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Guide to negotiations, contracts, inspections, and closing

This is a guide to show you what you can expect from working an offer to a contract, inspection negotiations, contract law, seller and buyer communications, buyer and seller due diligence WDO inspection, wind mitigation inspection, septic inspection, HOA, addendum request, contract related language, appraisal, Realtor relations, walk-through inspection, title insurance, early move in agreements, seller financing, insurance, HUD settlement statement review and who pays title insurance, documentary stamps of deed and mortgage, and day of closing procedures.

Negotiations are a matter of great importance

Working professionally with buyers, sellers, and Realtors is of critical importance when negotiating real estate offers and closing a transaction. Buyers can achieve the best results when negotiating an offer to purchase a property by having a skilled negotiator deal with matters of offer strategies, inspection reports, closing costs, which contract is best to use when presenting an offer, financing and timely closing a transaction.

Best Way to Negotiate

Sellers are often slow to counter and slow to drop price as a form of negotiation strategy to make buyers anxious. Depending on many factors including days on market, vacant or owner occupied, value, and who owns the property, negotiations techniques vary.

Negotiating a Straight-Sale

When negotiating a straight sale (not a short sale or bank owned property), typically sellers have more motivation if the property is vacant. If a property has a high number of “days on market” this could either mean the property is challenged by some functional obsolescence or more likely, is over-priced. Sellers often get bad advice from listing agents and price their homes in excess of 10% over current market values. If so, many buyers will view this as an unapproachable listing and seek those listings that are priced within 10% of current values. As well, when a property is re-listed with a new agent, that agent will use additional pressure to get the seller to re-price the home which will often make negotiations easier for the next buyer. That is why a low “days on market” may be a positive for a buyer. Regardless of whether a property is a short-sale, bank owned, or straight sale, all properties are sold at the highest market price possible. This means that all sales are based on what has sold the prior 6 months creating a guide to value or comparables.

Auctions and Court House Sales

In these transactions, the holder of the first mortgage may or may not bid up to their loan amount or place a minimum reserve amount in which case they would take back ownership through foreclosure and re-list the home as a “bank-owned” (foreclosure) property. At times these properties can be bought substantially below market value, but there are risks. These transactions are sold “As-is-where-Is” which means there are no associated guarantees or title insurance. You are buying a note. This note may or may not be the note in first position which can cause a substantial loss the purchaser. The seller is not warranting anything about what he buyer is purchasing. There is no recourse. On-line auctions rules vary.

Negotiating a Short-Sale

In Florida, between 2007-2012, as many as 30% of all residential real estate sales are or will be short sales. It can take anywhere from 70-200 days to close a short-sale transaction. A short sale is a real estate sale where the seller negotiates the sale of a property for less than what is owned to the lender(s). With the cooperation and approval from the lender, the seller is permitted to market the property through a Realtor, find a buyer and close the transaction at market values. The shortfall between the sales price and the banks payoff creates the “short-sale”.

Before an offer from a buyer on a short sale is accepted by the seller, there are negotiations that occur but differ from a typical buyer v. seller traditional negotiations. In a short sale, a buyer's goal is to get the property for a reasonable fair market price, which is what the seller and lender want as well. This price is often negotiated in a rather “soft” negotiating manner with the common goal of all parties to the short sale transaction to seek a price that the lender will accept. If the offer is too low, the lender may possibly reject that offer or counter the buyer. If the buyer expects a deal too far below market, this situation can back-fire on the seller because the buyer may not be willing to negotiate a bank counter and walk from the deal after months of negotiations.

The length of time to close a short sale varies depending on many factors including how many mortgages are on the property, the skills of the lender's negotiator in charge of the asset, the skills of the negotiator hired by the seller to represent them with the short-sale process, the seller's short sale application and how cooperative the sellers are with the lender and finally, if the seller's short sale application is accepted by the lender. Not all sellers are truly in a hardship which is the primary condition that must be met to have a short sale transaction close.

If the short sale is approved, there may be strings attached for the seller and the buyer. With regard to the seller, the lender may require the seller to sign a note or request a seller cash contribution to the lender(s) or PMI company (insurer of the loan) as compensation for allowing the short sale transaction to occur. This depends on the seller's degree of hardship, credit score, cash on hand, and other mitigating circumstances. The seller may be fully released from all future liability with the short sale deficiency or may not be. The buyers have three possible outcomes. The best case would be an acceptance of the offer and a normal closing taking just 70-90 days. The worst case would be no lender counter or the lender chooses to deny the short sale itself. A third situation would be a counter from the lender which would require an acceptance by the buyer or a buyer counter offer.

In short sale transactions, the foreclosing or primary lender pays for the title policy, real estate commissions and all other traditional “seller” closing fees. In most real estate transactions, all fees are negotiable including who pays title insurance, buyer closing costs, home warranties, inspection repairs and other costs associated with closing a real estate transaction. In short sales, lenders pretty much dictate the terms.

In a short sale, sellers are selling “as-is-where-is” meaning the property is sold without the seller warranting any items in need of repair. The contract is always written on an “As-Is” FAR/BAR contract with an attachment called a short sale addendum. Buyers have the right to inspect and this right starts from the day buyer is notified of acceptance of their offer from the lender. The typical inspection period is 10 days. Because the contract is “As-Is”, the buyer can choose to cancel their offer for practically any reason within the inspection period.

Negotiating a Bank Owned “Foreclosed” Property

Most bank-owned (REO) properties restrict the sale of the property for the first 14 days of a listing to “owner occupants”. If the property is highly desirable, there is often more than one offer. If such is the case, the listing agent will establish an “offer cutoff date” and then call for a “highest and best” from all bidders seeking the highest and best offer. Most foreclosed properties require offers to be made on an “As-Is” contract accompanied by a buyer “proof of funds” statement which is evidence of one's ability to close.

As well, lenders do have their own special addenda detailing closing costs responsibilities (bank owned properties often require buyers to pay doc stamps on the deed at .70/$100 which is typically a seller expense), penalties for not closing on time, and a special addendum that addends the “As-Is” to an “As-is-where-is” contract which states that buyers have the right to inspect but no concessions will be offered to the buyer for deficiencies or property conditions. This doesn't close the door for possible future negotiations once an inspection has been completed. It merely states the terms. As broker for many buyers in negotiating bank owned properties, I have successfully negotiated concessions from the lender of foreclosed properties after an inspection revealed damage. I leveraged my position by notifying the seller that they would have to disclose to future buyers the items found in the report and that strategy has worked.

Buyer Closing Costs

Traditionally, the seller pays for title insurance at $5.85/$1000 of sales price (except in Miami-Dade and Collier Counties where it is customary for the buyer to pay), documentary stamps in deed (.70/$100) while the buyer traditionally pays for survey which costs $300-$500 depending on the size of the property (except Duval county), appraisal ($380 except VA loans), all buyer closing costs related to acquiring financing including documentary stamps on the new mortgage (.35 per $100) and intangible tax on the new mortgage (.002).

Buyer Pre-Approval Letters or Cash Purchases

Before presenting an offer, buyers either need a pre-approval letter from a mortgage banker such as Wells Fargo, a Credit Union or a mortgage broker. ADDvantage works with many mortgage brokers and bankers.

Buyers can get a “buyer-ready” or “underwriting approval” from most lenders such as Wells Fargo. This is the best form of a pre-approval letter because there is no credit risk for the seller as underwriting has approved the buyer. This type of approval is subject to appraisal and inspections only.

Cash buyers would need a “proof-of-funds” letter which is simply a copy of one or more liquid accounts showing sufficient funds to close the transaction or a letter from a financial institution. The name on the accounts must match the contract name.

Title insurance

It is recommended that all buyers get title insurance before closing a real estate transaction. Title insurance guarantees clear title to ownership. The best form of title is a General Warranty Deed while the least form of owner is Quick-Claim Deed. All liens including lenders (first, second and third) mortgages, mechanics liens, HOA liens, code enforcement liens, utilities and other possible encumbrances that may affect title will be paid. In all Florida counties, except Collier and Miami-Dade, the seller pays for title insurance.

In short sale transactions, the foreclosing or primary lender pays for the title policy and typically all transactional fees including documentary stamps on deed, Realtor commissions and title “junk” fees. All fees in real estate transactions are negotiable including who pays title insurance, buyer closing costs, home guarantees, inspection repairs and other costs associated with closing a real estate transaction.

The Contract

In Florida, there are two types of contracts: those with repair limits and those without, also known as “As-Is” contracts. Most buyers and Realtor use “repair limits”, often 1.5% of the sales price, as a basic guide for negotiating items found to be in disrepair as a result of a home inspection, also called “warranted items”. Buyers and buyers' agents alike feel that this clause in the purchase and sale agreement adds leverage to maximize any potential credits due to the buyer as a result of the home inspection. Sellers generally hold the position that it is to their advantage to have either an “As-Is” contract with no repair limits or $500 maximum repair limits as opposed to 1.5% of the sales price.

My experience says an “As-Is” contract works best for both buyer and seller. As a seller, you can request offers to be made on an “As-Is” contract, but that carries a stigma that something is wrong with the property. On a side note, all short sales and bank owned “foreclosed” properties are required to be on “As-Is” contracts. Bank owned properties often require an addendum to an “As-Is” which states “As-Is-Where-Is”, which means right to inspect but take it or leave it.

As a buyer's agent, I believe an “As-Is” contract is to the benefit of a buyer. The primary reason is the language in the contract regarding repair limits states that the seller will provide buyer with a written estimate by appropriately licensed persons for all warranted items noted in the inspection report. If buyer and seller disagree with the report, paid for and provided by buyer, then the remedy is a second inspection paid for by the seller. This is an oxymoron in many respects. First and foremost, it opens the door for a battle between buyers and sellers rather than a productive arms-length negotiation with regard to repairs. As well, why would the seller provide a buyer with cost estimates? It is the buyer's due diligence that should be the foremost consideration. The ultimate reason for buyers using an as-is contract to present their offer is to preserve their right to escape the contract without any reason other than presenting a “release and cancellation” signed by buyer within the inspection period time limits. As I have noted, a FAR/BAR contract with repair limits can work for and against a buyer. If a buyer, after an inspection, chooses to escape the contract, the seller can, within the terms of the contract, attempt to force the buyer to close the property citing the “repair limits” clause of 1.5%. If the 1.5% is within the realm of the inspection repair costs estimates, then there exists the potential for a dispute. As well, a listing agent can add fuel to the fire by boasting to the seller that they can hold the buyer in the deal by following the contract to the letter.

Seller's Disclosure Statement

It may be to the benefit of the seller (not the buyer) to include items in the seller's disclosure statement that are known to be defective. By doing such disclosure, this should preclude the buyer from requesting repair of these items from seller. So, buyers should pay close attention to items in the seller's disclosure that affect value and of course the offer amount.

Home Inspections

The buyers should hire and pay for a home inspection from a licensed home inspector. It costs between $225-$500 for a home and pool inspection. Reports typically come with pictures and a detailed report about your prospective homes electrical, mechanical, plumbing, roof, drainage, some structural inspection, water intrusion, windows, paint, pool, sprinkler, and gutters. See sample of a home inspection report from Frontline Inspections.

In Greater Tampa Bay, ADDvantage recommends Frontline Inspections, Todd Johnson inspector 727-460-2655. Todd is a licensed General Contractor and an ASHI (American Society of Home inspectors) Home inspector. The ASHI website is an excellent source of well-trained home inspectors or ADDvantage has a network of home inspectors throughout Florida. Call us (727-942-2929 or 1-877-232-9695) anytime and we will recommend a trusted home inspector.

Buyer Due Diligence

Besides confirming home owner's insurance costs, buyers should review utilities bills on proposed purchases. High electric (hydro) bills could mean an inefficient, under or over sized a/c system or an energy inefficient home caused by poor insulation, leaking unsealed windows or possibly excessive heat gain (western exposure). High water bills could mean a leaking pipe or leaking pool.

WDO Inspection

Wood Destroying Organism (dry-wood and subterranean termites) inspection is typically performed by an inspector specializing in termites. Like a home inspector, this is a highly specialized service. The buyer pays for this report, except VA loans, which typically costs $90 dollars. The treatment for dry-wood termites is tenting with a gas called Vikane. The costs range from $800-$4,000. Dry-wood termites are colonies of a few thousand termites that nest inside wood members. Once a home is tented, the gas kills all existing termites but leave no residual material. Dry-woods can re-infest and therefore it is recommended to get a termite warranty.

Subterranean termites are a completely different type of issue and are regarded as more destructive. A subterranean colony can be in the millions. They are veracious eaters returning to the ground to gain moisture and then returning to the wood elements leaving rails of dirt called “mud tubs”. If these trails or tubes are moist, then the activity is likely fresh. The treatment for subterranean termites is a chemical called Termidor. Termidor bonds with the soil and lasts up to 10 years. It is either trenched 18" into the soil around the homes or drilled into the slab to treat hard to get areas. The cost of this treatment varies from $500-$3,000. If a home is found to have termites, this cost of remediation is negotiable.

Wind Mitigation Inspection and Insurance

Buyers should get a home owner's insurance quote before making an offer on a property or during the due diligence period. Insurance companies quote will be for “replacement” value of the property. Buyers can, in most cases, assume the prior insurance policy from the seller.

Insurance companies evaluate homes for wind tolerances for underwriting purposes. This inspection is usually performed by a certified inspector and is typically arranged by the insurance company. Below are some insurance resources for obtain quotes:

Septic Inspection

This is separate from a home inspection and performed by a company specializing in septic. A septic inspection is required for VA and FHA financing. The cost of a septic pump and inspection is near $250. The buyer pays for such an inspection except if the buyer is going to be financed through the VA.

Condominium HOA Defaults

Banks and mortgage companies require there be no more than 15% of the home owners delinquent or in default with the HOA. See our list of Ginny Mae approved condominiums.

Addendum Request

Once a contract is negotiated, there are often requests from all parties to the contract for addenda to adjust contract dates and modify terms within the contract. These changes must be agreed to and signed by all parties.

Risks of Contract Related Language

All contracts used by Florida Realtors are approved by the Florida Supreme Court. Because real estate practitioners are only licensed to make minor changes to contracts, it is recommended to seek the legal advice from a real estate attorney.

Short Sales in Florida

It is recommended that all sellers contemplating a short sale seek the advice of a lawyer that specializes in short sales. While we at ADDvantage handle many short sale transactions for both buyers and sellers, we use a law firm to negotiate short sales for our sellers. Our choice is Chad Orsatti located at 3204 Alternate 19 North, Palm Harbor, Florida office: 727-772-9060; Cell: 727-643-4023. Chad does not charge sellers a fee to negotiate and represent them for a short sale, but rather he earns his fee through title charges paid by the primary short sale lender. Sellers pay no fees, no commissions, and no closing costs when doing a short sale with ADDvantage. ADDvantage offers a quick online 100% electronic listing platform for short sales.

Buyers pay their traditional fees for financing. Cash buyers pay only a title service fee of near $250.

Short sales can take anywhere from 60-200 days to close depending on the number of loans involved, the prowess of the short sale negotiator (listing agent controls the short sale process and selects along with the seller whom will be negotiating for the seller), the bank negotiator, if there is PMI on the mortgage, whether or not the seller is cooperative with the process, the seller's hardship and subject to the banks, seller and buyers final approval.

Option Contracts and Lease to Own Contracts

Florida Supreme Court does not allow licensees to alter a purchase and sale contract to include language that modifies such a contract in an effort to create an option contract or a “lease to own”. What is acceptable under the licensee's capacity within the laws of the State of Florida is to create a lease and include an addendum or attachment, add a purchase and sale agreement. It would be advisable to seek a qualified real estate attorney when dealing with option and lease to own contracts.

Appraisal

Since the Real Estate bubble of 2006, Real Estate appraisals have been placed into a blind pool whereby no one controls the exact individual who does the appraisal. Appraisals are typically ordered by the lender, if financing is involved, and paid for typically by the buyer. If the appraisal value falls short of the sales price, typically the parties to the contract negotiate the difference or possibly order a second appraisal. The seller would pay for the second appraisal which costs about $380. The seller is not obligated to sell at the appraised price nor is the buyer obligated to buy.

Buyer and Seller Relations

If ADDvantage is representing you, as your broker, all communications come through our office. The ADDvantage team is the fastest document turn-a-round team in the industry as we respond within 30 minutes to all requests from parties to the contract. All verbal and email requests are properly named and stored electronically in your client control panel under “client documents”. This creates a fluid and a timely closing. In a typical transaction there are between 20-50 emails and supporting documents.

Walk-through Inspection

One day prior to closing or the same day of closing, the buyer should inspect the property for condition, appliances, and outside air condition/heat pump. We use this form.

Title Insurance

Title insurance is paid for by the seller in all counties in Florida except Collier and Miami-Dade counties, where the buyer traditionally pays. All costs of closing are negotiable. The State of Florida publishes the fees for title insurance and the rates are currently $5.85 per $1,000 of sales price, although all other title fees (junk fees) can vary from one title company to another. An efficient closing agent coordinates with all parties to a closing including buyer, seller, real estate agents, mortgage broker and the HOA representative for an estoppel letter. ADDvantage trusts this important task to Roxanne R. Bocich at Wollinka-Wikle Title Agency, 1835 Health Care Drive, Trinity, Florida 34655; (O)727-937-4177 (C) 727-934-3689 (F) 727-934-3689.

Survey

When closing a residential transaction, lenders typically require a survey, especially with VA and FHA financing. In most Florida counties the buyer pays for survey, with the exception of Duval County where typically the buyer pays for a survey. Residential surveys can vary in price from $300-$600 depending on the size of the home and lot.

Why get a survey? Simple stated, without a survey, a buyer would have no idea what there are buying. An example would be if a buyer was purchasing a large parcel where the seller quick claimed (sold) a portion to a neighbor for easement or a water front property where a seller deeded 40' of their waterfront to a land locked neighbor so they could have water access. A property survey tells the real story when people aren't around to give the new buyer details.

Early Move in Agreements and buyer Lease-Backs

At times, buyers requests sellers to move in a property before closing. There is no rule of thumb to minimize the risks associated with such transactions. The seller assumes most of the risk as the buyer has all rights associated with a lessee. At the least, a lease should be executed between buyer and seller.

Day of Closing Belongs to Buyer

The day of closing belongs to the buyer. The buyer pays for real estate taxes, insurance, mortgage costs and gets position of the property on day of closing. The seller must deliver a “clean swept home”. The question is always the same, how does a seller schedule a moving truck, pack, and move the day before closing when there is no guarantee that the transaction will close. In many states, there is a 3 day delay lag time between closing and possession for this reason. The short answer is there is no 100% test here. There is what is called a “clear to close” which typically occurs within 2-5 days prior to closing where all parties to the closing have been given the OK to close including the lender's funding of the transaction. At this point, the title company coordinates a time to close. Another important hurdle to clear is the buyer's file coming out of underwriting at the lender.

HUD Settlement Statement

Prior to closing, all parties receive and must approve the closing settlement statement which is a spread sheet of debts and credits for buyer and seller. The US Department of Housing and Urban Development mandates what must be disclosed.