Know Your Contract When Buying a Home

Last week I encouraged prospective homebuyers to get preapproved for a loan before they look for a new home. This week I’ll share what happens next.

Your preapproval provides information about how much house you can afford, allowing your realtor to recommend which properties to consider. Be aware that listing price and sales price do not always match, and your realtor can assess which homes may be priced over- or under-value. It boils down to this, within reason when it comes to making an offer, ignore the list price and make an offer on what the home is worth to YOU.

In calculating the amount to offer, don’t forget to include extras like yard furniture and window treatments, if you want them. You should also include the value of any repair or maintenance work you want the seller to do, like replacing the roof or painting the exterior.

Once you’ve determined the offer price, your realtor will draft an offer in the form of a purchase contract. Along with the offer you’ll need to include a deposit—typically a significant chunk of change—so the seller knows you’re serious and not just kicking the tires. When you make an offer to purchase a home, you are signing a legal contract. Be sure to read and understand it, because if you back out for a reason that is not clearly allowed in the contract, you may find yourself liable for damages to the seller. In California they use this catchy little phrase, “Courts abhor a forfeiture.”

How much might you be liable for? If your contract includes a Liquidated Damages provision and you later withdraw from the contract for a non-itemized reason, your entire deposit can be forfeit to the seller without much discussion. If you do not agree to a Liquidated Damages provision and withdraw, you could be held responsible for damages far exceeding the value of the deposit. As painful as losing your deposit would be, at least with a Liquidated Damages provision, your liability is limited to your deposit.

Liquidated Damages provisions are often the most complex provisions in a purchase agreement, so read carefully and ask your realtor for the California Association of Realtors Q&A on Liquidated Damages for more information.

Once your offer is presented, the seller has three options: accept the offer as written, make a counter offer, or reject the offer outright. (Sellers who reject an offer outright are acting just plain silly. If they don’t like the terms, they should offer ones they do like.)

Assuming you and the seller come to an agreement, escrow is opened and the loan is applied for. Now comes more work for you and your realtor.

Your realtor will oversee appropriate disclosures and help you determine which inspections to order, and you will work on supplying piles and piles of paper to your lender full of obscure information. When inspections are complete, you’ll review results and make sure you’re happy with the physical and legal condition of the property. If something needs to be addressed, you’ll have the opportunity to ask the seller to repair or resolve the problem. If the seller chooses not to, you have to decide to live with the problem or withdraw from the contract. If you withdraw based on inspection findings for which there are contract contingencies, you’ll receive your deposit back. (This is why you shouldn’t remove contingencies until you’ve reviewed all inspection reports.)

Once you’ve removed all contingencies, you are now committed to purchasing the property. All you have to do now is nail down the loan, write a big check for your down payment and closing costs, and wait for escrow to close.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.