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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.

REAL ESTATE AUCTIONS

We are seeing auctions again in real estate, but they are mostly online, so it’s more like eBay.

 

Usually the opening bid is quite low compared to the market value. This is what usually attracts buyers to auctions as they think they may be able to get a “deal.” What most people don’t know is that there is often an undisclosed reserve price. So let’s say a home worth $500,000 has an opening bid of $300,000, and the highest bid is $400,000 when the auction ends. But it’s possible the owner of the property had put a reserve price of $475,000, which means the auction is just cancelled in this case. Auctions with NO reserve are preferred by buyers, but feared by sellers.

 

You can usually view the properties before bidding and it’s common to have normal loan and inspection contingencies. This means you normally don’t HAVE to pay 100% cash. You generally can be represented by an agent if you choose. Either you or your agent can register and bid for you. You will usually need to register and give your credit card information. This is so if you are the winning bidder, they can collect the deposit. This is also an attempt to make sure you are a real bidder. Although, we have heard several reports where the home’s owner logged in and created a fake account to try to bid the price up.

 

There will be a deadline for offers, but if an offer comes in within the last few minutes, they will usually automatically extend the deadline another 5-10 minutes.

 

Another oddity of auctions is something called a “Buyer’s Premium.” This is a fee that is paid by the buyer at close of escrow. I’ve seen them as low as 1% and as high as 10%. So it’s important to read EVERYTHING prior to bidding!

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.

WATCH WHAT YOU SIGN

I realize there is a LOT of paperwork in buying or selling a home and that we are often under a time crunch to get an offer submitted BUT you should still read what you are signing!

 

Here is a horrible recent example that will give you some extra incentive to read what you are signing. Some past clients of mine moved out of the area and started working with a local agent there and wrote several offers unsuccessfully. Very quickly they realized this agent wasn’t very experienced and very likely had a full-time job other than real estate. They politely told this agent they would be working with another agent and they got into contract on another home. However, their prior agent advised the new agent that the client had signed an exclusive buyer’s representation agreement with her, and they would owe her the full commission on the sale! The client says the agent never discussed this arrangement with her, but when they went back and reviewed all the paperwork they had signed with her, on the last transaction the buyer’s representation forms were quietly slipped in behind the offer documents and they did sign them. They may have to hire an attorney to fight this. These are highly intelligent people that this happened to. It’s just that after writing several offers, it’s easy to think these are the same documents as before, just on a different property and sign away. (Unfortunately, this is not the first time I’ve heard of this happening to someone.)

 

Another moral of the story is to only work with an ethical agent, but better still is to read everything before you sign it. If it’s a form you’ve seen before, maybe you can glance over it just to look for any changes. But watch for any new forms and ask questions of your agent!

1031 BASICS

If you are thinking of selling an investment property and you’ve heard that you can delay paying income tax on the gains by buying another investment property, this article is for you. This is called a 1031 exchange. In years past, you could only sell and then buy “similar” properties. For example, if you were selling a single-family home that you were renting out, you had to buy another single-family home, not a condo, or commercial building. But now the rules have been expanded so that as long as you are selling some kind of investment property and buying another type of investment property, it’s probably OK.

 

There are rules to this that must be followed. Most importantly, you have to set up the exchange BEFORE you close escrow on the first property. This means selecting a Qualified Intermediary who will step in take title of the property you are buying, so they receive the proceeds of the sale, and then they will purchase the next property for you, and then that property is put back into your name.  This way you never have what’s called “constructive receipt”’ of any of the proceeds.

 

From the time the escrow closes on the first property, you will have 45 calendar days to identify the replacement property (you can even identify more than one property in case there is a problem). Then you will have up to 180 days to close escrow on the replacement property(ies). It can be less than 180 days if you sell the first property late in the year.

 

There are other rules about the amount of debt you have on each and there is even a situation where you can buy first, and then sell, called a reverse exchange.

 

I AM NOT A TAX EXPERT OR 1031 EXPERT SO CONSULT ONE FOR YOUR SITUATION. If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). #1 for Brentwood listings sold multiple years. To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty.

USE THE RIGHT TYPE OF AGENT

When you are experiencing an important medical situation, you will normally wind up with a specialist of some kind. The same goes for real estate.

 

A California real estate license allows us to transact business across a wide range of activities. What usually comes to mind is that we can represent sellers or buyers in a residential resale transaction of a single-family home. But our license also allows us to do leases, property management, bare land, commercial transactions, business opportunities, mobile homes, mortgages (with some extra requirements), and more. Each of these transactions can be very different and have their own pitfalls and steep learning curves. When someone takes the required courses and then passes the real estate test, they may be licensed to perform all these transactions, but they likely don’t know everything about all these different type of transactions. Personally, I’ve focused almost exclusively on representing sellers of residential homes, and after almost 20 years I feel like I’m still learning something new all the time!

 

It’s one thing to ask an agent, “Can you help me buy/sell/lease this home/mobile home/commercial building?” They can honestly answer, “Yes,” since our license is so broad. But the better question to ask is, “Have you done this type of transaction before? How many times?” Ask them for a list of their transactions for the last few years. Even if they HAVE done many transactions of that type, do they usually represent buyers or sellers? If you are selling a custom home on 10 acres with a well and septic and your agent usually only sells tract homes in town, that could pose challenges. If your situation is a divorce, have they dealt with divorces before? Probate? Short sale? If they haven’t, make sure they have a mentor to rely on.

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.

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