Real estate contract decisions

Real Estate Contract Decisions - two women drafting an offerThe real estate contract decisions faced by home buyers include the price and terms – and terms are basically “everything else” beyond the price.

Real estate contract decisions – price and terms

Assuming that you are pre-approved for a mortgage and that you are are working with a great Realtor or real estate licensee (those should be your starting point), you’ll have a number of things to address and choices to make involving price and terms.  The next is to find out if there will be multiple offers or not – your agent should call the listing agent to inquire.  That is a game changer so should be done upfront. Here are a few of the basic considerations.

1. FORMS Most listing agents prefer the CAR contract, but some may request that offers be written on PRDS forms. Will you draft your offer on the CAR or PRDS contract?

This is perhaps the first “term” to be considered.  In general, this decision is influenced by geography: the “west valley” communities from Almaden or Los Gatos on the southern end up to Redwood Shores or a bit further north will tend to use the PRDS contract.  Most of San Jose, Santa Clara, Milpitas and so on will usually prefer the CAR contract.

If you have written a couple of offers on one of them and then shift to the other, this can be unsettling. Talk with your agent about this decision.

2. TIME / DEADLINES Some of the most important terms among your real estate contract decisions are the timeframes. Other terms matter, such as having a pre-approval letter and providing all the required documentation, such as the proof of funds.  Contingencies are also hugely important terms. Today most sellers want to see no contingencies. That doesn’t always happen, though.
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Why do sellers care if the offer has a loan or is all cash?

Image of $20 and $10 bills with the words "Why do sellers care if it's a loan or all cash?"Why are all cash offers such a big deal?

Buyers who are getting slammed out of the Silicon Valley real estate market due to low inventory and multiple offers are extremely frustrated. Part of the problem may be the amount of cash in their offer. It can be hard to compete with bids with smaller loan amounts or which are “all cash, no loans”.

The question arises all the time: why isn’t my 20% down offer just as good as the 50% down or the all cash offer? Isn’t 20% down good enough? Or for that matter, why wouldn’t a lower interest rate FHA backed loan be suitable?

All cash is better because there’s less risk

Twenty percent down is “good enough” if there are no other offers. If it’s multiple offers, though, it’s probably not sufficient for most sellers provided that the all cash offers are written with realistic pricing. Right now, about 15% of home sales in Santa Clara County are all cash, and sellers would far rather deal with an offer that includes no finance or appraisal contingencies.  For sellers, the fewer contingencies the better and no contingencies is ideal.  Particularly now, when we are seeing a very sudden and dramatic upswing in pricing, appraisal contingencies can kill an offer’s chances of success due to the fear of a low appraisal. With all cash, there is no appraisal at all – it’s a slam dunk on that front. (more…)

What is a contingent offer?

What is a contingent offerContingent offers are making a comeback as our Silicon Valley real estate market is becoming less intense of a seller’s market and inching a little more toward balanced market conditions.

What is a contingent offer? A contingent offer is a contract on residential real estate which is based on the contingency of or subject to the sale of another property.

A contingency is a way out of the contract. If   “xyz” doesn’t happen, then someone (whoever has the contingency) can get out of the obligation to complete the sale. For example, a loan or financing contingency is very common when someone buys a home. But if the loan falls through, at least under some circumstances, the buyer can back out with little or no consequence.

Most of the time, the buyers have the normal contingencies relating to financing, appraisal, property condition, title documents, and related items (approval of the CCRs, HOA docs if any, lead paint tests and more).  Sometimes the seller has a contingency (finding a replacement property, selling short and needing bank approval, or in the case of a sale after death perhaps the approval of the trustees or a right of first refusal of close relatives to purchase the house). Once in awhile, though, there is a sale subject to the sale of another house.  Often this is referred to as a “contingent sale”, even though most offers have some contingencies. We do not see these kinds of purchase agreements accepted too often in the current market in Silicon Valley.

To muddle things a bit, recently our local multiple listing service, MLSListings.com, recently eliminated the sale pending or under contract status that had been associated with either the contingency to sell another property (formerly “status 2”).  We used to have 3 types of pending sales – contingent (status 2), pending (status 3, normal contingencies in place) and sold but not yet closed (status 4, all contingencies are removed).  I don’t know why we now have just “contingent sale” and “pending sale”, but I think it was a terrible idea.

Contingent offers: they are not all the same!

A contingent offer in the San Jose or Los Gatos area may come at any stage of the home selling business:

  1. the home may not yet be on the market
  2. the house may be on the market but not yet under contract
  3. the property may be on the market and sale pending (under contract), but the buyers’ contingencies are still in place
  4. the property is on the market, in escrow (under contract) and contingencies are all removed – it is close to closing escrow

As you can imagine, there are varying degrees of risk involved with a Santa Clara County home seller accepting contracts with these various scenarios. The closer a property is to closing, of course, the more likely it is to close and the smaller the risk.  If it is not yet even on the market, the risk is far greater. (more…)

How much time do you need for inspections when buying a home?

Ability to inspectThe real estate contracts in use in Santa Clara County (PRDS and CAR forms) both include a space for stating how many days are requested for the property condition contingency, which includes inspections as well as other investigations.  How much time does it usually take? The CAR contract has a boilerplate number of days offered, 17, as well as a blank.  The PRDS doesn’t make any such suggestion.

In Silicon Valley, unlike most of the rest of California, most home sellers provide pre-sale inspections for viewing by potential buyers. Often it’s at least a termite or pest report plus a home inspection. In many cases the disclosure package includes not just these two inspections, but others as well, possibly roof, chimney, or other components.

When there are no pre-sale inspections available for home buyers to read prior to writing the offer, the number of days requested for inspections tends to be longer.  In this case, prospective buyers don’t really know the condition of what they’re purchasing so they will need a couple of weeks or more, in most cases, to be satisfied that they understand the condition of the property. Sellers are far less likely to see non-contingent offers or contracts with short numbers of days for investigation if the buyers aren’t given full disclosure upfront. (more…)

Cash offers: what do you need to know if buying “all cash”?

Ten dollar bill (shown in part) with the words "Cash Is King" underneathIf you are purchasing your Silicon Valley home “all cash”, you will be in a stronger negotiating position.  Most of the time, you will get a slight discount on the price and the escrow period should be smoother as there will be fewer hurdles with no financing contingency.  Sellers always welcome cash offers, especially now.

What do you need to know if writing an all-cash real estate offer?

First, make sure you really do have your funds available or “liquid”.  Sometimes buyers think that because they have stock worth a certain amount of money, funds in an overseas bank account or equity in another property they will have access to that cash almost immediately.  It often doesn’t work that way.

Large sums of money coming from out of the United States may have to sit in a bank account for some time, possibly 30 days.  Domestic wire transfers usually have little or no hold time. Is your money overseas? You may want to consider moving it well in advance of the close of escrow. Speak with your escrow officer and Realtor about the details. (more…)

Competing Against Multiple Offers: Contingencies and Timeframes (Part 5)

In the first four posts in this series on writing an offer when competing against multiple offers to purchase a Silicon Valley home, we focused on the financial terms.  In the next few posts, we’ll address the non-financial terms that can “sweeten the pot” to help you succeed – without giving away all your rights!

Price & terms work together like the scales of justice.  When they are “level” to each other, you have a normal sale with a good reflection of market value (normal terms, normal price).  If one is low (poor), the other will need to be high (good) to “even out” the balance.  If the terms are fantastic, the seller may sell the home for a little less or may pick that offer if there are multiple bidders.  If the terms are terrible, the seller may only sell the home if it sells for a bit more to compensate for the terms.    With multiple offers, sometimes you can only go just so far with price.  But often you can improve your offer with the right terms.

Offer ContingenciesToday we’ll focus on contingencies specifically.  Contingencies are not the only terms, but they’re among the most important terms in your offer to buy a home.  We’ll look at both which contingencies may be involved in your offer and potential transaction, and how much time (how many days) to allow for each.  In my opinion, you should never write an offer with NO contingencies. It is just too risky!

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