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  Troubleshooting Problems Along the Way
A seamless transaction is rare. There's always wrinkle here or there, but the good news is that most issues can be remedied. Keep in mind that you are bound to your initial contract timeframes, unless you and the buyer agree to an extension of the contract. An extension is not always as easy as it seems, being that the buyer has their own timelines they have to live up to, such as a concurrent close of escrow on their existing residence. There are a myriad of issues that can pop up on a real estate transaction. When encountering a problem, there are three things you must do before moving forward:
Below are some common issues on all real estate loan transactions and an idea or two, and some remedies.
Problem: Home won't appraise for the agreed selling price: Remedy: This happens frequently in a down market. You will have to work with the buyer closely here. The buyer may have to increase their downpayment to cover the defieciency between the appraised value and the purchase price. Test the waters to see if they are willing and have the funds. The buyer may have to undergo another separate loan approval as well since they are depleting assets that were used to qualify. The smallest adjustment may disqualify a buyer from getting their desired loan. If the difference in appraised value vs. purchase price causes the buyer to not qualify for their loan, and they won't or can't make a larger downpayment, their deposit is refunded and generally the contract is null and void. That's why it is critical in this market, you obtain a backup offer from a second prospective homebuyer. Also expect the buyer to ask you to renegotiate the purchase price down to the appraised value. Another remedy may involve getting a second appraisal paid for by either you, or the seller. A second appraisal may involve another loan approval from a different lender as well, so the contract may have to be extended since the original timelines may not be able to be met. In down markets lenders are very conservative. Foreclosures are further bringing down values in many parts of the U.S. and this trend is likely to continue thru 2009 so a second appraisal may not be the answer. Ask for a copy of the appraisal. Make sure the bed/bath count, square footage and lot size match your home dimensions. If they are incorrect, the appraiser may have to make an adjustment which may or may not affect the appraised value. Be prepared in this current down market of 2008, to have some flexibility with buyers in regards to obtaining a loan and getting your home appraised for your agreed upon sales price. Lenders are extremely conservative, and can and will turn down loans for the slightest reason. Soft real estate values mean big losses and foreclosures for lenders, hence their being conservative. Appraisers are also under pressure by lenders to use more and more foreclosures in their reports to help determine the value of your home. The lenders are checking the appraisers work with their own review appraisers and if the review appraiser, who works on behalf of the lender, feels your home was appraised too high, they will ignore your agreed upon sales price and dictate the value of your home based on their review appraisers findings. This causes all buyer loans to be re-underwritten, and/or the buyer to come up with a larger downpayment. Both of these issues can cause a loan to fall out of escrow and cancel a transaction. Borrowers with strong credit and employment histories and ample assets can still obtain a home loan, but there will be more hoops to jump through than before. Problem: Your buyer's home loan is declined Remedy: The reasons listed above are a few reasons for a home loan rejection. Asking for a loan prequalification letter prior to accepting an offer to purchase your home is smart, however asking for a home loan commitment is smarter. A home loan commitment is a document that means your borrowers home loan application and documentation has been reviewed by a lender underwriter. The commitment will also have a list of conditions that the underwriter requires prior to the funding of their loan. What's the difference between a loan commitment and a prequalification? The prequalification is a letter typed by the loan officer/consultant, not an underwriter. There is more weight to a commitment vs. a prequal letter since it is done by a non-salesperson. You can also obtain a loan commitment subject to an appraisal being done. This means that as long as the buyer fulfills all the condtions on the commitment letter, they have a bonafied loan waiting for them......as long as the appraised value comes in at your asking price. The commitment letter has pertinent and private information about the borrower. Do not be surprised if the commitment letter has information "blacked out" on it that refer to the buyers income, social security number etc... If the buyer is turned down for a loan, make sure and ask for a copy of the decline letter. You as a seller have the right to ask for the decline letter before you refund the buyers earnest money deposit. If the buyer gave you a prequalification letter instead of a commitment letter, and the buyer gave misleading information to the lender just to obtain a prequalification letter, you may have a right to keep the buyers deposit. This would involve retaining an attorney, which is an expense to you. Litigation however, should be a last resort. Again keep in mind that lender underwriting guidelines are changing weekly. A buyer could get have received a prequalification/commitment 60 days ago, but if guidelines change, the borrower may have to requalify. Sellers need to understand this, which is why it is of utmost importance to obtain a backup buyer. If the buyer's loan gets denied for an excessive expense debt ratio (affordability to buy the home), you can also ask if a reduction in the price of your home (assuming you are willing to accept less) makes a difference in helping the buyer qualify. You would have to initiate a call to the buyer's home loan officer/consultant who can put things into motion. Problem: The home inspection (customarily done after the loan approval) reveals numerous repairs and the buyer wants all of them fixed prior to close of escrow Remedy: This is where maintaining a positive line of communication with the buyers if paramount. You do not have to do any of the repairs listed in the home inspection. However, in good faith, you should think about doing some of them to keep your buyer from tempting to walk out of the transaction. Separate the items that are big ticket "fix its" from the small items. Before you make up your mind which items you may fix, get estimates from licensed people who can fix them. If you use a handyman, make sure they are licensed and bonded. Don't use an "under the table" service. If something isn't fixed correctly, and your handyman isn't insured, you are on the hook for damages. It is custom in California, that the seller pays for the home inspection, usually $200.00-350.00. It may be a good idea prior to listing your home for sale, to get your own home inspection done. When you live in your home day after day it's easy to overlook "fix its" that you have learned to deal with on an everday basis. A home inspector is a non-interested third party who will see things that need minor repair that we don't see. You do not have have your own home inspection, it's just an idea. By the way even if you have your own sellers home inspection, the buyer will still probably ask that you pay for their buyers home inspection as well since they may think your inspection may be tainted to show less "fix its" than their inspection. If this is the case and you have bought a sellers home inspection, advise the homebuyer that upon the close of escrow, your sellers home inspection can convert to a buyers home inspection policy. You have to advise the home inspection company prior to buying the policy, that you request it be converted to the buyer so that it's priced correctly. After the inspection is done, the items if any, you have agreed to fix can handled in a few ways. You can either pay for the work to be done out of your pocket, or you can give a credit to the seller. The credit comes from your pocket in the form of less of a profit from the sale of the home at close of escrow time. If there is a major "fix it" such as a cracked slab or a roof with several leaks, that is something that must be fixed prior to escrow closing. Usually buyers will not fix these items, or may even cancel the transaction and look for another property without this major issue. If you choose not to fix the item, and re-list the home, you must disclose this item to each and every prospective buyer as early as possible. If you don't, you are on the hook for future litigation after the property has been sold. The item will more than likely be uncovered in the next property inspection anyway, so there is no way around it. Also realize that if the buyers lender finds out about a major "fix it" they will not allow the loan to close. How can the lender find out about these issues? If the appraiser writes it up in his report, if the buyer notifies their lender or loan officer/consultant or if the pest control report (which the lender can require to have reviewed) shows a major problem. Disclosing major problems upfront is the best way to approach the sale of your home. Trying to hide things can only cause misery. There are types of loans that a buyer can get that involve getting funds to fix up property along with purchase money. So don't worry about the buyer not being able to obtain a loan. In many states buyers have 5-10 years to find an undisclosed problem and go back and sue the prior homeowner for undisclosed problems. It isn't worth the risk. Disclose upfront and you will rest easier. Problem: Pest Control/Termite Inspection shows damage Remedy: The seller usually pays for the repairs,. however they may be negotiable. There are section 1 and section 2 repairs. You have to check with the buyers lender as to which repairs they require fixed prior to the close of escrow. Keep in mind, that if the buyer didn't require a pest control/termite inspection in their offer to purchase contract, the lender isn't going to ask to view the inspection results unless............the appraiser makes a comment in their report about possible wood rot, or contamination. Than the lender may demand a pest control report be done prior to escrow closing if they see negative comments in the appraisal. If there is an item that the lender needs repaired, get it writing which repairs they are requiring to be fixed to allow the buyers loan to fund. The pest control inspection company may have a licensed contractor on staff to fix the items. If not, you will have to go out and get your own bids to fix the items, again make sure they are licensed and bonded. You will still be held accountable to close escrow according to your original purchase contract timelines. If the repair work looks like it's going to delay your transaction, address this problem right away with the buyer, and see if you can get an extension on your time to close. Both you and the homebuyer have to agree to this and sign an escrow document, drafted by your escrow officer, that reflects such.
Problem: Your property has a title issue ie.. a lien, encroachment, lis pen dens etc... Remedy: These issues can delay or cancel a transaction altogether. To solve this problem, you need to contact the title company officer who found the problem. When an escrow is opened on your home, a title company must guarantee the lender that a clear title for the new home buyer can be obtained subject to a list of conditions ie...paying off your existing lender and removing all current homeowners before the new homebuyer can take title to the home. Liens of all kinds can be placed against property for non-payment of debts and services performed, taxes, neighbor complaints, and putting or building a structure too close to a neighbors property line are a few title issues that can pop up. The preliminary title check on your property is a service paid for, by either the buyer or seller. The preliminary title report will have the escrow officers name as well as the title officers name and phone number. If you have any questions as to the content of this report, call them, they will let you know if there are any red flags. They will also give you guidance on how to proceed with solving the issue. It's best to call them, the day you receive your report in the mail. It's better to find out if there are any red flags upfront, rather than finding out at the last minute. The seller is usually the last to find out about any issues, so being proactiive is a must.
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