What does it mean to be “out of contract” in a home sale?

Is your indecision putting you out of contract? Worried looking woman with laptop computer.Every region of the country has some unique real estate vocabulary and phrases.  Here, in Silicon Valley, when we say “you’re out of contract“, it’s another way of saying “you are not doing what you promised to do in the purchase agreement that you signed” (meaning the real estate contract).  In other words, there is a seller or buyer default happening.

“Out of contract” is not a legal term. I remember hearing a local real estate educator say “there’s no such thing”. It’s not an official status. But it is a way of describing behavior that’s not in alignment with the contract’s express promises.

Contractual “Save the Dates”

Both sellers and buyers make promises to do certain things and most of these promises are tied to time frames or dates.  Here are a few of these time-sensitive promises or contractual obligations:

  • sellers agree to leave the utilities on until close of escrow
  • sellers promise to maintain the home until close of escrow as it was on the day the property went into contract (so mow the lawn, water it etc.)
  • buyers assert that they will get their initial deposit to title within a set number of days (the California Association of Realtor’s form states 3 business days or provides a blank to fill in an alternate number – it’s often 1 business day here)
  • buyers promise to remove contingencies within the times they stipulated in the offer
  • sellers will move out in according to the date set out in the contract
  • indecision over material facts or between buyers may make it hard to decide whether or not to remove any contingencies
  • buyers agree to take possession (move in) per the time/day agreed to in the purchase agreement (not before)
  • sellers bind themselves to having repairs done in a certain manner (depends on contract and clauses, if promised)

At one time or another, I have seen all of these items not adhered to by the parties who were supposed to make good on their word, and stranger violations that I don’t want to write about here lest I give someone a bad idea. I have seen sellers not move out on time (in some cases, elderly sellers who grossly misjudged the effort required to vacate.)  The failure to do so causes stress and anxiety, and sometimes worse: fear and anger.

Out of Contract: Why the Delay?

Sometimes, when either party is consumed with worry, a kind of emotional paralysis can set in. Luckily that is rare, but I have seen it. Buying and selling a home is extremely stressful, and once in awhile it coincides with other things: the death of a family member, a diagnosis of cancer, a divorce, a relocation that one party doesn’t want. So many things can happen at the same time. You may have heard the saying that “a confused mind says no”. With real estate, the confused mind doesn’t write or accept an offer, or doesn’t move forward as planned.

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What is a “Kick Out” Clause?

What is a kick out clause?A kick out clause refers to language in the contract which permits the seller, in some cases, to cancel the contract with the current buyer.  The current buyer is “kicked out” of contract.  Another expression for the same idea is a “release clause” – the seller can release the buyer under some situations.

This is a bit of a surprise to most Silicon Valley home buyers, who tend to think that they can walk away from a property during their contingency time frames, but a seller is stuck with them, no matter what.  That’s simply not true!

In the last few years, both the CAR and PRDS contract forms have been updated.  Both now include language that specifies the seller’s right to cancel the contract.  Both parties have rights and responsibilities. Failing to do what one has promised to do in the purchase agreement could potentially find that home buyer out of contract and without that home to buy.  There are many shades of gray, and few things are automatic.  If a seller is going to give a buyer the boot, there will be a “notice to perform” tendered first.

Let’s talk specifics.  When can the seller kick out or release the buyer? (more…)

Lawsuits against the banks: how can they impact you?

Banks in courtMany of us cheered to hear that some of the large banks (who have not been wonderful to deal with regarding loan modifications, short sales and foreclosures or bank owned property sales) were getting sued by federal regulators for various types of malfeasance.

Most recently, the Federal Housing Finance Agency, which is in charge of Fannie Mae and Freddie Mac, filed a lawsuit against 17 major banks, including Bank of America, Citibank, Morgan Stanley, and several others (see a complete list here).

So how does this impact you, the Silicon Valley real estate home buyer or seller?

Imagine you’re on the board of any of these institutions.  What do you do to protect your shareholders when something like this happens?  Perhaps first of all, you make sure that whatever you’re accused of doing cannot happen in the future.  You hand down new policies and get them implemented immediately.  No exceptions.

Some of my buyers got caught in this situation, without warning, when their lender informed us that there will be a week-long delay in closing due to new procedures which are mandatory for every file, bar none.  Our loan contingency was removed awhile ago (with the lender’s assurance that all was fine).  We will still close escrow, but late.  This never makes anyone happy.

Right now, if you are trying to buy a house and will be relying on lender financing, I suggest you find out if your bank or lender is involved in a big lawsuit and if so, how this may be impacting real estate purchase contract deadlines.  Most lenders do need 17 days to get you fully approved if you go into the escrow pre-approved (with a real pre-approval, not a pre-qualification only) and 30 days to close the sale.  But if your lending institution is in a messy legal battle, it could take longer, and it could be a surprise.  In escrow, no one likes surprises, especially if they cause any sort of default.

This situation will probably benefit the credit unions and banks which did not misstep with the subprime loans.  Got a great bank that performs fast and is free of legal battles? Please share it here!

 

 

 

Buying a Silicon Valley condo? A few questions to ask!

What do you need to know if you’re buying a condominium in Silicon Valley?  Isn’t it simpler and easier than buying a house?

No, not really.

With a condo, you are buying not just the unit (or airspace) that you intend to occupy, you’re also buying a shared ownership in the common features.  This means, of course, that you are also buying into any potential liabilities.

Here are some questions to ask and areas to investigate when buying a San Jose area condo:

  • What is the percentage of owner occupied homes? (Too high of a ratio and buyers will have trouble purchasing with a loan, which means you could have trouble selling.)
  • Is there any litigation (lawsuits) ongoing?  Again, this can impact saleability.  Often newer condo units investigate any building problems around years 7-9 as there’s a 10 year statute of limitations for finding building errors, so younger homes that are just under 10 years of age could be involved in a lawsuit.
  • Is the complex professionally managed or managed by owners? (There will be implications for each.)
  • How much have the dues been going up each year?
  • How many home owners are currently in default on their HOA dues? (HOA dues are often skipped before distressed home owners default on their mortgage.) (more…)

What Is A Default in a Real Estate Transaction or Contract?

what is a defaultDefault is a dirty word, but how many Silicon Valley home buyers and sellers understand what a it is?  Consumers often confuse the term default with cancelling the sale at any time – even backing out of a contract during the contingency period for a legitimate reason. Buyers cancelling during the contingency period is very easy to do in most cases and is very seldom a default.

Default is a strong word which refers to a failure to do something promised in contract or not doing it on time; we sometimes call it “non-performance”.  In the purchase agreement, buyers and sellers both make promises to do certain things within a certain time frame, so either one could potentially default.

Defaults don’t always cause the sale to not go through, but they can cause a delay and it may harm the other party – at the very least, not fulfilling the promises of the contract adds unnecessary stress and drama to real estate transactions, which are already, in & of themselves, stressful.

Home buyer defaults

For instance, the following items are areas where a buyer could default (not an exhaustive list):

  • not putting the initial deposit (good faith deposit) into escrow on time
  • cancelling the sale after removing all contingencies or without cause allowed by the contract
  • not removing contingencies on time (or possibly ignoring other deadlines)
  • not completing loan papers on time
  • not returning the signed disclosures on time
  • not bringing “good funds” to escrow in time for closing

Missing contingency removal deadlines may be a default.  For instance, the PRDS contract states on page 1 of that agreement:

BUYER’S  FUNDS:  Buyer  represents  that  all  funds,  including  deposits,  cash  balance,  and closing costs, will be readily available as “good funds” (as determined by Escrow Holder) at  the  time  of  payment.  Obtaining  these  funds  is not a contingency of this Contract.

The loan approval, though, may be indirectly tied to whether or not the buyer liquidates stocks or other accounts to provide the down payment.  What happens if the loan is fully approved except for the verification of this down payment?  The buyer’s job is to have the funds available so that obtaining them later does not cause a delay.  If a delay is caused because the buyer didn’t get the funds ready on time, that is a buyer default.

Not every default is an equally grave problem, of course.  In the case above, the buyer can go ahead and remove the loan contingency and continue to liquidate the down payment assets (which should have been done much earlier in the escrow).  BUT, if the buyer does not complete the sale due to a problem with getting those funds, his or her good faith deposit will be at risk via the liquidated damages clause because getting those funds is not a contingency.

Home seller defaults

Sellers, too, can be guilty of defaulting on contractual promises. Here are some areas in which a seller could default:

  • not moving out on time
  • not providing completed disclosures or reports on time
  • not having work done which was contractually required (such as pest work or repairs)
  • not keeping the power & water on for inspections and final walk through
  • not providing the loan payoff information, or any other required information, in a timely manner to the title company (escrow)
  • causing a delay in closing due to not signing off on time
  • refusing to schedule or attend a sign off to sign the closing papers

In Silicon Valley, there are two purchase agreement forms in use: the California Association of Realtors (CAR) contract and the Peninsula Regional Data Service (PRDS) contract.  Generally speaking, the PRDS & CAR contracts are similar on many points.  They are not so similar in the treatment of defaults, though.

What does the contract say about defaults?

Oddly, the CAR contract only mentions the word default twice, and in both cases the topic is a buyer’s default, first in the liquidated damages paragraph (25) and next in the other terms & conditions paragraph (27). (more…)

Writing an Offer in a Multiples Situation? Financing Tips (Part 2)

ten-dollar-billMultiple offers are a joy to home sellers and a nightmare for home buyers.  There are many disclosures warning of the dangers of overbidding and giving away too many rights in the purchase agreement, and rightly so.  You certainly never want to give up that which will make you overly vulnerable (such as no contingencies for financing or property inspection).   At the same time, though, to actually be the winning bidder, your offer must be better than everyone else’s.  Financing terms can really “make or break” your offer.  Today we’ll discuss a couple of those financing terms: the initial deposit  & the increase of deposit (and related issues of liquidated damages and default).

What are financing terms?   They are all the details of how exactly you will pay for the home and get money into escrow.  For example:

  • good faith deposit (initial deposit)
  • increase of deposit (if needed)
  • loan type (conventional, FHA, VA, seller carry?)
  • loan costs (will you pay or are you asking the seller to help pay?)
  • loan terms: are they realistic?
  • is there a pre-approval letter or a pre-qualification letter?
  • what is the total down payment amount? (and % of purchase price)
  • will you provide the “proof of funds” to the seller?
  • will you submit a copy of the check with your offer?

The initial deposit or good faith deposit is the amount of money that you’re “putting down” with your offer.  If your contract to buy the home is accepted, that check will be cashed within a day or two, so make sure that you write one that will not bounce!  In the San Jose area, most real estate agents write the offer such that there are three business days to get that money into the title company (which handles escrow services in northern California most of the time), but make sure you know how many days it is because it can be variable.  It is written right in the contract, so read & understand it.

(Please note that except for the initial deposit, the rest of the contract will reference days, not business days, if your agent is using either the CAR or PRDS purchase agreement form, both of which are standard in Santa Clara County and San Jose generally.)

Smart real estate agents will usually look for 3% deposit when a home sells, preferably in the initial deposit, but possibly part in that first check and the balance in an “increase of deposit”, which normally would happen when all contingencies are removed.  If you are competing against other homebuyers and your deposit is less than 3%, your position is weakened relative to theirs.

Why does the 3% target matter so much?  The reason is that it’s connected to the liquidated damages clause.  The liquidated damages clause is something buyer and seller would need to agree to for it to be enforceable, so in our PRDS or CAR purchase agreement forms there’s a place for buyers and sellers to initial it if desired (and in my experience, everyone does initial for it).  The deposit (and possibly increase of deposit)  is the potential penalty if the buyer defaults on the purchase.  (I’ll speak of defaults below.)

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What is a Short Sale, and Who Qualifies For One?

Recently I have received a number of emails and calls from San Jose and Silicon Valley homeowners who are “upside down” in their homes and want to sell that property and “move up” into a bigger house, better neighborhood, or higher performing school district. They contact me to see if they can do a short sale and get out from under their loan, and several seem to think that they can pull equity out from that property to purchase the next home.

It doesn’t work that way.

There are a lot of misconceptions about short selling a home, and what a short sale is, and who qualifies for a short sale, so this post is aimed at clarifying what it’s all about.

short sale signsA “short sale” is a sale of the property in which the lender (or lenders) accepts a “short payoff” to get the home conveyed to the new owner. The “short” in short sale refers to the lender not getting paid back what was promised by the borrower/homeowner.

Why would a lender agree to taking less than what is owed? The answer is simple: only if it’s the lesser of two evils, the other being a foreclosure (which would cause a greater loss to the lender in most cases).

Under what circumstances will a lender agree to a short sale? There are a few conditions which absolutely must be met if a seller will even consider a short payoff:

  1. The homeowner has some sort of significant hardship (such as the death of a spouse and loss of that spouse’s income, divorce, job loss, serious medical illness with large medical expenses)
  2. The monthly payments can no longer be made (in part or in full)
  3. The owners or property does not qualify for a loan modification
  4. The property owner has no other assets which could be sold to make up the difference between sale price and loan balance (such as a vacation home, stocks, etc.)
  5. In many cases, lenders will not consider a short sale unless payments or parts of payments have been missed (the owner is in or near default status)

A few very significant ramifications occur when there is a short sale:
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