Negotiating Your Home Sales Contract
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Negotiate the Net Bottom Line Effect
Price isn't the only factor..
The natural focus of a real estate purchase contract is the selling price of the home. Price, however, isn't the only factor that determines the net bottom line for both the buyer and the seller. Is it a bargain for the buyer if he or she is paying all the transaction costs? Is a top price for the seller really a top price if the buyer wants all the furniture to be included in the purchase price? If the best offer comes from a buyer who can't raise the downpayment or qualify for a mortgage - what value does it have?
Be sure to ask your real estate agent to go over the standard contract with you before you receive or make a purchase offer. That way, you'll know what to expect and be prepared to negotiate the best deal you can get.
Some bottom-line points to consider:
What are the estimated transaction costs and how are expenses to be shared?
Typical costs include: brokers' commission, home inspection, termite inspection, escrow or attorney's fees, title search, owner's title insurance policy, transfer taxes and recording fees. The cost of these items will vary greatly around the country. Who pays for what is a matter of both local custom and negotiation. You need to agree with the seller about how these expenses are to be divided on the date of settlement. Unless you agree otherwise, you should only be responsible for the portion of these expenses owed after the date of sale.
How much money is the buyer putting into escrow and when?
A big deposit (earnest money) and a substantial downpayment are generally seen as a sign that the buyer is serious about completing the transaction. From the seller's point of view, the more money the buyer places in escrow and the sooner the money is transferred, the better.
Is there a mortgage financing contingency?
The mortgage escape clause is a must for buyers, unless they're paying all cash for the home. Without this contingency, buyers can be legally obligated to purchase the home even if they can't obtain financing. An open-ended statement that says the buyer will obtain a loan "at the prevailing rate of interest" leaves the buyer completely exposed to interest rate fluctuations. The agreement should provide that your deposit will be refunded if the sale has to be canceled because you are unable to get a mortgage loan. For example, your agreement of sale could allow the purchase to be canceled if you cannot obtain mortgage financing at an interest rate at or below a rate you specify in the agreement.
What furniture, fixtures and appliances, if any, are being sold with the property?
Technically, anything that's permanently affixed to or installed in the home is real property. Everything else is the seller's personal property. This distinction is a narrow one and it naturally leads to a fair amount of confusion. Are built-in appliances real property or personal property? What about a shelving system? A chandelier? Window coverings? Potted plants in the backyard? Sellers who intend to remove anything that's attached to the home should have that spelled out in the contract. And the same goes for buyers who expect to acquire any of the furniture or other items that can be moved.
What happens if either side breaches the home sales contract?
Unless an unmet contingency triggers the abandonment of the home sales contract, it's a binding legal document. Buyers who fail to perform can lose their deposit money. Sellers who try to back out can be sued for "specific performance," which forces the sale of the home to the buyer. Many contracts also specify that disputes must be brought in small-claims court or presented for arbitration or mediation.
Negotiating a Win-Win Situation
Most home buyers and home sellers want to arrive at a win-win agreement, but that's not to say either side would regret getting a bigger "win" than the other. Successful negotiating is more than a matter of luck or natural talent. It also encompasses the learned ability to use certain skills and techniques to bring about those coveted win-win results.
Use these suggestions to turn negotiation into agreement:
Start with a fair price and a fair offer.
Significantly overpricing your home is a turn off to potential buyers. Likewise, making an offer that's far lower than the asking price is almost guaranteed to alienate the sellers. Your listing prices should be based on recent sales prices of comparable homes.
Understand and respect the other side's priorities.
Knowing what's most important to the person on the other side of the negotiating table can help you avoid pushing too hard on sensitive issues. A seller who won't budge on the sales price, might be willing to pay more of the transaction costs or make more repairs to the home, while a buyer with an urgent move-in date might be willing to pay a higher portion of the transaction costs or forgo some major repairs.
Be prepared to compromise.
"Win-win" doesn't mean both the buyer and the seller will get everything they want. It means both sides will win some and give some. Rather than approaching negotiations from an adversarial winner-take-all perspective, focus on your top priorities and don't let your emotions overrule your better judgment.
Meet in the middle.
Splitting the difference is a time-honored and often successful negotiation strategy. Pay half the fee. Count off half the days. Fix half the blemishes, etc.
Leave it aside.
Politicians and corporate executives are famous for their "for future discussion" agreements. If you have a major sticking point that's not material to the overall contract (the purchase of furniture or fixtures, etc.), finish the main agreement, then resolve the other difficulties in a side agreement or amendment. This technique allows both sides to recognize and solidify basic areas of agreement, then move ahead toward a fair compromise on other terms and conditions. Summarizing the points of agreement in writing is another helpful strategy.
Ask for advice.
Successful realtors tend to be experienced home sales contract negotiators. They've seen what works and what doesn't in countless real estate transactions, and they've established a track-record of bringing buyers and sellers together. Ask your realtor about negotiating strategies, win-win compromises and creative alternatives to sticking points.
Negotiating Home Purchase Contract Terms and Conditions
After all, the price will be moot if the transaction never closes.
The typical residential real estate purchase contract is complicated, densely written and packed with legal terms. Take your time and read slowly. Don't use the complexity as an excuse to not read and understand it thoroughly. Be flexible and willing to negotiate.
The following points are among many contract items that require attention:
Who pays for the home inspection?
It is a good idea to have the home inspected. An inspection should determine the condition of the plumbing, heating, cooling and electrical systems. The structure should also be examined to assure it is sound and to determine the condition of the roof, siding, windows and doors. The lot should be graded away from the house so that water does not drain toward the house and into the basement.
Most buyers prefer to pay for these inspections so that the inspector is working for them, not the seller. You may wish to include in your agreement of sale the right to cancel, if you are not satisfied with the inspection results. In that case, you may want to re-negotiate for a lower sale price or require the seller to make repairs.
What are the cutoff dates for inspections and approvals of the inspection reports?
A typical contract provides an opportunity for the buyer to hire many types of experts to verify the home's condition. From the buyer's perspective, the more time that's allowed for this, the better. Sellers, conversely, usually want the inspections to be completed and signed off as soon as possible.
Termites and other pests and pest damage.
Your lender will require a certificate from a qualified inspector stating that the home is free from termites and other pests and pest damage. You may want to reserve the right to cancel the agreement or seek immediate treatment and repairs by the seller if pest damage is found.
Who is responsible for making repairs indicated by the inspections?
The fact that the buyer orders one of more inspections of the home for informational purposes doesn't obligate the seller to make indicated repairs or modifications. In practice, however, inspection reports often are used to negotiate repairs of major problems or safety or environmental hazards that may be noted. The purchase contract should clearly spell out the responsibility.
Verify that the title is free and clear; decide who pays for search.
Title refers to the legal ownership of your new home. The seller should provide title, free and clear of all claims by others against your new home. Claims by others against your new home are sometimes known as "liens" or "encumbrances." You may negotiate who will pay for the title search which will tell you whether the title is "clear."
Are there any representations or warranties regarding the condition of the home?
In some contracts, the seller warrants that specified major components of the home are in good repair and working order at the close of escrow. Buyers should understand which components of the home are guaranteed and which are being sold "as-is."
Lead-Based Paint Hazards in Housing Built Before 1978.
If you buy a home built before 1978, you have certain rights concerning lead-based paint and lead poisoning hazards. The seller or sales agent must give you the EPA pamphlet "Protect Your Family From Lead in Your Home" or other EPA-approved lead hazard information. The seller or sales agent must tell you what the seller actually knows about the home's lead-based paint or lead-based paint hazards and give you any relevant records or reports.
You have at least ten (10) days to do an inspection or risk assessment for lead-based paint or lead-based paint hazards. However, to have the right to cancel the sale based on the results of an inspection or risk assessment, you will need to negotiate this condition with the seller.
Finally, the seller must attach a disclosure form to the agreement of sale which will include a Lead Warning Statement. You, the seller, and the sales agent will sign an acknowledgment that these notification requirements have been satisfied.
Other Environmental Concerns.
Your city or state may have laws requiring buyers or sellers to test for environmental hazards such as leaking underground oil tanks, the presence of radon or asbestos, lead water pipes, and other such hazards, and to take the steps to clean-up any such hazards. You may negotiate who will pay for the costs of any required testing and/or clean-up.
Will a home warranty plan be purchased?
A home warranty plan is a type of limited insurance policy covering basic major systems and appliances in the home. It may seem like a prize for the buyers, but it's equally important for the sellers and the real estate broker representing the sellers. In fact, these warranty plans are so popular among real estate agents that many of them will pick up the tab for the program in order to insulate themselves from irate buyers.
When is escrow scheduled to close?
If you're selling your home, you'll be expected to move out completely before the property changes hands. Make sure the closing date doesn't fall before you're able to move into your next residence. Make sure you don't give up your prior residence too soon. Don't cut the dates too close. Many escrows end up closing a day or two later than the contract states, but that can happen only with the mutual agreement of the buyer and seller.
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