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WHEN IS BUYER “APPROVED”?

I received an offer on one of my listings recently, and when I presented the offer to my client, they asked why there was a financial contingency in the contract if the buyer was already “approved” for their loan? I explained that there are different types of approvals, and different levels within each type. I don’t have space to go into all of them, but I wanted to cover the most common misunderstanding about an “approved” buyer.

 

When a lender issues a pre-approval letter for a buyer, there will almost always be some conditions to the approval. These conditions can may be really basic and easy to meet. For example, let’s say the buyer has submitted all their bank statements and paystubs, but they will receive new ones within a week, and the lender wants to see those when they are printed and confirm there are no big changes. Or the conditions could be more difficult to meet. For example, let’s say a buyer’s credit report shows a bunch of old unpaid accounts from various sources. The buyer believes they were all paid off years ago, or that some are not their accounts. In that case the buyer needs to find the proof they were paid, or verify somehow that the information in the credit report is incorrect.

 

Depending on the buyer’s and lender’s confidence to clear these conditions, they may say that the buyer is “approved” and the buyer may even remove their loan contingency when the time comes. But the loan won’t fund and we can’t close the escrow until all the conditions are met. There have been situations in the past where a buyer had a super-clean, full loan commitment from a lender, but then the buyer lost their job before closing. Continued employment would be a “condition” of that approval.

WHEN IS IT REALLY CLOSED?

We use words in real estate that can be confusing.  One of the biggest areas of confusion is around when the transaction is actually CLOSED. Each of the steps below can take hours or even days. There are cut-off times during the day for some of these things to happen. This means that sometimes being even just a few minutes late on any of these can delay closing by a day or even a few days if it’s before a weekend.

 

“Approved for docs” – This means buyer’s lender has cleared the conditions of their approval enough to where they will print the buyer’s loan documents in the very near future.

“Docs are in title” – The loan documents have arrived at the title company and they are ready for buyer to sign.

“Buyers have signed” – The buyers have signed their loan documents.

“Docs are at lender” – The signed documents have arrived at the lender’s office and they are reviewing them for accuracy.

“Docs are approved” – The lender has approved the signatures and will wire funds at the next available opportunity.

“Lender funds have been sent”’ – The lender has sent a wire with their funds to the title company.

“Lender funds have been received” – The title company has received the wire.

“Clear to close” – Everyone that has a say in the matter says it’s OK to close the escrow.

“Deed is at County” – The grant deed has been delivered to the County Recorder’s office. (Technically ownership passes as soon as it’s stamped as “received.”)

“Confirmation received” – Later that day the County confirms with the title company that the grant deed was received.

“Wire sent” – The title company has wired out the Seller’s proceeds.

“Wire received” – The money is now liquid in the Seller’s bank account.

PRIVATE TRANSFER FEES

If you are buying a home, you need to be on the watch for something called a “Private Transfer Fee.” This is a fee that can come due whenever a property is sold, and it could be a cost to the buyer or the seller. (I am NOT talking about the County Transfer Tax.) It  can be a percentage or a flat amount but there is no minimum or maximum. The last few we have seen have been $300 to 1,000.

 

The most common purpose is that the original builder needed to offset some kind of environmental impact or affordable housing requirement required by the City or County, but they can actually be for almost anything. These have been around for a long time but were not very common. That’s changed as more builders are using this as a way to offload some costs to the new home buyer. We’ve come across several of these recently and mostly on homes built within the last 4-5 years. It’s coming to our attention now that some of those homes are being sold for the first time.

 

What’s concerning is that the sellers weren’t aware of this. I’m sure it was disclosed to them when they bought the home, but they just didn’t notice it because it was just a few lines buried in all the paperwork. We had a buyer in contract on a new home in a neighborhood where we just had this situation come up on a recent listing. We asked and the new home representative wasn’t even aware of it until we all really dug into it.

 

Bottom line is that you need to read EVERY line of the preliminary title report, and if you see anything that mentions a “transfer fee” of any kind, find out how much it is and who pays it.

LOCAL AGENT?

Over the last few years, many of the Multiple Listing Services across California have started sharing data so agents can have access to areas far beyond where they live. I am NOT a big fan of this! When you are selecting an agent to work with, either to buy or to sell, my advice is to stick with someone who lives in and knows that area.  That may seem like common-sense advice, but I’m surprised how many people use an agent from out of the area. Maybe it’s a relative, or a close friend, or they used them last time they bought or sold and they just trust that agent. This can present challenges, for all parties involved.

 

A perfect example of this is the situation with the golf courses in Brentwood right now. One or more of the courses may close, or combine, or part of them may become vineyards or assisted living, etc. This is information that buyers need to have so they can make an educated decision. This is something that sellers should be disclosing to protect themselves from liability later if the buyer is disgruntled after paying top dollar for a “golf course view” that may go away.

 

I could think of many other examples where a local agent may have knowledge of some local issue where an out of town agent may not: the railroad tracks through town that appear to be abandoned but may be used in the future, rising and falling water rates, E-Bart, areas of high tax assessments, funky school boundaries (there are a few isolated cases where a home with an address in one town is actually zoned for the school district of the neighboring town), etc.

 

I don’t care if the person changing my oil just moved to town that day. Same goes for a haircut. But real estate is LOCAL!

KEEP YOUR HOME SAFE

There have been many burglars willing to share how they target which home to break into. The #1 thing they usually look for is a dark house where it appears no one is home, but they know valuables are inside. There are simple steps you can take to make your home less attractive.

 

Prune the bushes in front of your home so they don’t have a place to hide. Install motion-sensor lights. This one tip can often send burglars scrambling when the lights go on. Get a dog, or at least put up a “beware of dog” sign. Same thing with an alarm, either install an alarm or put up a sign saying you have an alarm.

 

If you buy a new TV, stereo or computer equipment, don’t leave the empty boxes outside or at your curb. You are just advertising, “Nice stuff inside!” Don’t leave expensive items laying around on tables or in view from the front window. Shut your blinds at night. When you are home at night with the lights on, you can’t really see out your windows, but thieves can easily see what you have.

 

When you are gone from the house, especially on vacation, you need to make the house look occupied. Put a timer on a few lights and especially the TV at random times. Ask your neighbors to collect any newspapers, flyers, etc. from your porch. Be sure to tell your neighbors so they can keep an eye out for suspicious people. Ask them to park a car in your driveway now and then. And DON’T post your vacation pics on social media until AFTER you get home! I often see posts with a pic of the whole family boarding an airplane with the caption, “Two weeks in paradise starts today!” You are just inviting thieves to your home!

APPRAISAL WOES

Over the last 30 days, I’ve had challenges on several transactions due to appraisals coming in low. I believe I’m being objective when I say they came in “low” because they were not in contract for tremendously higher than what the recent solds were. The appraisers seemed to be making overly negative adjustments and/or were just flat-out ignoring major positive attributes to our subject property. I’ve checked with other local agents and many of them are reporting similar challenges. This is NOT on every transaction, and most appraisers do a great job, but it’s happening on enough transactions that it’s becoming a common issue.

 

It’s possible that some appraisers think our market is getting over-heated again beyond the fundamentals, and that it’s their job to slow things down by putting their “thumb on the scale” a little bit. I had a situation recently where the same home was appraised by two different appraisers less than two weeks of each other and it came in $25K higher the second time.

 

So what does this mean if you are in the real estate market right now? If you are a seller, you may look more favorably at offers where the buyer is willing to waive some or all of the appraisal contingency. Sometimes the highest offer is not the best offer. If you are the buyer, don’t be surprised if the seller asks you to waive some or all of the appraisal contingency. If you are willing to do that, it helps if you can provide proof of liquid funds with your offer to show that you can pay the difference if needed. In the SF/Silicon Valley, it’s almost expected that the buyer waive the appraisal contingency. We aren’t there yet out here, but it may be moving in that direction.

MOVING OUT WARNINGS

Moving can be stressful. So many things to do, so many loose ends. The last week or two is the worst because the deadline of moving day is approaching. Here are some items that are easy to miss in the hustle and bustle but can cause MAJOR headaches if not handled correctly:

 

REFRIGERATOR AND LAUNDRY HOOK-UPS. Your washer and possibly your refrigerator have water line hookups on the back. If you are taking either of these with you, you need to really monitor the shut-off valves. These valves don’t get used except once or twice every few years so they OFTEN don’t shut off all the way. Or they appear to shut off, but then develop a small leak hours later. I’ve walked into several vacant homes with water damage because of this very issue. Your best bet is to turn the main water valve off to the house to avoid leaks until the new owner can set up their appliances.

 

THIEVES. They are watching you. They notice when you start moving out but know it can take several trips. This can make you a prime target and unfortunately, I’ve had clients experience thefts during this time period. One client actually had their whole moving truck stolen full of their belongings! Other times the house was broken into when it was obvious no one was home but there were still items inside. Do your best to avoid telegraphing that the house is vacant. Put lights on timers, play music, ask a neighbor to park a car in the driveway, etc. Also communicate with your neighbors and ask them to be aware. The thieves are banking on your neighbors not being suspicious when a strange car or person shows up, even at odd hours, and not calling the police.

THE “BEST” PRE-APPROVAL LETTER

When a buyer submits an offer on a home they want to buy, it’s expected that they will include a letter from their lender. There are several varieties of letters that a lender can provide with different levels of confidence behind them.

 

The least impressive letter is a “pre-qualification letter.” This usually means the lender spoke with the buyer in person or over the phone and asked them some basic questions about how much money do they make, what are their currently monthly obligations (car payment, student loans, etc.), what are their assets (liquid and non-liquid), and how is their credit. Based on the buyer’s answers, the lender will print out a pre-qualification letter.

 

The next step up would be a “pre-approval letter.” This is where the lender gets a full written application and then actually verifies the information and doesn’t just rely upon the buyer’s verbal representations. So they see copies of tax returns, paystubs, bank statements and runs their credit report.

 

In the prior two letters, the lender’s representative is pretty sure that an underwriter will approve the file once it’s submitted to them for their review. A higher-level letter would be one where it’s stated that an underwriter has actually reviewed the file. Either a flesh-and-blood person, or a computer underwriting system, usually called “Desktop Underwriting” or “DU” for short. The best letter is what’s called a “loan commitment” where the lender is saying they are truly ready to make that borrower a loan as soon as they identify a home. This means everything is verified, an underwriter has signed off on it, and the only missing piece is the house itself.

 

So if you are buyer wanting to make your offer stand out in multiple offer situations, see if your lender can provide this last kind of letter. This will take cooperation from you to get them absolutely every document they ask for. If you are a seller and you’ve received multiple offers on your property that are otherwise pretty similar, you may want to give extra consideration to offers with this last kind of letter versus the others.

TITLE CO. = NEUTRAL

From time to time, a real estate deal will fall apart. Sellers are usually pretty locked into selling as long as the buyer is performing. So most often it’s the buyer that can’t or won’t perform for some reason. In some rare occasions, the Buyer just freely admits that they are at fault, and they agree to give up their deposit. A form is drawn up, both Buyer and Seller sign it, which cancels the contract and releases the deposit, or most of it (depending on the negotiation process) to the Seller.

 

But what if the Buyer DOESN’T just agree to release their deposit? What if they have reasons to believe that they should get their deposit back? And what if the Seller is just as adamant that they should keep the deposit? I don’t have room to go into all the particulars of what happens next, but I did want to clarify the role of the title company in this situation. They are a neutral third-party to the transaction. They can only act when they receive identical instructions from BOTH parties.

 

What this means is that even if you have iron-clad proof that YOU should get the deposit, if the other side doesn’t sign that form, the title company will do nothing until it is resolved. You can scream at them all you want and ask to speak to the president of the company, but they will not release a deposit, or even change any of the terms of the deal, unless both parties give the same instructions.

 

If an impasse is reached, then Buyer and Seller will go to the dispute resolution options as called for in their purchase agreement. Once that process is taken to it’s final conclusion, only then will the deposit be released. But again, the title company is not the one that makes the final decision on this matter.

DOLLAR PER SF?

Many people use dollar per sq. ft. as the “gold standard” when valuing a home. However, I’ve found that it isn’t nearly as accurate as they think.

 

The biggest challenge is that it doesn’t account for condition, location or upgrades from one home to the next. An immaculate home on a large lot at the end of a court with a pool, granite slab counters, and hardwood floors will be a LOT more per sq. ft. than the same floor plan in poor condition with no upgrades and on a busy street.

 

Another challenge is that it is difficult to compare homes of drastically different sizes. Smaller homes tend to have higher dollar per sq. ft. values compared to a larger home. This is because you still have the lot, the utilities, a kitchen, etc., no matter how big the house is. There are many fixed costs, and have larger impact on the value of a smaller house.

 

The other issue that makes dollar per sq. ft. confusing is that there is only an incremental difference in value between two homes of similar size. Most appraisers tell me that they will only give a value of between $40-60 per sq. ft. to compare two different homes, even though it may have cost $200 per sq. ft. to build the whole house. For example, if you were comparing two homes, one at 2100 square feet, and the other at 2350 square feet, the difference is 250 square feet more. An appraiser may only give the larger home about $12,500 more for the size ($50 X 250), not $50,000 ($200 X 250).

 

This doesn’t mean you should completely ignore dollar per sq. ft., but it’s only one factor to consider among many, and it works best when you are comparing homes of similar size and location with similar upgrades and amenities.

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