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MESSAGE FROM BROKER/TOC
A. FIND YOUR LENDER
B. FIND YOUR REALTOR
C. FIND YOUR NEW HOME
D. NEGOTIATE YOUR PURCHASE
CONTRACT
E. GET ORGANIZED FOR YOUR
CLOSING
F. CLOSE YOUR DEAL
NEGOTIATE YOUR PURCHASE CONTRACT
1.
Common Contract Negotiation Issues.
Contract negotiation is a critical part of the home buying process.
The purchase contract outlines who, what, where, when, and how the
purchase of your home will occur. In the residential market, the
purchaser typically submits a contract to the seller as a written
offer. The seller may accept the contract, reject the contract,
or counter with respect to certain contract issues (most commonly,
the purchase price). Below is a summary of key issues (aside from
the purchase price) that are often negotiated in the purchase contract:
- Earnest Money Deposit. An
offer will be more attractive to a seller if accompanied by a
substantial earnest money deposit. In a residential contract,
this deposit is typically non-refundable, except in very limited
circumstances. A buyer needs to assess market conditions, the
prospect of competing bids, and the overall desirability of the
property in determining the deposit amount that will accompany
their offer.
- Downpayment. This
concept should be distinguished from “earnest money”.
The earnest money is the deposit made by the buyer when the buyer
submits the contract. The downpayment is the agreed upon amount
of the buyer’s own cash that will be used to purchase the
property (as distinguished from loan proceeds that will be used
to purchase the property). Typically, the downpayment amount is
greater than the “earnest money” deposit. Occasionally,
however, the parties may agree the earnest money amount will also
serve as the minimum required downpayment. A seller is more likely
to sign a contract with a prospective buyer who agrees to make
a large down payment (e.g. 30% or more of the purchase price),
as compared to a buyer that plans to try and finance 90% or more
of the purchase price.
- Closing Date. In
most circumstances, a seller prefers a quick closing, such as
a closing within 30 days of contract execution. Occasionally,
however, a seller wants to get the property under contract with
a buyer but delay the closing for a period of time. A buyer should
not agree to a quick closing if they are not likely to be prepared
to close within that time frame. See discussion below regarding
“Financing Contingency” and “Sale of Existing
Home Contingency”. Both are examples of situations where
a buyer is unlikely to be prepared to agree to a quick closing.
- Seller Disclosure Form.
South Carolina has adopted the “Residential Property Condition
Disclosure Act”. Pursuant to this law, the South Carolina
Real Estate Commission has published a standard disclosure form
that all sellers are generally required (there are some statutory
exceptions) to complete and provide to buyers. The buyer and seller
may expressly agree to waive the disclosure form requirement.
It has now become common practice for sellers to provide these
forms and publish them with the property listing.
- Property Inspection and Repairs.
The contract should contemplate that the purchaser will undertake
an inspection of the house (typically through the use of a professional
home inspector) and notify the seller of any necessary repairs
within an established time period. A seller typically desires
a short period for inspections to be completed, whereas a buyer
typically desires a longer period of time. In some circumstances,
the seller may refuse to have any responsibility for making repairs.
In other situations, the seller may agree to make repairs, subject
to a pre-determined “cap” on the seller’s liability
for such repairs. The purchase contract should also contemplate
the preparation of a termite damage report, and should address
(i) which party pays for the preparation of the termite report;
and (ii) how much responsibility the seller will have for repairing
termite damage identified by the report.
- Personal Property. Personal
property is property that can be removed from the house. Generally,
personal property is not included with the sale of the house unless
specifically identified in the contract. The most commonly negotiated
items of personal property are major appliances such as the refrigerator
and washer/dryer machines. Purchasers often negotiate for window
dressings (curtains, blinds, “plantation shutters”)
to be included as part of a sale. Occasionally, certain furniture
may be identified in the contract as well.
- Closing Costs. In
South Carolina, it is customary (but not required) for the seller
to agree to pay for: (a) the real estate transfer tax (sometimes
referred to as “deed stamps”, referring to the now
abandoned practice of actually sticking stamps on the deed to
evidence the payment of the transfer tax); (b) the legal cost
of preparing the deed itself; and (c) all realtor commissions.
It is also not uncommon for a seller to agree to pay the cost
of a termite inspection report. All other closing costs are typically
(but not always) the responsibility of the buyer. All that having
been said, the parties are free to negotiate responsibility for
closing costs. With new construction, it is very common for the
developer to agree to bear a number of different closing costs
as part of their marketing strategy. For example, a residential
developer may agree, as part of its marketing strategy, to pay
the cost at closing of a home warranty in favor of the purchaser.
The negotiation of closing costs is a good strategy for a buyer
where, for psychological or other reasons, the seller is unlikely
to agree to any negotiation of the purchase price itself.
- Seller Lease Back. Occasionally,
a seller may desire to lease the house back from the buyer for
a period of time after the closing while the seller locates a
new permanent personal residence.
- Seller Financing. A
buyer may negotiate for the seller to agree to act as a lender
and accept a promissory note secured by a first or second mortgage
(for either all or a portion of the purchase price). Most sellers
are hesitant to agree to seller financing because they need the
cash for other purposes (such as their own next home purchase)
or they do not want to bear the risk of a default by the buyer.
Seller financing is rarely agreed to during strong “seller’s
market” conditions.
2.
What about Contract Contingencies? Do They Help
or Hurt the Buyer? A buyer’s personal circumstances
may necessitate the inclusion of certain contingencies within the
purchase contract. A contingency identifies an event that is at
least in part outside of the buyer’s complete control, and
generally permits a cancellation of the contract in the event that
the contingency is not satisfied. Buyers are more likely to succeed
in negotiating contingencies during a soft real estate market where
there are not many competing bidders. In contrast, during strong
market conditions, a buyer runs the risk that the contingency may
make the buyer’s offer appear less attractive. Thus, while
a contingency may help the buyer work through an uncertain circumstance,
the inclusion of a contingency may hurt the buyer’s chances
of getting the seller to accept the buyer’s offer. Below is
a description of a few common buyer contract contingencies:
- Financing Contingency. This
refers to a contract clause that conditions the buyer’s
obligation to close upon the approval of mortgage financing for
the buyer. To avoid the need for this contingency, a buyer should
seek out loan pre-qualification or pre-approval prior to submitting
an offer.
- Review of Covenants and Restrictions.
This refers to a contract clause that conditions
the buyer’s obligation to close upon the buyer’s review
and satisfaction with the covenants and restrictions for a property.
This clause may be appropriate where the house is located in a
subdivision that is known to have lengthy or complicated restrictive
covenants. When agreed to by a seller, the buyer is typically
given a relatively short period (e.g. 5 days) to complete its
review of the covenants and restrictions.
- Sale of Existing Home Contingency.
This refers to a contract clause that conditions
the buyer’s obligation to close upon the sale of the buyer’s
current residence within a certain period of time.
- Appraisal Contingency. This
refers to a contract clause that conditions the buyer’s
obligation to close upon the buyer obtaining an appraisal showing
a value equal to or greater than the purchase price.
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