted by the seller, the buyer is obligated to go to closing, regardless of whether they can get financing, and irrespective of the condition of the property.

To me, however, a "clean" contract is one which has been carefully negotiated between buyer and seller, and is mutually acceptable.

While the real estate market appears to have slowed down somewhat, we are still seeing pockets of what I can only call "market frenzy". Buyers are so anxious to purchase a piece of real estate that they just do not think carefully, and are making offers which are, in my opinion, a potential for disaster.

Let's face it: no home is worth the subsequent aggravation you may face should there be problems in the future -- problems which might have been discovered (and solved) before you took title to the house.

But, in todays world, where buyers such as you are getting frustrated because they are losing out on houses, people are starting to panic and are just not thinking clearly.

A buyer cannot be rushed into signing a real estate contract. A buyer must have time in which to carefully review all of the important elements, including the neighborhood, the price, and the condition of the house.

Here are some areas which potential buyers should avoid at all costs -- even if it means that you will lose out on your next real estate offer:

Escalation clause: Such a clause basically tells the seller that the buyer is willing to increase the offer up to a certain amount (usually way over the seller's asking price), so as to beat any other offers.

This makes no sense; the real estate market is not (or should not be) a flea market bazaar, where bargaining and haggling is the name of the game. You are purchasing a house -- perhaps the most significant investment in your life -- and not a piece of meat or a trinket for your car.
Economists often review past history in order predict the future. Many of us will remember those bleak days in the early l990's when houses in many areas lost value. Indeed, many people who purchased at the peak of the market in the late l980's found that their mortgage was more than the value of their house for a number of years until around the mid-90's.

I am concerned that those buyers who have recently purchased property at exorbitant, inflated prices may be faced with the same scenario in the years to come.

Additionally, sellers should also be concerned about these inflated prices, since lenders are becoming reluctant to make loans where the price is so high. I have encountered several recent situations where the seller took the house off the market when a contract was signed, only to learn several weeks later that the house did not appraise at the selling price and the buyer backed away from the deal.

Home Inspection Contingency: I doubt that you would buy a used car without a test drive -- or without having an independent mechanic inspect the various parts to make sure that they work. Why, then, are buyers signing contracts to buy expensive houses without having it inspected? This makes absolutely no sense. I know of several new homebuyers who rushed into buying a house with no home- inspection contingency, only to find after settlement major problems in the roof, gutters or electrical systems.

In many jurisdictions, sellers are required to disclose certain items about the condition of their house -- or at least disclaim any such disclosures. Some real estate brokers advise potential purchasers that they can rely on those seller disclosures. That is not at all accurate. The seller may not know of specific problems or (believe it or not) lie about the condition of the property.
As a potential purchaser, you are doing a disservice to you, your household and your checkbook if your contract is not contingent on obtaining a satisfactory home inspection -- by an inspector of your choosing. If the real estate broker advises you that the seller is not interested in accepting a contract which contains such a contingency, start looking for another house to buy or insist on including the contingency in your offer anyway.

Sellers should understand that the inspection contingency is often helpful to them also, since if the buyer comes back after closing to complain about certain items, the seller can try to blame the inspector for not finding the problem in the first place.

Financing Contingency: This is perhaps one of the most important provisions which must be included in any real estate contract, unless you are absolutely positive that you will be able to get enough money to buy the house when the settlement date arrives.

Let's look at this example: you sign a contract to purchase a $300,000 house, and the real estate broker convinces you that you should put up $30,000 as the good faith earnest money deposit. In the excitement of the moment, you write the check. If you are unable to obtain the necessary financing after making a diligent effort to do so, you may lose that deposit. Thirty thousand dollars is a lot of money to lose.

Appraisal Contingency: Another clause which must be contained in any sales contract is language to the effect that if the lender's appraisal of the property is lower than the purchase price, you have three options: (l) you can increase the amount of cash you will need to purchase the property; (2) you can try to get the seller to reduce the price to match the appraisal, or (3) you can terminate the contract and get a full refund of your deposit. This is standard language in the new Regional Sales Contract used throughout my local area, and must not be crossed off.
Buyers must not be rushed into signing contracts they will subsequently regret. Once you have put your signature on the paper called a "contract" and the seller has accepted your offer, there is a binding contract, and it is difficult to get out from under that written, legal document.
There is an old adage which is appropriate here: "fools rush in where angels fear to tread."

LINDA REYNOLDS

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