If you are interested in buying a home or if you are thinking about selling a home in today’s market, did you know there are certain steps that must be followed to complete any residential real estate transaction? You might be thinking wait, what do you mean by this? If you are a home seller, you may be thinking that this should be pretty simple and straight forward. You probably are thinking that all you need to do is just contact a Realtor and sign a listing agreement and that’s it, all your troubles are over; you do not need to do anything else. Right? If you are a home buyer, you may have thought that all you need to do is find a home to your liking, and put an offer in and away you go. Right? Wrong to both of these common assumptions.
In this article, we will share and demystify that steps that are needed to complete a residential real estate transaction. Some things will need to be done by the seller in advance of putting their house on the market. Some things will need to be done by the buyer in advance of wanting to purchase a home, and some things will need to be done simultaneously during the process while the house is under agreement.
This is part of an on-going 2022 best in class series of helpful real estate articles by Nick Santoro and Joe Santoro of Personal Property Managers who service Pennsylvania and New Jersey and specialize in real estate, home content downsizing, property management, estate sales and home watch services. These tips and insights are especially important in the economic environment we are in today, with the global economy turned upside down, and the need for extreme social distancing due to the Corona Virus. Additionally, during this challenging time in the Corona Virus and COVID-19 era, we help families that are unable travel or tend to their property needs by providing a true one-stop resource. We are focused on making life just a little easier for families during often difficult times. With Personal Property Managers, one call does it all.
Home Seller: Important items before you put your house on the market
If you are a home seller, there are certain important things that you need to do before you put your house on the market. They are:
- Declutter your home. This is an important first step. First impressions are lasting impressions. You will want to get your home market ready so that it shows in the best possible light. Spruce up the outside of the house. Clean up and declutter the inside of the house. Fix little odds and ends that can turn off a buyer. Brighten up your home with lighting and window treatments. Paint where needed. More info on getting your home market ready, please click here.
- Properly Price your home. One of the most important things you can do as a seller is to properly price your home for sale right from the beginning. A home priced too high in relation to other comparable homes will not sell. In addition, a home seller needs to factor in that for most buyers, they will need a mortgage. The mortgage company will come out to your house and do an appraisal. Even if a buyer and seller have an agreement of sale in place, the lender will not lend the buyer money to buy the house if the house is appraised or valued less than the agreed upon purchase price, so the deal at that point will fall through. So what should a seller do? If a seller is working with a Realtor, the Realtor should conduct a CMA or comparable market analysis. This will show the value of the house in relation to others of similar style, age, amenities, location and design. For more information on CMA’s please click here.
- Seller - Certificate of Occupancy. Most sellers do not realize that they must meet certain local municipal safety standards. They just figure, great, they want to sell their house. They clean it up, figure out a good selling price, contact a Realtor and like magic everything is done and success is just around the corner. Wrong. Almost every township now has certain safety requirements that are non-negotiable. A township will not authorize a Certificate of Occupancy (C of O) or sometimes it’s called a Use and Occupancy or a Resale Certificate unless these safety related items are met. What are they? They are things like installing new smoke detectors; many now require 10-year battery operated detectors. They are combination Smoke and Carbon Monoxide detectors placed in designated locations like just outside bedrooms. They are now requiring fire extinguishers to be mounted in the kitchens. They are the installation of GFCI electrical wall outlets anywhere near water, such as in the kitchen, bathrooms, laundry rooms and even in the garage. They are making sure that there are handrails where there are steps. Each township has its own requirements. There is usually a fee that accompanies the C of O application, and then there is the scheduling of the township inspections. If a home seller successfully meets all the local requirements, they will be issued a township C of O. In some cases, townships will mandate that a home seller has no open permits for work that has been done on the home. Typical things like replacement of hot water heaters, furnaces, roofs and other remodeling worked are looked at. If permits were not issued, some municipalities will impose stiff fines. So, this is an important area that must be looked into. A buyer and seller cannot go to settlement without a clear Certificate of Occupancy.
Home Buyer: Important items to consider before house hunting
If you are a home buyer, there are certain important things that you need to do before you start looking for a new house. They are:
- Mortgage pre-approval. For most buyers, the home purchase is financed with the help of a mortgage. Obtaining a buyer mortgage pre-approval is vital at this point. It just makes no sense to start looking for a home if you cannot afford one or if you have not been preapproved for mortgage financing. This is accomplished by going to your preferred lender and seeking a finance or mortgage preapproval. The lender will look at your employment, your income, your debts, credit history and credit score. From this, if approved, they will issue you a mortgage preapproval letter. This just says you are credit worthy to buy a property up to a certain limit. This is very important not only for the buyer to understand what they can and cannot afford, but also for a seller to understand if the buyer is prequalified and credit worthy enough to even buy a new home. There are a host of mortgage lenders from traditional banks to FHA mortgages, VA mortgage, Credit Unions and on and on. Each one has its own requirements, advantages and disadvantages.
- Down payment. Buyers will need to figure out how much they can spend and how much they can put down on a house.
- Contingencies. Buyers, and for that matter, home sellers will want to find out how the buyer will be able to afford to buy a new house. In other words, will the buyer need to sell their existing home in order to afford to buy a new home? This is called a buyer home sale contingency. In a hot real estate market, most sellers will not want to deal with or wait for a buyer to sell their home in order to buy their home. All purchases are also contingent upon the buyer’s ability to obtain a mortgage.
The Agreement of Sale Process: for Buyers and Sellers
Now that we know what needs to be done in the pre-sell process and in the pre-buy process, now lets turn our attention to the Agreement of Sale process. This is the point when there is a meeting of the mind between a buyer and seller. This is where a formal document often called an Agreement of Sale is drafted, typically from the buyer agent / Realtor to the seller agent / Realtor of the seller. This document spells out what the buyer is offering to purchase the house for, the amount of money being used by the buyer as a down payment, the buyers mortgage amount, the proposed date of settlement and a variety of other things like home inspections and finance contingencies.
It is important to note that almost all things in real estate are dynamic and evolving between the buyer and the seller. Things like the purchase price, the settlement date, home inspections and contingencies have a lot of give and take from both sides. For a deal to work out successfully there needs to be give and take from both sides to ultimately achieve a win-win deal. It is not uncommon for agreements to go back for forth multiple times even when a purchase and sale price are agreed to, until there is ultimately a final agreement or not.
Elements beyond the Agreement of Sale:
Once the Agreement of Sale is in place and signed by both buyer and seller there are still more elements that now need to happen simultaneously. This is a period of go, no-go where deals either move forward to fall apart. They are:
- Attorney Review. In some states, such as New Jersey, it is common for an attorney review process of the formal agreement, which is typically done during a 3-day period after the Agreement of Sale is signed. At this point, deals can move forward or fall apart based upon how amenable or adversarial buyer and seller attorneys are, and the terms and conditions entered into by buyers and seller in the agreement of sale. Often times a variety of changes are made here and various addendums are drafted. If both sides are in agreement here the deal progresses. If things get bogged down here either side can walk away from the deal.
- Home Inspections. Home inspections are generally conducted as part of the buying process and are included in the agreement of sale. The buyer will contract out to a third party to conduct a full review of the home. This often cost around $700 and a report ranging in size from 30 to 70 plus pages is generated. It is important to note that in general buyers want to know if there is anything major that they should be aware of. This is usually structural in nature like the roof or foundation, or water damage and or HVAC system. Many smaller things can be discovered by the home inspector as in all houses new and old. Again, this is an area where deals can either move forward or fall apart very quickly. This all depends on how flexible the buyer or seller is. In addition to a home inspection, other things can be inspected at additional cost to the buyer such as septic systems and wells.Â All sellers complete a document called a Sellers Disclosure noting important information such as age of items, service of items and or housing issues / defects. This is compared to the home inspection and negotiations then take place with a go or no-go status at each point. Lastly, a buyer, depending upon the mortgage they choose, such as an FHA or VA mortgage, which are government issued mortgages, which can be obtained with little to no money down come with more stringent inspection criteria. Some sellers do not want to deal with FHA or VA mortgage because they require the seller to obtain incremental inspections which a seller must pay for, such as chimney certifications, heater certifications, water certifications (if there is well water), septic inspections (if there is no public sewer service), radon testing and lead paint testing. More information on home inspection click here.
- Mortgage Appraisal / Commitment. Buyers requiring a mortgage obtain a mortgage preapproval when initially shopping for a house. Now after an agreement is reached and inspections are made, the lender will come out to the house and conduct their own appraisal of the property. If the purchase price of the house is equal or lower than the lender appraisal, the deal progresses. If the appraisal of the house comes out lower than the purchase price the lender may choose not to lend the buyer money. The lender feels that they may be lending out more money than the house is worth and may turn down the deal. At this point the deal may collapse. If all goes well here the lender will issue a mortgage commitment letter. This is then presented to the seller as proof of funding and also is presented to the buyer title company for advancement to settlement.
- Title Search. All home purchases are conducted with the buyer contracting out for a title search, to make sure there are no issues, encumbrances or liens on the property. In other words, a buyer and the buyers mortgage company wants a clean title to the property. The title company is generally the quarterback of the team at this point as the transaction moves towards settlement. All information and documents are forwarded to the title company so that they may conduct a thorough investigation into the title search. They will then prepare a document often called a CD or Closing Disclosure document (formerly a HUD, and sometimes called an ALTA) which shows by line item everything that a buyer is spending to purchase the property and everything that a seller is getting from the proceeds of the sale.
- Miscellaneous Items. Lastly, there are a variety of miscellaneous items that will need to be in place for both buyers and or sellers, such as switching utilities from one party to another, homeowners’ insurance for new home buyers, and taxes to be paid. If the seller is an executor of an estate, they will need to furnish such things as a death certificate, a will, documents from the county surrogates offices and a short certificate which shows that the court recognizes the seller as the legal heir and has the legal right to sell and or liquidate the assets of the estate. Finally, if a seller cannot be at settlement, the title company or an attorney can prepare a document called a deed package which the seller must get notarized and furnish sale proceed instructions (mail or wire transfer of funds).
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