contracts

Can I Terminate the Contract? What Happens if I Do?

March 14, 2016 by khproperties 7 Comments

If you’ve ever put an offer in on a home, you may be familiar with what is known as “buyer’s remorse.” It’s that sudden sinking feeling of “oh no, what have I done,” that many buyers feel when making a large purchase such as a home and can be cause for a lot of stress. Of course, the next question that pops into your head is, “Can I terminate the contract?” While the feelings of buyer’s remorse often fade, there are occasions where you find a need to terminate the contract and walk away from the purchase. Depending on the circumstances, you may be able to walk away quite easily and in others, there may be major issues.

When Can I Terminate the Contract?

The easiest way to terminate a contract is to terminate it during the option period (if you have one). The option period is a negotiable timeline written into the contract that allows the buyer the unrestricted right to terminate the contract and receive their earnest money back. The option period is for a set amount of days from the executed date and must be paid for. The buyer will lose their option fee, which is typically a nominal amount compared to their earnest money. Within the allotted timeline, the buyer may cancel for any reason. During that option period, buyers will usually conduct their inspections of the home and use that time period to negotiate any repairs. If the two parties can’t come to an agreement on repairs, the buyer may terminate the contract.

While that may be the most common, there are other times the buyer may terminate the contract. From financing periods to performance items like delivery of surveys and HOA docs, there are several different so-called outs in the contract, but as the items in the contract are negotiable, it is hard to be specific about when you can and you can’t, since it depends on what’s in your contract.

The big answer to any questions about termination is to look at your contract. What does it say? In any paragraph where there is an ability to terminate, it will clearly outlined. As with anything, ask your agent and let them know your desire to get out of the contract and they will look for the answers for you. In extreme cases, you may need to get a lawyer involved to interpret the contract and give you the steps you’ll need to take next.

Just remember, termination is a last resort. Take a breath and figure out what it is that you’d like resolved and how you can find the answers to the issues and then maybe you’ll find that you don’t need to terminate. While we don’t like to see contracts terminate, there are times when it is necessary and the goal will be to make it as painless as possible.

image courtesy of jmlawlor

Third Party Financing Addendum

March 12, 2016 by khproperties 1 Comment

The Third Party Financing Addendum was updated by the Texas Real Estate Commission on January 1, 2016 and since we’ve talked about the form previously (although some parts of the form have changed, this older post is a good primer on some of the details of the financing side of purchasing a home), we thought we should talk about the new form and the changes that affect you and the contract on your home. The Third Party Financing Addendum is an addendum to the One to Four Family Residential Contract that covers the financing of the home. In a cash deal, it is not needed, but if you’re getting a loan and you need that loan to buy a house, you’ll be seeing this form when sitting with your agent to write up an offer.

What is Third Party Financing?

Third party financing is any loan you take to purchase a home – this can come in several different forms: conventional loans, Texas veterans loans, FHA loans, VA loans, USDA loans, and reverse mortgages (they are not often used to buy homes, but it is possible). As the loan requires approval (in various forms) by the lender, the Third Party Financing Addendum ties the approval process to the contract so that if a buyer is unable to obtain the loan, they have ways to get out of the contract.

Third Party Financing Addendum

A. TYPE OF FINANCING AND DUTY TO APPLY AND OBTAIN APPROVAL: Buyer shall apply promptly for all financing described below and make every reasonable effort to obtain approval for the financing, including but not limited to furnishing all information and documents required by Buyer’s lender. (Check applicable boxes):

The first section of the form lays out the type of financing the buyer is seeking of obtain and requires the buyer to apply for such financing promptly. The next sections of the paragraph outline the various types of financing: 1. Conventional Financing, 2. Texas Veterans Loan, 3. FHA Insured Loan, 4. VA Guaranteed Financing, 5. USDA Guaranteed Financing, and 6. Reverse Mortgage Financing. Each loan type requires the buyer to outline the basic criteria for the loan they are seeking – the amount of financing, how many years the loan will be, the interest rate, and origination fees (the money a lender charges to make the loan). By outlining the criteria, the buyer sets the basics of the loan they are seeking and if for some reason they cannot get a loan under these terms, they can terminate the contract (covered in the next paragraph).

B. APPROVAL OF FINANCING: Approval for the financing described above will be deemed to have been obtained when Buyer Approval and Property Approval are obtained.
1. Buyer Approval:
This contract is subject to Buyer obtaining Buyer Approval. If Buyer cannot obtain Buyer Approval, Buyer may give written notice to Seller within _____ days after the effective date of this contract and this contract will terminate and the earnest money will be refunded to Buyer. If Buyer does not terminate the contract under this provision, the contract shall no longer be subject to the Buyer obtaining Buyer Approval. Buyer Approval will be deemed to have been obtained when (i) the terms of the loan(s) described above are available and (ii) lender determines that Buyer has satisfied all of lender’s requirements related to Buyer’s assets, income and credit history.
This contract is not subject to Buyer obtaining Buyer Approval.
2. Property Approval: Property Approval will be deemed to have been obtained when the Property has satisfied lender’s underwriting requirements for the loan, including but not limited to appraisal, insurability, and lender required repairs. If Property Approval is not obtained, Buyer may terminate this contract by giving notice to Seller before closing and the earnest money will be refunded to Buyer.
3. Time is of the essence for this paragraph and strict compliance with the time for performance is required.

As you can see in Paragraph B., there are two types of approval: buyer approval and property approval. The buyer approval piece is similar to the old Third Party Financing Addendum language in that it gives a negotiable amount of days in which the buyer must obtain their approval. If the buyer cannot obtain the loan approval in time, they will need to give the seller written notice and they can terminate the contract and receive their earnest money back. The buyer can also opt to make make the contract not subject to buyer approval. This usually occurs when someone is seeking a loan, but doesn’t necessarily need it and could (and will) buy the home with cash if necessary.

The property approval section used to be outlined in the contract, but has been moved over to this form and combined in this paragraph in order to avoid confusion about what defines “approval.” Property approval relates to the lender satisfying their own requirements for a property from the appraisal to insurability to any lender required repairs. Although the paragraph lists those, it does say such approval is not limited to those items. Once again, if the buyer can not obtain property approval from the lender, they may terminate and keep their earnest money.

As always with contract items that are tied to the effective date of the contract and involve termination potential, the third section reminds all parties that time is of the essence and timelines should be strictly adhered to in order to face any potential issues.

C. SECURITY: Each note for the financing described above must be secured by vendor’s and deed of trust liens.

All loans must be secured by vendor’s and deed of trust liens. When you take a loan on a house, the lender will place a lien on the home, securing their interest in the property. Should anything happen and you need to sell it, you can not sell it without satisfying the obligation to the mortgage company by paying off the remaining balance of the loan.

D. FHA/VA REQUIRED PROVISION: If the financing described above involves FHA insured or VA financing, it is expressly agreed that, notwithstanding any other provision of this contract, the purchaser (Buyer) shall not be obligated to complete the purchase of the Property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise: (i) unless the Buyer has been given in accordance with HUD/FHA or VA requirements a written statement issued by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement Lender setting forth the appraised value of the Property of not less than $_______________; or (ii) if the contract purchase price or cost exceeds the reasonable value of the Property established by the Department of Veterans Affairs.
(1) The Buyer shall have the privilege and option of proceeding with consummation of the contract without regard to the amount of the appraised valuation or the reasonable value established by the Department of Veterans Affairs.
(2) If FHA financing is involved, the appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure. HUD does not warrant the value or the condition of the Property. The Buyer should satisfy himself/herself that the price and the condition of the Property are acceptable.
(3) If VA financing is involved and if Buyer elects to complete the purchase at an amount in excess of the reasonable value established by the VA, Buyer shall pay such excess amount in cash from a source which Buyer agrees to disclose to the VA and which Buyer represents will not be from borrowed funds except as approved by VA. If VA reasonable value of the Property is less than the Sales Prices, Seller may reduce the Sales Price to an amount equal to the VA reasonable value and the sale will be closed at the lower Sales Price with proportionate adjustments to the down payment and the loan amount.

When getting an FHA or VA loan, the appraised price of the property must be equal to (or more) than the sales price listed in the contract. If the appraised value comes in lower, the buyer may either pay the difference themselves (the lender will not loan more than the appraised amount) or the buyer and seller can come to an agreement to lower the price. Both loans involve the federal government, so the language here is required to notify both parties of the potential issues and outcomes.

E. AUTHORIZATION TO RELEASE INFORMATION:
(1) Buyer authorizes Buyer’s lender to furnish to Seller or Buyer or their representatives information relating to the status of the approval for the financing.
(2) Seller and Buyer authorize Buyer’s lender, title company, and escrow agent to disclose and furnish a copy of the closing disclosures provided in relation to the closing of this sale to the parties’ respective brokers and sales agents identified on the last page of the contract.

The last paragraph gives authorization to the lender, title company, and escrow officer to release pertinent information to the the seller and buyer as well as their representatives (your real estate agent and their broker) and to give copies of the new closing disclosures to those parties. Without this authorization, they cannot provide this information to all of the parties under new Consumer Financial Protection Bureau regulations.

image courtesy of frankieleon

Non-Realty Items Addendum

February 10, 2016 by khproperties Leave a Comment

The Non-Realty Items Addendum is a form issued by the Texas Real Estate Commission that can be added onto a real estate contract and is used to purchase other items (personal property) along with the home. It’s not a terribly complicated form, but it is important to know how to use and some of the pitfalls involved in using it. The basic use of the Non-Realty Items Addendum is to add items to the purchase that are not considered part of the accessories or improvements of the home, such as refrigerators, washers, dryers, and furniture just to name a few. These so-called non-realty items are often “purchased” with the home via this addendum and considered part of the entire sale. There are a few things of note with this form though, so we encourage you not to be tricked by its seemingly simplistic appearance.

The Non-Realty Items Addendum

A. For an additional sum of $_______ and other good and valuable consideration, Seller shall convey to Buyer at closing the following personal property (specify each item carefully, include description, model numbers, serial numbers, location, and other information): _____________________

The heart of the Non-Realty Items Addendum, this section asks for two things – a monetary value that will be exchanged for the goods and a list of the goods themselves. The more specific you are about the items in question, the better. If you just say “refrigerator,” it could be argued that you mean any old refrigerator, not the shiny brand new stainless steel deluxe model in the kitchen you were referring to. The monetary value also comes up a lot in legal discussions – it has been common practice for a long time to put a value of zero in the blank, but most legal theories say that this does not pass the “good and valuable consideration” test – in other words, you need to give something to get something. There is an issue with putting a value to the items as well, but we’ll get to that in a minute.

B. Seller represents and warrants that Seller owns the personal property described in Paragraph A free and clear of all encumbrances.

C. Seller does not warrant or guarantee the condition or future performance of the personal property conveyed by this document.

These two items are pretty straight forward. They are just assuring that the seller actually owns the property free and clear and state that the seller is not held responsible if the items don’t work in the future.

A Word About Exchanging Goods for Money

The Non-Realty Items Addendum is quite common in its use, but not without some controversy. The problem is that by making it part of the contract, you are now including personal property (known as chattel, which is defined as “an item of property other than real estate”) in the purchase of the house and if a lender is financing the purchase of the home, many underwriters do not want to see a form like this. Why? Because the lender is only supposed to be loaning you money to buy a house and not any personal property along with it. Their reasoning is that if you add items to the purchase, they are technically financing the purchase of those items. Many lenders these days will tell you to remove a Non-Realty Items Addendum if they see one and many lenders encourage buyers and sellers to arrange the sale of any personal property through a private bill of sale. This way, the lender is not financing that purchase and it keeps the underwriters happy.

image courtesy of Liamfm . – it has absolutely nothing to do with the post, but we thought it looked like a fun photo

Real Estate Negotiation – What’s Reasonable and What’s Not?

February 9, 2016 by Dave Taylor Leave a Comment

In simplest terms, a real estate negotiation is a discussion that generally takes place between two sides with an issue to resolve. Both sides attempt to use influence and/or leverage to obtain their respective goals, which are often not the same. The nature of these discussions can take on a “win-lose” or a “win-win” approach. According to Saul Alinsky, “…there is an art of how to take and how to give.” Regardless of your political views I think we can all agree, Mr. Alinsky’s notion seems like a good starting point for crafting a strategy on how to negotiate. And just for the record, even William F. Buckley thought Saul Alinsky was highly effective. See, even political polar opposites can find some common ground for agreement! It might be stretching it a tad to say those two figures were ever in total agreement, but total agreement is irrelevant to a successful negotiation. But how is Mr. Alinsky telling us to attempt to optimize outcomes for two sides with conflicts of interest in a real estate negotiation?

One can infer that Mr. Alinsky is telling us that “reciprocation” is an extremely influential motivator. One may further presume from his statement that in order to parley successfully, both sides must find a common ground along with understanding what the other side wants. Once you understand the desire of the other side you can begin to work toward reaching a reasonable solution that both sides can live with – the “win-win” approach. In residential real estate, the common ground involves a person who wants to sell their home and another person who wants to buy the home. The problem – the seller normally wants the best price the market will allow and a buyer normally wants to pay as low a price as possible. All too often, sellers and buyers tend to only focus on their own personal wants and needs. And as Stephen King explains, “I believe the road to hell is paved with adverbs, and I will shout it from the rooftops.” Obviously Mr. King is speaking about using too many adverbs in writing, however, in our case, one adverb, “only,” can derail the sales process and make everybody’s life a living hell. How do we prevent that? Understanding what is reasonable and unreasonable to a seller or buyer in any given situation will go a long way to solving the dilemma! There are typically two main items that come up in any real estate negotiation. The first involves getting a home under contract and the second, and often most difficult, is resolving the option period during which most buyers will inspect the property and look for repairs to be made.

The First Real Estate Negotiation

There is an old saying, “the buyer gets two bites of the apple.” The first bite (negotiation) in a real estate transaction involves a buyer and seller arriving at a reasonable sales price based on the location of the home, the condition of the home from a visual inspection or a Property Condition Assessment, and a review of the Seller’s Disclosure Notice (before an inspector looks at the home); and the terms involved. The written agreement based on these four real estate fundamentals (price, location, condition, and terms) is what we call an executed contract. But is the contract reasonable? Well, it’s reasonable to believe that homes in popular locations, with high quality amenities, and are not in need of any major repairs normally sell for a higher price than similar homes in the same or less popular areas, with standard amenities, or that require some major repair work. It’s also reasonable to believe that terms of a sale like cash and a quick close, where the buyer is not asking for assistance with closing costs, can generally bring a lower sales price. Just as it’s reasonable for a seller to ask for a higher sales price when the buyer is financing the sale with an extended closing date and has requested seller paid closing costs. In the former example, the buyer using cash and a quick close is providing favorable advantages to a seller. Consequently, a seller may be more inclined to give the buyer a more advantageous sales price. In the later example, the seller is assuming some risk by taking his home off the market for an extended period of time while the buyer completes his financing requirements and in addition, they’re also helping with the buyer’s closing costs. Therefore, it’s reasonable for the seller to normally want a higher sales price based on the risk and the seller paid closing costs involved.

Let’s take a look at a basic scenario. If a seller has priced his home in line with the market for $300,000, it’s probably unreasonable for a buyer to expect the seller to accept a sales price of $290,000 based on the buyer being approved for a loan coupled with a request for $8,000 in closing cost assistance. In essence, the buyer is asking the seller to sell his home for $18,000 below market price. That is not a win-win solution. There are many other factors that come into play that may assist the buyer and seller in this example to reach an agreement. If the buyer absolutely needs the closing cost assistance than he should be prepared to go up on sales price. Other terms could be adjusted also. For example, the buyer could pay the seller’s title policy or allow a seller who needs more time to move to remain in the home on a seller’s leaseback. Every situation is different and one size does not fit all. However, these are examples of each side “giving something to get something.” Too often negotiations break down over minor details because one side or both are looking for an “I win – they lose” solution. Just think, how many times have we seen a difference of several thousand dollars lead to a transaction’s failure? As a general rule of thumb, when a buyer is financing a purchase, each $1,000 financed will cost a buyer $6 toward his monthly mortgage payment. So a $2,000 difference in sales prices is around a $12 a month on a monthly mortgage payment. Now let’s jump forward and look at how we resolve the option period and repair negotiations. This is usually referred to as the second bite (negotiation). And it’s usually the more contested of the two negotiations for myriad of reasons.

The Second Real Estate Negotiation

The general purpose of the option period is for the buyer to have the home inspected and, if required, have the seller and buyer renegotiate the price and/or repairs. Remember, initially the buyer and seller based the price of the home on the condition known from a visual inspection and review of the Seller’s Disclosure Notice and any other information delivered by the seller. Therefore, once an inspection has taken place, latent defects not known or disclosed can impact the price. If a buyer is going to have to replace a roof because the current one is not functioning as intended (not known at the time of executing the contract), then the buyer has a reasonable right to come back and ask the seller to remedy the situation. The roofer worcester acknowledges it. A prudent seller will figure out how best to resolve the roof issue in order to keep the transaction on track to close. Unreasonable sellers fail to consider that if they let the current buyers walk away, the next reasonable buyer will probably ask for the same or similar repairs or resolutions. Tree damaged roof shingles, leaking air conditioner coils, a faulty septic system, a rusted air conditioner drain pan, plumbing leaks, and other items are not going to disappear upon the next buyer’s inspection. It’s very reasonable for a buyer to ask a seller to resolve safety issues as they have a high probability of causing injury. Or to correct water penetration issues that could lead to mold problems. And correct material defects that severely degrade the performance of major systems such as the foundation, roof, heating and cooling system, electrical system, plumbing system, appliances, pools, septic systems, or wells. On the flip side, it’s unreasonable to expect sellers to cure code items in older homes, when those items were not required at the time the home was built. For example don’t send the seller a laundry list of requested repairs for a home built in the 1970s which essentially represents a remodel and code upgrade of the entire home to present day standards. When a buyer chooses to buy an older home, he should know and accept this. Also, if the seller holds out for at or above full price on the sale at the beginning, it’s reasonable for a buyer to expect a seller to be a bit more flexible on the repairs. The buyer will want the house and land packages to be in “full price condition,” which means no major problems. Accordingly, if the buyer has absolutely beat the seller up on price right at the outset, you can’t usually expect to beat the seller up again on repairs and expect the deal to proceed smoothly.

Focus on what is reasonable. Clearly understand what the other side wants and articulate what it is you want. This will most likely lead toward a win-win solution when reasonable people are involved. And above all, remember real estate negotiation isn’t about egos – they only tend to get in the way of the solutions. It’s about finding the best alternative for all involved. There will be times when you simply can’t reach an agreement, but more often than not, you will.

image courtesy of US Mission Geneva

Does It Convey? – MLS vs. the Contract

February 8, 2016 by khproperties Leave a Comment

Recently on our Facebook page we shared an article from this site, “Does that come with the house? Accessories and Improvements,” about what is considered part of the house according to the legal definition of improvements and accessories found in the Texas’ residential real estate contract. Certain items are considered part of the sale without any specific inclusion in the contract (such as a stove or ceiling fans) and others are not automatically considered part of the sale (refrigerators are a great example).There are methods listed in this useful reference to include such items as well as to exclude certain items, but what happens when the MLS mentions that the refrigerator does convey, but the contract does not? Does the seller have to honor the MLS…or the contract?

It is common practice for agents to include items in the MLS that are not legally considered accessories or improvements, but the seller wishes to leave behind and make part of the sale. Refrigerators are one of the most common, but there are other items that often get included in the sale like washers and dryers. By placing those items in the descriptions and inclusions in the MLS we are indicating that they are part of the sale and the seller will leave them behind for the new owners. Except there’s one minor problem. The MLS is not a contract and merely an advertisement and an offer of what’s for sale. Regardless of any previous negotiations or talks about the items between buyer and seller, or their agents, if it’s not part of the contract and not in writing, it is unenforceable. The contract is the final word on what stays or goes. So if a seller advertised there were items like a refrigerator included, but the buyer’s agent neglects to write it into the contract, the seller is legally allowed to pack up the refrigerator when they move and take it with them.

The same also applies to items the seller wishes to keep that would be considered part of the accessories and improvements that are part of the home. If the seller lists their home for sale and wants to keep the chandelier in the dining room that their grandmother gave them, they should mention it in the MLS, but if they sign off on a contract that neglects to exclude that item in Paragraph 2.D. Exclusions, they cannot keep the chandelier and if they were to take it with them, they could face legal consequences.

Remember, if there’s something you want to keep or something that you want to stay with the home, you must define it in the contract – failing to do so and falling back on the fact that is was stated in the MLS is not sufficient. The MLS does not create a contractual obligation.

image courtesy of ericmay

New Contract Forms for Commercial Real Estate

January 1, 2016 by khproperties 1 Comment

On January 1, 2016, the Texas Association of REALTORS, updated a long list of contract forms for use by its members. This list included a couple of commercial forms, notably the Commercial Contract – Improved Property and Commercial Contract – Unimproved Property. These forms are not required use for commercial real estate transactions, but many members of the Texas Association of REALTORS do use them. Consult with your agent if you have any questions regarding the new contract changes. While often small changes, they can have consequences and may change your position during a transaction.

image courtesy of 24oranges.nl