Nolo's Essential Guide to Buying Your First Home (54 page)

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Authors: Ilona Bray,Alayna Schroeder,Marcia Stewart

Tags: #Law, #Business & Economics, #House buying, #Property, #Real Estate

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Wrappin’ It Up: Removing Contingencies
 
One of your main objectives for the period before the closing is removing (checking off as “done”) contingencies in your purchase agreement. While you might be securing a loan and getting inspections, the seller may be working on performing repairs and finding a new place to live. Each of you will need to advise the other of your progress and, with the help of your real estate agents or attorneys, provide written releases when a contingency is removed. If either of you fails to meet or remove a contingency, you can either call off the purchase or renegotiate.
 
TIP
 
If you need more time, ask.
If, for example, a general inspection reveals that another specialized inspection is needed, you can ask the seller for additional time (in writing). The seller may say no, perhaps as an excuse to back out of the deal. Most sellers, however, are motivated to close the deal and will agree to a reasonable request.
 
Removing Your Inspection Contingency
 
Your purchase contract should include an inspection contingency. In Chapter 12 we’ll explain what the various types of property inspections include and what problems they may reveal. Here, we’re just going to talk about what to do when you get the inspector’s report that explains the problems. Don’t worry: Every house has hidden flaws or defects that you won’t know about until the inspection.
After reviewing the report, you’ll have to decide whether the problems can be fixed and whether you can live with them if they can’t; who should pay for repairs; and what you’ll do if you and the seller can’t agree on who pays.
Whether the Problems Can Be Fixed
 
Discuss with the inspector or outside contractors whether the problems can be fixed and how much repairs are likely to cost. A pervasive mold problem, for example, sometimes can’t be fixed, but a pet door that violates a fire code shouldn’t require a team of specialists.
If a problem can’t be fixed, you must decide whether you still want the property. Sometimes—like if repairs will take several weeks—the answer may be “no.” In some states, your standard inspection contingency will say that you must give the seller a chance to fix a problem before backing out of the deal. But if the problem truly can’t be fixed, you should be able to walk away.
Who Pays for Repairs
 
Your first inclination may be to ask the seller to pay for everything (“Hey, it’s
her
cat that needed the pet door—I don’t even have a pet!”). You can certainly try, but don’t be so unreasonable that the seller says, “Forget it!”
 
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“Don’t expect the house to be brought up to ‘new’ condition,” advises Nancy Atwood, of ZipRealty.
“All homes (except new construction) have issues that we refer to as ‘the price of homeownership’: loose faucets, old paint, and so forth. Asking for every little thing to be fixed is simply unreasonable.”
 
If you’ve got some leverage—for example, you know the seller needs to move fast or that the house sat on the market for months before your offer came along—you can push harder for the seller to take responsibility. But if you know that the seller got a later offer that was higher than yours, you might want to keep requests to a minimum.
If the seller agrees to be financially responsible for all or some repairs, the two of you can handle it in one of a few ways, including:
•
Have the seller credit you a portion of the purchase price.
Normally, when a deal closes, the seller gets paid the full contract price. Instead, you can have the seller agree to have the amount needed for repairs transferred directly to you at closing or put into a special account, which you’d draw on after closing. (Lenders prefer this, because it gives you an incentive to make the repairs rather than pocket the money.) Of course, this assumes you and the seller agree on the estimated repair costs and that those estimates will be accurate enough that you don’t get stuck with a big bill.
•
Reduce the sale price by the estimated cost of repairs.
The advantage to this is that, with a lower purchase price on record, your annual property taxes will be lowered, as will your transfer tax if you live in a state where they’re required (and from the buyer, not the seller). And you can do the repairs whenever you like—though you’ll have to come up with the cash on your own.
•
Trust the seller to hire someone to make the repairs before the closing.
This tends to be a bad idea. The seller may do the repairs on the cheap or, worse, attempt a do-it-yourself job.
•
Hire someone to make the repairs before the closing, with the seller paying.
This may raise more problems than it solves—if the repair takes longer than expected, you can bump into your closing date.
 
Your lender may require certain repairs to be done before the deal is finalized. If you’re paying for those repairs, discuss this with your mortgage broker—creative solutions are possible, such as taking out a larger mortgage to cover the repairs or reducing your down payment to free up the cash.
New Construction: Removing the Final Inspection Contingency
 
If you’re buying a new home, you hopefully negotiated a “final inspection” contingency, which allows you to bring in a professional to approve the completion of the house before closing. Be prepared for unpleasant surprises—legions of homebuyers have discovered unfinished construction or major defects just days before they were supposed to move in.
If this happens, your most obvious choice is to delay the closing. However, that may be impossible if you’ve arranged to move. Your next-best bet is to go ahead with the closing but insist on a written agreement that says the money needed to complete your house will be taken from the purchase price and put into a trust account that the developer can’t touch until the work is done. To keep the developer’s feet to the fire, also add new deadlines to this agreement and state that if the work isn’t done by these deadlines, the money must be returned to you. You can then hire outside contractors to finish the job.
Get an attorney’s help drafting an addendum to your agreement. If the developer’s contract prohibits this kind of agreement or if the developer won’t agree, your final option is to make a list of the remaining tasks, assign each a completion date, and insist that the developer sign it before you agree to close. This is normally called a “punch list,” and developers commonly agree to it. Unfortunately, you’ll have to chase down the developer to get the work done.
 
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The developer will bring in a city inspector to do a separate final inspection—and you’ll need a certificate of occupancy by the closing.
Realtor® Mark Nash says, “The developer normally schedules such an inspection a couple of days before closing—you may not even know it’s taking place. If the house fails, your lender won’t fund your loan. Failures are usually due to basic safety or habitability issues, such as potable water, sewage, or heating.” (In some communities, a closing can go forward with a “temporary certificate” that says the house is habitable, even if lacking some features.) Because the lender requires this certificate to close the deal, check with your closing agent to make sure the developer has forwarded it.
 
Removing a Financing Contingency
 
To remove a financing contingency, you must obtain financing (a loan) on the terms stated in your contract. That means either following up with whichever lender preapproved you or finding another lender that offers a better deal. (If you aren’t preapproved, collect the documents described in Chapter 3 and listed on the “Financial Information for Lender” form in the Homebuyer’s Toolkit.) In any case, your mortgage broker or loan officer should help you.
If you were preapproved, your lender will probably add a few requirements for your “final” approval, including verification of your credit, income, and employment; a property appraisal; and, in some cases, a property survey.
The appraisal assures the lender that you’re not borrowing more than the house is worth. While the lender or broker will probably coordinate the appraisal, you’ll receive a copy of the report. If the house is appraised for less than you’ve agreed to pay, the lender may not approve the loan. Likewise, you may not want to purchase the property for what you’d originally agreed and can use the appraisal to either back out of the deal or renegotiate the purchase price.
Once the various requirements are met, the lender will give you an “approval” or “commitment” letter mentioning the exact dollar amount, which you can show to the seller as you remove the financing contingency. If you’re borrowing from a family member or friend, you’ll need a letter from that person explaining how much you’re borrowing and on what terms (as described in Chapter 7). Attorney Fred Steingold counsels, “Never remove a financing contingency until you have the lender’s written approval or commitment in hand.”
 
TIP
 
It’s not final until closing day.
All commitment letters have some conditions attached, allowing the lender to back out if your financial status changes before closing. And, adviser Russell Straub warns, “I know of homebuyers who stopped paying their credit card bills, thinking they already had their loan commitment—thereby destroying their eligibility.” Similarly, quitting your job or emptying your savings account could disqualify you for the loan.

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