You hired a Realtor, prepared your property for market, kept your house in immaculate condition for showings, found an interested and qualified buyer, and you finally have a ratified (signed by buyer and seller) contract. Nothing else to do, right? On the contrary, though you’re nearing a sale, there is now a closing process, which should be managed carefully by your Realtor or a qualified member of his/her team. Considering the serious legal implications associated with such a large transaction, you’ll definitely want assistance from someone with plenty of experience in home sales.
Generally, a seller can’t change their mind about selling when a house is under contract. The contract is a legally binding agreement, and both parties must perform their contractual obligations or risk a lawsuit for breaching the contract. Your seller can’t just scrap your deal and sell to someone else if a better offer comes along. The law is a complicated thing, however, and there are circumstances under which a seller may have the option of backing out after all. Read your specific contract carefully for the details as not all contain the same conditions.
What does it mean when a house is under contract?
On the Multiple Listing Service (MLS), the status of your property will change from “active” to “under contract” or “pending”. This lets the public know that you’ve accepted an offer, but the deal is not complete. Your home will not have a “sold” status on the MLS until after settlement. The sign in your front yard will also indicate “under contract”.
In the Washington, DC metro area, settlement (another term for closing) generally happens within 30-45 days after the contract is signed. During this period, information is exchanged between various parties. For sellers, it’s mostly a time of waiting (anxiously, no doubt) and packing while buyers conduct the inspections agreed to in your contract, the lender processes the loan application, and the title company ensures that anyone with claims to the property receives their portion of the proceeds when the deed is transferred to the new owners.
Keep on Top of Contingencies
All contract contingencies have tight deadlines. Your agent should provide you with a clear schedule and keep in close contact with all parties to ensure the deadlines are met.
The home inspection is a milestone in this process. Inspections are generally paid for by the buyers and they reveal things about the house that can’t be seen with the naked eye. Therefore, once the buyers have the results, they may ask you to repair or replace items.
Your agent will guide you regarding what to fix (usually anything that addresses a safety issue) and when to counter-offer. As with the sale price, you can negotiate inspection results.
Another milestone is the home appraisal, which is ordered by the lending institution to ensure that the property’s value is commensurate with the amount of money they are giving to the borrower. Since the home is used as collateral for the mortgage loan, the bank wants to make sure they can recoup the money if the borrower defaults.
Once in a blue moon (about five percent of the time, according to the National Association of Realtors), buyers will back out of the contract before closing, usually due to issues with the home inspection or with financing. When the buyers submitted their offer, they also provided an earnest money deposit (typically one to ten percent of the purchase price), which is kept in an escrow account until closing. Depending on how your contract is worded, they may be entitled to some or all of their deposit back. 77% of contracts include contingencies, which legally allow for buyers to back out in certain circumstances and not lose any money. This is why it’s crucial to understand the contingencies before you sign the contract. If a buyer cancels the contract simply due to “cold feet,” you as the seller are entitled to keep their earnest money deposit.
What’s the deal with contingencies?
Once all contingencies are met and the lender has finished processing the loan, you will receive a loan commitment letter, which means the buyers have been approved for the mortgage. Now you’re 95% of the way there! At this point, you can:
- Call your utility companies to take your name off the accounts as of the closing date (make sure they don’t shut anything off on that date though, as the new owners will need lights and running water at the final walkthrough)
- Contact the post office to have your mail forwarded and notify necessary parties of your address change
- Schedule movers
- Call homeowner’s insurance to cancel your policy on that property
- Gather all instruction manuals, warranties, contractor receipts, house keys, garage remotes, etc. in one place for the new owners. You might even create a document for them that explains certain things about the property they need to know, like the alarm code or how to work the home theater.
When settlement day arrives, you may or may not have to show up at the title office (ask your agent). Unless you’ve negotiated a rent-back in your contract, allowing you more time in the property after closing, you should have vacated by this date. The buyers will do a final walkthrough of the property to make sure it’s in the condition agreed to in the contract. You and the buyers will sit at the settlement table to sign documents, pay off your mortgage, and receive any proceeds from the sale. You’ll hand over your keys and ownership of the property will have officially changed hands. Congratulations!
7 tips for making your best offer
When you’re shopping for a new home, you may find you have to compete with multiple offers on the same listing. This is especially true in a seller’s market. While you want your offer to win, the last thing you should do is keep increasing your bids until you can no longer afford the home.
To get the house you want without overpaying, start by following these seven guidelines. Many of your rivals will skip some of these steps, giving you a competitive edge.
1. Get pre-approved for a mortgage
The home-buying process doesn’t begin by searching real estate listings or even by calling a real estate agent. Instead, it should start with a mortgage pre-approval from a lender.
A pre-approval accomplishes two important steps:
- Verifies your price range so you know what homes you can afford
- Shows home sellers you’re serious about the home purchase and won’t fall through
Sellers give preference to buyers who are pre-approved. Pre-approval tells them that when it’s time to close, you will have the money. So before you hit the streets, get a pre-approval letter from one or more lenders — not just a pre-qualification letter. A pre-approval letter confirms that you’ll be able to borrow X amount based on that lender’s evaluation of your credit score, assets, and income.
With pre-qualification, the lender is merely estimating how much you could borrow. It’s not committing to giving you a loan.
Although pre-approval takes a bit longer and requires an application, it’s a worthwhile investment — especially in a competitive market. And, when the seller accepts your offer and you sign a purchase agreement, your pre-approval gives you a head start on your mortgage application.
2. Leave some ‘wiggle room’ in your offer amount
Just because a bank is willing to loan you $250,000, doesn’t mean you should offer exactly $250,000 for a house. In fact, doing this may damage your credibility. Experienced sellers and real estate agents get nervous when buyers bid their full pre-approval amount.
Why is this a bad idea?
- For one thing, maxing out your pre-approval could eliminate your “wiggle room” in future negotiations. The seller knows you’re already spending up to your mortgage lender’s limits
- And, if interest rates rise, you may no longer qualify for that loan amount and will have to back out of the deal
- Rates change all the time — up until you lock in a rate — and that happens after you have a purchase agreement
Understand, that just because you can afford your full pre-approved loan amount doesn’t mean you should borrow that much. Your lender won’t consider your long (expensive) commute, your pricey hobbies, or your savings goals. You may want to borrow less and breathe easier. Also, be sure you’re planning ahead for closing costs, which will come due on your home’s closing date. Typical closing costs equal 3% to 5% of the loan amount.
3. Research the market and the seller
Your buyer’s agent can do a comparative market analysis to help you find the fair market value of homes you’re considering. Realtors may call this market data “comps,” and it’s a key piece of the puzzle as you put together your first offer. But there’s more to market research than finding a fair offer price. If you or your agent search public records and real estate listings, you may unearth valuable “intel” about the homeowner’s motivations for selling. This could help you structure a winning offer for less money.
Also, check the seller’s social media for clues. You may find you have things or people in common, and that could help when negotiating. Just don’t overstep your bounds when trying to get personal. For example, you might learn the seller is moving for a new job and needs a quick closing — faster than other buyers are willing to accept. Or, you might learn the seller hasn’t yet found a new home and may want to delay closing. Armed with this information, you can craft a more tempting offer than your rivals for the same sale price (or less).
4. Make a respectable offer
Submitting a lowball offer that isn’t supported by sales data usually backfires, especially in a sellers’ market. Buying a house isn’t like haggling at a flea market. So don’t offer $150,000 for a house worth $250,000 and then expect a counteroffer. All too often, the seller will be insulted by your “opening bid” and won’t bother to return your calls after that.
If in doubt about your offer amount, think about the home sale from the perspective of the seller. As the seller, you could have put a decade or more of work and money into the home, keeping the place updated and structurally sound. The seller may also have memories that linger in the empty rooms: A blemish on the baseboard or a faint stain on the carpet may spark a story in the seller’s mind.
You can’t assign a dollar value to this kind of emotional attachment, and it shouldn’t add a penny to the home purchase price. Still, making a lowball offer disregards this human aspect of the transaction, and it can short-circuit negotiations. This doesn’t mean you can’t offer below the seller’s asking price; it just means you’ll have more success with a serious offer letter backed up by market data.+
5. Go easy on the contingencies
Most home purchase offers include a few standard “contingencies” — things that need to happen before the deal can close. For example, it’s wise to make your offer contingent on a home inspection and your ability to get financing within a specified time. The transaction should also include an appraisal contingency: If the home’s appraisal doesn’t justify the loan amount, the lender can’t move forward with your loan. As a rule, however, contingencies are obstacles to successful closings. So keep them to a minimum.
In red-hot housing markets, skip contingencies for non-essential repairs and credits. It doesn’t hurt to ask, but be prepared to waive those contingencies to seal the deal. Whatever you do, though, don’t waive the home inspection contingency. If you do, and later discover a major defect, you could lose your earnest money deposit if you back out of the deal.
6. Use your own real estate agent — not the seller’s
When you find the right house, move fast. Delays can be deal killers. At the same time, don’t hire the seller’s agent (aka, “listing agent”) to expedite the process. Before you start house hunting, hire a buyer’s agent to represent your interests and help you negotiate.
The seller’s agent has a duty to promote the seller’s interests. That means getting the highest price and best terms for the seller, not you. Using the seller’s agent creates a “dual agency” situation, which leaves your interests unprotected — except by you. And in that case, why bother hiring an agent?
After all, the agents’ commissions will likely be built into the sale price you’re paying. When you don’t have a buyer’s agent, the entire commission goes to the seller’s agent. That’s a lot of money to pay someone else’s agent.
7. Keep your emotions in the background
Sometimes, buyers are so blinded by certain features — polished hardwood floors or swimming pools — that they overlook obvious defects. This happens to experienced as well as first-time homebuyers. It’s another reason to hire an agent. You need a third-party advisor at your side in case you fall in love with a home and try to bust your budget.
No matter how much you love a house, and how good your purchase offer, you won’t always win. Rather than overpaying, be prepared to walk away. There will be more homes for sale that meet your needs and wants. It’s possible that your true “dream home” is still out there.
The last item on your to-do list is to visit Zillow or Google and leave a review of your agent for future home buyers and sellers.