The bottom line is, if you're in the market for a property, don't believe the price tag. In the end, it's the market—that is, the level of other buyers' interest in the place, and their view of how it compares to other available homes or real estate—that rules.
In a hot real estate market, with lots of demand for houses and prices steadily rising, sellers often take an approach that seems counterintuitive. They list their houses at an artificially low price. Why? It helps make sure the maximum number of buyers come in to take a look, so that a bidding war ensues among desperate buyers (who might feel scarred by having been outbid before) and the price goes sky high, even higher than the sellers might have realistically listed the place at.
Of course, other home sellers might set a more realistic, or even optimistic, price. Some are being strategic, not wanting to make buyers think, for example, that something is wrong with the place.
In a cold real estate market by contrast, where houses are moving slowly and demand is low, it's more common for sellers to set the list price that's meant to be "just right," so as to neither scare away potential buyers nor feel stuck if only one offer comes in at list price.
Nevertheless, some sellers in slow markets choose to set the list price on the low side, just trying to get potential buyers to come in and take a look. They figure that if the place really is a bargain, more than one person will bid, and the price will eventually get moved upward anyway.
You might find regional variations, too. In California, for example, the real estate industry sometimes uses what it calls "transparent pricing" even during hot markets, meaning that the list price was really truly what the seller would accept.
Then there are home sellers who set their house list prices on the high side, either wanting to set a starting point in negotiations (not a good idea), or because they're blind to what their house is actually worth. Sellers tend to have difficulty believing that their house has dropped in value (which can happen dramatically after a major market correction). Or, if they've put a lot of money intro improvements, they might be feeling entitled to recoup it.
Sometimes, the fault for overpricing a home lies with an inexperienced or unscrupulous real estate agent, who "bought the listing"—that is, convinced the sellers that they could get a higher amount for the house despite what other agents competing for the seller's business were saying about how the place compared in value to other properties.
It's perfectly legal for a real estate seller to reject a full-price offer, or indeed any offer (unless the reasons are discriminatory). For example, sellers in a hot market who are expecting to sell their place for over asking have been known to counter a full-price offer—even one that came without contingencies (such as to have a home inspection done). Similarly, sellers who receive multiple bids frequently reject full-price offers in favor of higher offers.
Even in slow markets, home sellers can and do reject full-price offers. Real estate purchase contracts are complex: They contain many terms beyond price, such as closing date, earnest money amount, and title insurance. So, even if potential buyers submit a full-price, contingency-free offer, the parties still need to come to an arrangement about these other terms. If the buyers’ offer doesn’t meet all the sellers’ needs and wants (or even if it does), the sellers can legally reject or counter the offer.
In the end, it's up to you (with the help of your real estate agent) to decide how much money a house that you like is really worth—and how much you're willing to offer for it. Base your offer price on such factors as:
Websites such as Zillow let you type in an address and receive an instant, free valuation for a home. These listings can be fun to look at—and are actually important to check on, so that you know what other buyers are also looking at—but realize that they tend to be based on general, sometimes out-of-date or erroneous, public data, and can be off by tens or even hundreds of thousands of dollars.
A computer has no way of knowing whether the house overlooks a botanical garden or a garbage dump, smells like the nearby pine woods or like the last owner’s cats, or is streaming with sunlight or molding in the shadow of a nearby high-rise. Nor will the computer know whether you are facing one other bidder or five. In the latter situation, you'll obviously want to aim high when setting your offer amount.
Putting it all together, you'll need to arrive at a number that's high enough to get the real estate seller's attention, but low enough that you won't feel buyer's remorse for having overpaid. If there's competition for the house, this could be your only chance to impress the seller. If not, and you come in low (but not insultingly low) the seller might be willing to negotiate, and will send you a counteroffer.
The exception to the "only chance" scenario is if you're bidding in a part of the country that allows "escalation clauses" (also sometimes called an "escalator clause") such as New York State. This advises the real estate seller that you are willing to match or exceed other bids on the property, up to a set limit. It turns the purchase process into a bit of an auction. For instance, you might say within the real estate purchase offer, "I will bid $x, but if any other buyer's offer is equal to or greater than this amount, I will raise my offer beyond theirs by an additional $x [typically an increment such as $3,000, $5,000, or $10,000], with an upper cap of $x."
Although this clause can make your offer stand out in a multiple-offer situation and show that you're highly motivated to complete the purchase, some home sellers simply refuse to accept offers with escalation clauses, period. They know it gives buyers a chance to set the base price relatively low, and put more money on the table only if higher offers come in. Or, the seller could sidestep the escalation clause, but come back to all interested buyers with a counteroffer requesting that they match or exceed the cap amount stated in your offer. Your maximum would become the minimum!
A final hint on choosing how much to offer: Although many homebuyers tend to think in multiples of five, that is, of offering either $350,000, $355,000, or $360,000, there's no rule that says you have to do this. If, for example, you know that another buyer is interested in the same property, and you think that person is likely to bid $360,000, you could bid $363,000, just to set yourself apart.
For more information on getting to know your local real estate market, looking carefully at houses, finding the house that's best for you, and making an offer, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, J.D. and Attorney Ann O’Connell.
]]>In some states, the standard home-purchase offer is a bare-bones statement that "I'll take the house for $X." After that. the seller writes up the first actual draft of the purchase contract. The buyer reviews the draft and could potentially either sign it on the spot or negotiate for amendments before signing.
In other states (the majority of states, in fact), your offer must be a written document that you've signed and that is so complete that the seller could then sign it and create a binding contract right there. Or (as is more likely) the seller could counteroffer by filling out the same form with slightly different terms and sending that to you for possible signing.
Unless you're in a state where it's the seller's lawyer who draws up the first draft of the contract, you're going to want to use the same basic form as all other home buyers. That form is most likely going to be available from your state's Realtor's association. Your agent, if you have one (and now would be a very good time to sign up with one) can get the form for you or, more likely, prepare it on a proprietary software program.
If you don't yet have an agent, be wary of the seller's agent trying to convince you that, "Don't worry, I can draw up all the paperwork on your behalf." That's called "dual agency," and it leaves you without someone whose primary loyalty is to represent your interests.
Remember that signing a contract isn't the end of the negotiating you might be doing with the home seller. During the escrow process, as the home inspection or title search possibly turn up issues with the property, there's a good chance you'll need to negotiate for price adjustments, repairs, changes to the closing date, and so on. It helps to have someone looking out for you, and only you, during this time.
Most property purchase contracts include basic information such as names and the property address, the price that you are offering, a proposed date for closing, and contingencies (events that must happen within a certain amount of time, such as 30 days, in order for the deal to become final). For example, you might want to make your offer contingent on your qualifying for financing, the house's passing certain physical inspections, or your ability to sell your existing house first.
One big reason that the seller is likely to counteroffer is so as to add pro-seller contingencies to the offer, such as a condition that the seller have found another house to buy before closing the sale to you.
For more information on your options, see Contingencies to Include in Your House Purchase Contract.
Don't make the mistake of thinking that as soon as you offer to buy the house, it's basically a done deal; not even if the seller says, "Sure, great." Only after both parties have actually signed onto the purchase contract are you each obligated to follow through.
Once that contract is signed, you are "in escrow," and bound to continue on toward the closing unless one of the contingencies isn't met.
For a detailed analysis of issues like how to decide the right price for a house, how to craft an offer tailor-made to your and the seller's needs and interests, and how to negotiate the final contract, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, J.D., and Attorney Ann O'Connell.
]]>It's rare, but a home seller might agree to loan a buyer part or all of the money to buy the property so as to create an incentive for buyers who can't borrow enough from a bank or commercial lender to buy the house.
Or, the seller's reasons could be tax related, since financing the purchase would allow the seller to spread out the income from the sale over a number of years.
Seller financing can be carried out in one of two ways.
The first is for the seller to "take back" a mortgage on the house. You, the buyer, sign both a promissory note (promising to repay the loan) and either a mortgage or a deed of trust (allowing the seller to foreclose if you fail to pay). In return, the seller signs a deed transferring title to you. Because you hold the title, you can sell the house or refinance. But you must keep making the agreed-upon payments to the seller.
The second and less popular possibility is for the seller to keep title to the property for as long as it takes you to pay off the loan. The contract you and the seller sign is known by various names, including "contract for deed," "contract of sale," "land sale contract," or "installment sales contract."
The installment arrangement works like this: The contract states that the seller will keep title to the property until you pay off the loan. (You normally pay the loan off in a series of regular payments, similar to a standard mortgage.) After you do so, the seller signs a deed transferring title to you. Because the seller keeps the title over the life of the loan, you cannot sell or refinance the property until all payments are made and the title is transferred--an obvious reason for the unpopularity of this contractual arrangement.
Buying a home with seller financing is not without risk, however, which you'll want to look into further.
]]>Below, we'll describe how these various scenarios could play out, as well as when you're actually mutually bound to make the real estate transfer.
First, it's important to realize that, whether yours is the only home purchase offer to have come along or one of several, a seller doesn't have to accept any particular offer—even if it's for the full asking price. Many homebuyers assume that if they get their offer in before anyone else's, or theirs has the highest dollar figure on it, the house is theirs for the buying. But that's not so. It doesn't matter if your offer is the first or the highest—the seller simply has no obligation to accept it.
Now, on with the post-offer timeline.
With any luck, after submitting the offer to buy a house, the first thing you'll hear back from your real estate agent is that the seller is interested in going forward. But that doesn't yet mean you're in contract; that is, mutually bound to complete the sale. It's rare for a seller to accept a buyer's offer as written. More likely the seller will counteroffer, as described next.
Commonly, a home seller will respond to an offer with a written counteroffer accepting some or most of the terms, but proposing changes to the:
You can accept the seller's counteroffer, reject it, or present a counter counteroffer. The negotiations will continue until either a deal or an impasse is reached. If you reach a verbal agreement on a deal, great—but you're not in contract yet, nor bound to the deal.
Unless you're in a bidding war with other buyers, or you've submitted an absurdly low offer, it's unlikely that the seller will just say "No." Actually, the seller doesn't have to get back to you at all, but your real estate agents will probably stay in contact so that you'll find out the seller's response.
But if you do get an outright rejection, your agent might be able to find out why. This will help you craft a stronger, more appealing offer next time you find a house you're interested in.
A contract is formed only when either the seller or the buyer accepts all of the terms of the latest offer or counteroffer from the other, in writing and with a signature, within the time allowed. Because every offer or counteroffer must include a signature, that basically means that you will have both signed on to the deal when the second party accepts the offer or counteroffer. Your two signatures indicate a mutual agreement and a binding contract.
At this point, if you have a change of heart and decide to back out for a reason that isn't covered in the contract contingencies, you'll forfeit any earnest money that you deposited along with your offer.
That's not to say that you have no escape hatches. If, for example, your contract included an inspection contingency, and you discover after the inspection that the house needs more repairs than you're ready to deal with or negotiate over, you can cancel the deal.
If the home seller backs out for a reason not covered by the contract contingencies, you can potentially sue for breach of contract and get damages awarded by the court. This might not be worth your effort, however, given that you've unlikely to be awarded the one thing you really wanted, namely, the house.
For a detailed analysis of how to negotiate the final house purchase contract and successfully navigate your way to the closing, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, J.D., and Attorney Ann O'Connell.
]]>It’s understandable that many sellers—and often their real estate agents—believe they must accept a perfect offer. After all, aren’t the buyers giving the sellers exactly what their listing asked for? However, there are currently no U.S. laws that require this. Home sellers are free to reject or counter even a contingency-free, full-price offer, and aren’t bound to any terms until they sign a written real estate purchase agreement.
In order to be legally binding, a real estate purchase contract must contain enough detail for a court to be able to enforce it in the event of a dispute. A promise to buy a house without more detail than price and lack of contingencies is not definite enough to enforce, as the parties would still have many more terms to work out. For example, a typical purchase agreement addresses:
And, it’s not enough for buyers to one-sidedly include these details in an offer—it’s also essential that the parties mutually decide on the terms (have a “meeting of the minds,” in legalese) as a matter of their own free will and without undue influence.
Because an offer to buy at the list price with no contingencies addresses only two of the matters that buyers and sellers need to agree on, sellers are free to counter a “perfect” offer or even reject it for any non-discriminatory reason. Unless the buyers and sellers reach a mutual understanding about the details of the arrangement, neither is obliged to move forward with the transaction. (See Home Buying Timeline: From Offer to Purchase Contract for more on this part of the process.)
Laws in every state impose two additional requirements on real estate purchase contracts: They must be in writing, and the writing must be signed by all parties. Oral agreements—even if the parties have worked out all the details—are not enforceable. And, even a detailed written agreement isn’t enforceable until all parties have signed it.
This means that even if a potential buyer presents a fully detailed, written contract that meets all of the sellers’ needs and wants, the sellers would not be bound by it until and unless they sign. Because no one can force a seller to sign (contracts must always be signed freely and without undue influence to be binding), a seller doesn’t have to accept even a supposedly “perfect” offer.
You'll avoid disappointment and delays in your home search by learning more about what a property's list price really means in your area. It could mean that the house seller really would be happy to accept the listed price (especially if the seller mentions "transparent pricing.")
But the list price is more likely to be a little below what the seller is really hoping for; a common strategy in order to incite a bidding war among eager buyers. Depending on how much you want a particular house, and what you and your agent have observed about local demand and pricing trends, you yourself might want to bid far over the list price.
]]>For starters, unlike in many other states, when you make an offer to purchase a home in New York and the seller accepts your offer, nothing legally prevents either side from walking away, almost regardless of the reason. You and the seller will not actually be legally bound to close the home purchase until the two of you have signed a formal contract, or are “in contract,” which typically occurs at least one week after the seller accepts your offer.
Another important difference from many other states’ procedures is that, upon signing the contract, you, the buyer, will need to make what’s called a "contract deposit" or sometimes “downpayment,” typically 10% of the purchase price. Don’t confuse this with the down payment that’s likely required by your mortgage lender at the closing, which is typically an additional 10% of the purchase price. This is more akin to the earnest money deposit made in other states, which serves as liquidated damages if you breach the contract and pull out of the deal.
This article discusses the process of getting “in contract” in New York and what happens to your 10% deposit once you make it.
When someone makes an offer to purchase a home in New York, it’s typically done by filling out a short offer form provided by the listing broker. Unlike in other states, you are not expected to sign a form contract when you make your offer.
If the New York seller accepts your offer, it’s definitely good news, indicating that the seller is seriously interested in proceeding with the deal. The seller’s acceptance might be communicated only orally to you or your broker, if you have one, by the seller’s broker. Despite this good news, neither of you is yet legally bound to go through with the home sale.
Accordingly, once your offer is accepted, it's essential that you and your attorney work as quickly as possible to finalize and sign a contract of sale with the sellers. This contract will lay out all the terms of the deal, such as price, contingencies, and closing date.
Before signing such a contract in New York, you should have an inspection of the property conducted, and if you are purchasing a coop or condo, your attorney should review the building’s books and records, including financial statements. Your attorney and the sellers’ attorney will also be the ones to prepare and negotiate the contract of sale. After these steps are completed, the contract will be ready for you to sign.
When you sign the home purchase contract and deliver it to the sellers' attorney, you will also be expected to produce 10% of the purchase price for your new New York home. The mode of payment could be certified check, wire transfer, or personal check made out to the sellers’ attorney or firm, for deposit in an escrow account. Your own attorney will provide you with specific instructions.
The amount will be deducted from the purchase price and the balance will be due at closing.
If paying by personal check, be careful that you have sufficient funds in your account to cover the full amount. Many contracts will allow the sellers to cancel the contract if this check is dishonored.
Next, the sellers will sign and deliver their signature pages to your attorney. At this point, you and the sellers are “in contract,” and neither of you can walk away without being in breach and subject to legal liability.
Your home sellers are not allowed to go out and spend the contract deposit money at this point. The sellers’ attorney must keep it in an attorney escrow account while the sale is pending. Typically, the account used will be non-interest bearing.
During the escrow period, you should line up any necessary mortgage financing, and your attorney will conduct a title search to ensure that no liens or other clouds are outstanding against the property.
If all goes well, a closing will take place, at which title to the home is transferred to you and money is exchanged. You will then be expected to produce the balance of the purchase price, using a certified or bank check. Most likely, you will pay an additional 10% of the purchase price at this time, in addition to the 10% you paid when you signed the contract. The bank giving you a mortgage will pay the rest.
The sellers’ attorney will likely use the deposit to pay sellers’ closing costs. These may include real property transfer taxes, brokers’ fees, and legal fees for the sellers’ attorney. If any money remains, the sellers’ attorney will transfer the balance to the seller.
If, after signing a contract, you decide (without a reason justified by the contract) that you no longer want to purchase the home, you and your attorney should attempt to get the sellers to agree to cancel the contract and return your deposit. If they do not agree to this, and you walk away from the deal, the sellers might be able to keep your money.
Most residential real estate contracts in New York contain a provision entitling sellers to keep the deposit as “liquidated damages” if the purchaser defaults. A default happens if you refuse to close for a reason not contemplated in the contract.
Rest assured, however, that if your contract contains contingencies, or conditions based upon which the deal will be canceled without either party being in default, and you are canceling based upon one of those contingencies, your deposit will not be at risk. If, for example, you included a mortgage commitment contingency, and you were ultimately unable to get a mortgage, you will not be in default and should be able to end the contract without legal consequence.
If, however, you actually default; for example, your life plans change and you decide to stay in your old house, or move to another city; the sellers will notify you of their demand for the contract deposit. If you object within ten days, the sellers’ attorney cannot release the money to the sellers. Instead, you will likely find yourself a party to litigation to determine who gets to keep the money.
The outcome of such litigation cannot be predicted, but New York courts have, in some cases, allowed home sellers to keep the contract deposit when purchasers defaulted. Accordingly, you should discuss any decision to walk away from a real estate contract with an experienced New York real estate attorney.
]]>As a buyer, contingencies are vital: They provide you with an escape hatch from the property purchase if, for example, your mortgage financing falls through or other uncontrollable events or discoveries create barriers to your finalizing the deal.
As a practical matter, most of your negotiating over contingencies will be done in writing, via your written offers and counteroffers.
By placing at least a few contingencies on the purchase, you give yourself the opportunity to make sure that completing the deal is the right thing to do—and an option to back out before it’s too late.
In some situations, such as with the financing contingency, you might literally be unable to complete the deal if you don't get the mortgage you were expecting. Thus having this condition within the contract saves you from financial disaster. In other situations, a contingency might address the level of risk you're willing to take on, such as with regard to repairs that turn up after an inspector's report (see discussion of the inspection contingency, below).
On the other hand, because every contingency offers you an "escape hatch," they make your offer less attractive to the seller. In hot markets with competitive bidding situations, buyers sometimes omit or waive certain contingencies altogether.
Not only you, but also the property sellers can ask that contingencies be included in the written purchase contract. These usually have to do with the seller's ability to sell or move out by the closing date; such as a contingency stating that the seller needs to have found another house to buy within a certain time, or can rent the house back from you for a limited time period after the closing.
Your real estate purchase contract will build in a certain amount of time (probably several weeks) between the contract signing and final "closing" of the deal, usually called the "escrow" period. The closing date is when the title to the property formally transfers from seller to buyer. To keep things moving, the various contingencies will also have deadlines attached to them.
During the escrow period, you and the seller will both be working hard to meet or remove the various contingencies. For example, you might be scheduling inspections, and the seller might be working with the title company to clear any liens for purposes of your securing title insurance.
Each of you will advise the other party of progress being made. If either of you fails to meet or remove a contingency, you can either cancel the purchase or renegotiate around the issue.
Many contingencies are quite standard, and both you and the seller would probably be foolish not to include them. Below are some common purchase contract contingencies:
Essentially, this contingency conditions the closing on the buyer receiving and being happy with the result of one or more home inspections. Home inspectors are trained to search properties for potential defects (such as in structure, foundation, electrical systems, plumbing, and so on) that might not be obvious to the naked eye and that might decrease the value of the home.
When this contingency is included in the contract, buyers can arrange for (at their own expense) one or more inspections of the property during what’s commonly referred to as the inspection period.
If an inspection reveals a problem, the parties can either negotiate a solution to the issue or back out of the deal. The exception would be if the buyer asked for only a "yes/no" inspection contingency, in which case the buyer's only two choices are to go ahead with the deal or cancel it (presumably only if major repair needs turn up). The buyer would not be able to demand repairs or a price reduction based on what the inspection report turns up in such a case.
This contingency conditions the sale on the buyers securing an acceptable mortgage or other method of paying for the property. Even when buyers obtain a prequalification or preapproval letter from a lender, there’s no guarantee that the loan will go through—most lenders require significant further documentation of buyers’ creditworthiness once the buyers go under contract. Having this contingency in place allows the buyers an out in the event the lender refuses to underwrite a mortgage after it delves further into the buyers’ finances, or something changes, like a job loss.
Because of the uncertainty that arises when buyers need to obtain a mortgage, sellers tend to favor buyers who make all-cash offers and leave out the financing contingency (perhaps knowing that, in a pinch, they could borrow from family until they succeed in getting a loan), or at least prove to the sellers' satisfaction that they're solid candidates to successfully receive the loan.
Many buyers add a homeowners’ insurance contingency to their contracts. That's because homeowners living in states with a history of household toxic mold, earthquakes, fires, or hurricanes have been surprised to receive a flat out "no coverage" response from insurance carriers. You can make your contract contingent on your applying for and receiving a satisfactory insurance commitment in writing.
Another common insurance-related contingency is the requirement that a title company be willing and ready to provide the buyers (and, most of the time, the lender) with a title insurance policy. Title insurance protects buyers from the possibility that the current—or previous—sellers didn’t have free and clear ownership of the property. If you were to discover a title problem after the sale is complete, title insurance would help cover any losses you suffer as a result, such as attorneys’ fees, loss of the property, and mortgage payments.
In order to obtain a loan, your lender will no doubt insist on sending out an appraiser to examine the property and assess its fair market value. If the appraised value comes in lower than what you're paying, the lender will be reluctant to fund the loan, giving that its collateral isn't worth enough to cover a foreclosure sale. By including an appraisal contingency, you can back out if the sale fair market value is determined to be lower than what you're paying.
Alternatively, you might be able to use a low appraisal to re-negotiate the purchase price with the sellers, especially if the appraisal is relatively close to the original purchase price, or if the local real estate market is cooling or cold.
Beyond these common contingencies, there might be others in the standard property purchase contract, and still others you or the seller might want to add.
For example, the seller might ask that the deal be made contingent on successfully buying another house (to avoid a gap in living situation after transferring ownership to you). If you need to move quickly, you can reject this contingency or demand a time limit, or instead offer the seller a "rent back" of the house for a limited time.
Likewise, you can request that the deal be made contingent on the sale of your current house; but if you're in a slow market, where it might take you months to sell, the seller is liable to balk at this.
Once you and the seller agree on any contingencies for the sale, be sure to put them in writing in writing. Often, these are concluded within the written home purchase offer. For help, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Ann O'Connell, and Marcia Stewart.
]]>Whether or not you consider yourself an investor, you no doubt want your second house purchase to be a sound financial move. Yet many second-home owners complain that the house -- including not just the purchase price, but ongoing expenses -- ended up costing more than they'd ever imagined. You'll want to tally up your likely expenses, factoring in any extra costs based on the fact that you won't be there every day (such as hiring a management company and the relatively high cost of hazard insurance). Then you'll need to build up your cash reserve, and, if you plan on renting out the property, determine how much you can expect from rental income (it's often not enough to cover your monthly costs).
A home in a badly chosen location won't serve anyone's goals -- an investor can't resell or rent it, a vacationer won't enjoy it, and a future retiree may have to pick up and move again. You'll need to rely on both market research and your own personal preferences. Look into factors like the strength of the local economy, trends in house resale values, convenience and amenities, property tax rates, the quality of local schools and medical care, and more.
The type of home you buy is similarly important. The costs and demands of owning a single-family home are different from those of owning a condominium, townhouse, or co-op. Which type serves you best will depend on factors such as cost, location, and upkeep. For example, condos, townhouses, and co-ops typically require less maintenance, since the areas of the property outside your unit are governed and maintained by a community association (of which you'll be a member). However, you'll pay for that maintenance in the form of monthly fees and special assessments.
Second-home owners need to worry about both property taxes (which vary by state and locality) and, if renting out the place, income tax. Though taxes are inevitably a burden, a little advance planning during the house-hunting process can save you thousands of dollars a year. For example, sometimes buying a home just over a town's border can significantly trim your annual property tax bill. And if you're renting out a vacation property, the amount of days you yourself spend there can make a difference in how much you'll owe in income tax.
Particularly if you'll be buying in a different state or country than where you live, you might also want to check in with your estate planning attorney. Different laws might apply regarding how the property will pass to your beneficiaries. Also see 8 Reasons to Update Your Estate Plan.
Most people pay for their home with a combination of a down payment and a loan for the remaining amount. The higher your down payment, the lower the loan, and the more house you can therefore afford. In order to come up with down payment cash (which should be at least 20% of the purchase price), you may need to get creative. Using the equity in your primary home, borrowing against a life insurance policy, or refinancing your car are among the possibilities.
Most buyers will also need to get a home loan to help with the rest of the financing. Shop around: By reviewing the various mortgage options and sample payment schedules and factoring in your own short- and long-term goals, you should be able to find a mortgage that suits you.
One unique way to help finance your second home is to tap the "Bank of Family and Friends." Borrowing from parents, siblings, or close friends lets you keep the tens of thousands of dollars in interest you'll pay over the life of your mortgage loan within your circle, rather than handing it over to a bank.
Another money-saving approach is to partner with another purchaser; for example; sharing a vacation home in the sun. Shared ownership is a growing trend -- but not one to rush into lightly. You'll want to start by determining whether co-ownership with a particular person is likely to work. Then draft a written agreement to spell out how ongoing costs will be split and deal with other potential sources of contention, such as what happens if one of you wants out after a few years or if one of you dies.
Some second-home owners plan to rent out their properties long-term with the idea of eventually turning a profit (rental properties usually take some years to make money). Others just want to rent out their property periodically as a means to offset expenses. Either way, you're taking on the role of a landlord, which means more than just following your instincts. Finding good tenants or trustworthy vacation renters, understanding and preparing leases or short-term rental agreements, and dealing with ongoing management and repairs are just a few of the practical and legal issues involved. Also, the obligations of managing a long-term rental are quite different from those of a periodic rental.
For more on becoming a landlord, see First-Time Landlord; Renting Out a Single-Family Home, by Ilona Bray, Janet Portman, and Marcia Stewart.
Protecting your property starts before you buy and continues long afterwards. For example, you'll want to get a proper home inspection prior to purchasing, so as to deal with some repair issues up front and get a sense of what other repairs may be looming.
You may need to purchase title insurance -- typically required by the lender -- in case problems such as past ownership or debt claims on the property surface after the purchase.
Your lender will also require that you carry hazard insurance, to protect your property against damage from such causes as theft, fire, flooding, or windstorms. The cost of insurance for second homes is usually higher than for first homes, since you won't be there as much. You will probably want to add liability insurance, covering you and members of your household for accidental injuries to your visitors. (Together, hazard plus liability insurance add up to the standard homeowners' insurance package.) Taking these protective steps will guard not only your home, but your peace of mind.
]]>Before you go running to your attorney, consider the situation on a human level. If you have been totally up front with your finances and clearly interested in moving forward, it’s possible that emotions or some change in personal situation are behind your sellers' sudden change of heart.
Do you know anything about why the sellers put the home on the market in the first place? If, for example, the sellers planned to move into a senior home because one of them had a serious illness, but that person made a miraculous recovery, there might be little you can say or do to convince them to sell now.
One common situation is where the seller, for whatever reason, doesn't trust the buyer to make good on the deal. Perhaps the seller has some reason to believe that you can’t make the required down payment, or that you won’t be able to get approved for a mortgage, and doesn't want to keep the house off the market for long enough to find out for sure. In this situation, sit down with the seller and proffer whatever evidence you can, for example, your level of savings or other assets, to allay the concerns.
Or perhaps the seller simply got a better monetary offer, and would rather sell to somebody else. It’s unethical, but it happens.
Your legal remedies depend largely on where you are in the negotiation process. Consider these two very different situations, including:
First, imagine that you just went to the open house, loved the property, and you both expressed mutual interest in the transaction. The seller stated a price and you said that price was within your range. You shake hands, smile, and part ways.
You call the next day to finalize the deal, and the supposed seller abruptly hangs up the phone. This surely angers you, but unfortunately, you likely do not have an enforceable “deal.” Under a legal code known as the statute of frauds (a concept borrowed from British common law) any contract for the sale of land must be in writing. A mere oral agreement and handshake are not enough for something as important and complex as a home purchase.
Even multiple conversations over a lengthy period of time are likely not enough to convince a court that the sale is enforceable. (Sometimes parties to a home sale will draft letters of intent, depending on your jurisdiction, but these are not as enforceable as full purchase contracts).
This can be frustrating for a buyer who thought the sale was a “done deal.” Remember, the statute of frauds is also an important protection for you; a seller cannot claim that you must buy a house after you express mere verbal interest. It’s a two-way street.
Imagine a different scenario. You went to the open house, expressed mutual interest, and had many follow-up conversations. You then both retained real estate agents and/or attorneys, you met with your lender, and both you and the seller signed a purchase contract.
You most likely scheduled a closing date within the purchase contract, likely for four to six weeks into the future. (The closing is, of course, when the house officially becomes “yours,” after further inspections, exchanges of money, and title formalities.) The purchase contract should contain specific provisions articulating the circumstances under which either the buyer or the seller can back out.
Typically a buyer has the option of backing out if, for example, the seller is unable to establish title to the house, or the house fails various inspections. The seller is able to back out if the buyer is unable to secure the expected financing, or fails to make the necessary down payment.
A purchase contract will sometimes spell out financial penalties for a home seller who backs out for another reason (not set out in the contract), like merely getting a better offer from another buyer. In this situation, you should consult with your attorney.
In some states, you can actually sue the seller for specific performance of the contract. Specific performance means that a court will order not just money damages, but will order that the seller actually complete the purchase and transfer title to you. This is because, as a common law concept, property is considered inherently unique. You did not merely want to buy a house; you wanted to buy that specific house. Thus, a court might determine that money damages alone would not give you the full benefit of your bargain. Nevertheless, it’s far more common for real estate buyers and sellers in such cases to come to a financial settlement.
]]>Before you can buy a co-op apartment, you will most likely have to receive the owner-corporation’s approval, by way of its board of directors. As such, the co-op contract will set forth the steps you must take to obtain the co-op board’s consent and any deadlines for completing those steps, as a contingency before the deal can close.
For instance, the standard form contract for New York co-ops requires purchasers to submit an application on a form provided by the board and to pay any application fees imposed by the board. The application typically requires the buyer to submit detailed financial information including pay stubs, bank statements, and income tax returns, as well as personal and business references. If you are getting a mortgage, the board will also want to see the loan commitment letter provided by your bank.
Co-op contracts usually specify the number of days that you have in which to submit your application and the event that will trigger the running of those days. In New York, if you are getting a mortgage, you typically have three business days from receipt of a loan commitment letter, and for all-cash deals, ten business days from delivery of the fully executed contract.
As part of the application process, your co-op contract likely will require you to attend an interview with members of the co-op board. The board is unlikely to decide upon your application until its next monthly board meeting. Accordingly, your co-op contract should allow the closing to be postponed if the board has not made a decision by the scheduled closing date.
The standard New York co-op contract allows the closing to be postponed by 30 days. This right to postpone the closing is explicitly stated because, in New York, time is considered of the essence in co-op sales. That means that, after one 30-day postponement in New York, if the board has not made a decision, either party may cancel the contract. Moreover, if the board rejects your application, your contract should provide that you will receive any deposit or down payment that you made.
Most co-op contracts include a clause stating that you examined, or waived your right to examine, the corporation’s documents before signing the contract. Those documents might include the offering plan, certificate of incorporation, bylaws, proprietary lease, house rules, minutes of shareholders’ and directors’ meetings, most recent audited financial statements, and most recent statement of tax deductions available to the corporation’s shareholders.
Do not waive this right! Your attorney should review these documents thoroughly before you sign the contract, in order to assess the corporation’s financial health and the building’s physical condition. These documents might, for example, reveal that the corporation is anticipating making major capital improvements, such as replacing an elevator or doing painting work on a brick façade, which could result in an assessment on shareholders if the corporation has insufficient reserve funds.
These documents will also reveal whether the co-op imposes a “flip tax,” which the seller pays to the corporation at closing. (The money will likely go into a general co-op fund.) The corporation’s bylaws will state how that flip tax is calculated. The method is likely to be either:
If the corporation for the co-op apartment you are purchasing charges a flip tax, your contract should specify that paying it is the seller’s responsibility.
Lastly, the seller should make various representations in the contract as to the condition of the specific co-op apartment that you are purchasing. These representations should include that the unit is free of leaks and bedbugs and that appliances will be delivered at closing in working order.
If the seller refuses to make one or more of these representations, consider this a red flag that a problem might exist. Investigate further. Your lawyer or broker should ask probing questions of the seller’s lawyer or broker to find out whether there might be a defect in the apartment. If you haven’t already, hire a professional to inspect the apartment before you sign the contract. Based on what you learn, you might decide to walk away from the purchase, negotiate a price reduction, or go ahead with the transaction as planned.
The co-op seller should also represent that any significant alterations to the apartment were done in compliance with applicable law and with the co-op board’s approval. If they were not, the board could require the seller to bring the apartment into compliance as a condition to closing, which could significantly delay your closing date. You might want to walk away from the deal if you need to close quickly.
This article highlights a few key contract clauses to watch out for if you are purchasing a co-op, but it should not take the place of the advice and review of an attorney knowledgeable about co-ops.
]]>Let's say you are in the market to buy your first home, but there's a small chance that I might be offered a job in a faraway location within the next several weeks, in which case all your plans will change. If you put in an offer on a house, how long do you have in which to get out of it without major legal or other hassles?
Your ability to withdraw from a home purchase depends on two things:
You are not "in contract" to buy a house until you (that's the plural "you" if buying as a couple) and the sellers have all signed your names to a purchase agreement. Getting to that point usually takes a few steps.
To get you to that point, in order to place an offer on a house, you will in all likelihood deliver a written offer to the seller, possibly on a standard form. That offer will likely contain an expiration date, so that if the seller doesn't act on it within a given amount of time, the offer dies by itself.
But let's assume that doesn't happen, and that you're placing an offer with a seller who would like nothing more than to sell you the house.
Just how detailed your offer document will be varies across the United States, and could impact the point at which you're in contract. In California, for example, the standard purchase offer is written in the form of a contract, so that the seller could sign it and boom, you'd be in contract to buy; though more often, the seller will come back with a counteroffer (also in the form of a full purchase agreement) hoping that the buyer will sign that amended version.
In New York, by contrast, the buyer delivers a much briefer statement of the terms being offered, and it's up to the seller to draft the full purchase agreement, which the buyer eventually signs off on.
Until both parties have come to an agreement on all the contract terms and actually signed the purchase agreement, neither of you are legally bound to anything, and you can withdraw your offer without any problem. You would simply have your real estate agent get in touch with the seller's agent, most likely orally at first, quickly followed up by a written confirmation.
After you are in contract, the situation changes. You are legally bound to go through with the sale, unless one of the contingencies (conditions) set forth in your purchase contract isn't met. The earnest money deposit that you likely put down to accompany your contract might be forfeited if you fail to go through with the deal for a reason not contemplated in the contract.
As a practical matter, most contract contingencies provide major "outs," assuming you included them rather than waiving them to make your offer more tempting to the seller. (In multiple bid situations, for instance, it's becoming increasingly common for offerors to waive the inspection contingency; and anyone with the cash to avoid needing a mortgage would likely waive the financing contingency).
But if you included all the usual contingencies in your contract, and, for example, your home financing doesn't come through, you could cancel the contract. Similarly, if you're not satisfied with the results of the home inspection (which is bound to turn up some defects) you can also call it quits. Talk to your real estate agent or lawyer about your exact rights under the contract, both before signing it and if it turns out that you need to cancel.
If you need to cancel the contract and can't justify it based on one of the contract contingencies, realize that many sellers will be reasonable and not insist on keeping your entire earnest money deposit; especially when it's clear that your reason for canceling isn't mere fickleness, but due to a major change in your circumstances. Again, your real estate agent or attorney is the best one to negotiate this.
For more information, see the Making an Offer on a House page of Nolo's website.