General Real Estate: January 2008 Archives
Not too long ago on a property I was selling I called an agent up on the day a transaction was supposed to close. He asked me the question, "Well who says it has to close today?"
"The contract that both of our clients agreed to," I told him, "I'll be bringing over a notice to perform later today."
He got all huffy and defensive and tried to talk me out of it, of course. His client was having difficulty finalizing the loan. He offered to fax me over a loan commitment, and it wasn't even in compliance with the purchase contract. The other agent didn't have a clue, being unwilling to take the few minutes to figure out what it said. Buyer's market or no buyer's market, he got the notice to perform as fast as I could take it to him. I didn't fax it; that could have been claimed to go astray. I hand carried it over. My client kept the deposit.
The issue at stake, most critical to sellers, but important for buyers also as well as costly to borrowers, is time. That seller can only have one escrow transaction on their property in the works at one time. If this buyer cannot perform in a timely fashion, they are spending money they would not otherwise have spent because of it. In most cases they are paying for an extra place to live while this joker of a buyer, or more precisely their agent or loan officer, bumbles about and wastes time. Around here, that's usually thousands of dollars per month. It has gotten to the point where one of the options I always consider is asking for an explicit "per day" escrow extension penalty for my client right in the purchase contract. That way, the buyer had better know right up front there is a deadline and will not treat it in some lackadaisical fashion, and if their agent does, well that's between them. Of course, in a buyer's market like this one, it scares a lot of buyers away, so discretion is advised.
Another way to cut unnecessary expense to my listing clients is a leaseback clause. What this means is that they can stay in the property, paying only appropriate daily rental on an equivalent property, for 30 to 60 days after the transaction records. That way, they don't have to arrange for new housing ahead of time; they can wait until the transaction is actually finalized, and. Of course, this means the buyer doesn't get possession right away, which many of them don't like, to say the least. They've gone to all this trouble to qualify for the property, scrimped and saved and now they're paying a mortgage and don't have the property. Nonetheless, it's a viable alternative to penalty clauses and sits a lot better at the beginning of the process when many of them are nervous about qualifying. As one final note to this idea, in order to get "owner occupied" loan rates as opposed to higher "investment property" rates, most lenders have a requirement to move in within 30 days, and this can, theoretically, create a conflict for the buyer.
On the flip side, suppose the seller is unable to perform? Cannot deliver good title, cannot get the clearances and inspections done, cannot get their lender to approve a Short Payoff, any one of a number of issues? Now the buyer is sitting here with an approved loan, and the clock is ticking on their rate lock. I always want a rate lock that will cover the entire contracted escrow period, but I don't want my clients to pay for a longer lock than they have to. So now the contracted escrow period is up and my client's loan is ready to go and the documents have been signed and it's ready to fund and for the entire transaction to record, but the seller is sitting over there with their thumb metaphorically you-know-where and the rate extensions are costing my client a tenth of a point for five days or a quarter point for fifteen (depending upon the lender), always charged in full on the first day of the extension. On a $500,000 loan, a tenth of a point is about $500, and a quarter is about $1250. In a buyer's market, like this one, it may be a good idea to pre-negotiate a "seller unable to perform" penalty.
Of course, in most transactions, it's not the buyer and seller who are really at fault. It's the agent or the loan officer. They are getting paid for getting it done on time, among other things, and they are dropping the ball, either due to a "manana mindset" or because they are responsible for too many transactions or because they don't want to tell their client they have to spend some money, or because they're just an incompetent flake.
For loan officers, add "they promised a loan they couldn't deliver" to the list. It happens disturbingly often, as the incentives are in place to promise the moon in order to get you to sign up, then play the "wait and hope" game of waiting and hoping the market drops far enough that they can deliver something that at least looks similar to what they promised. There are no loan extension fees in this case, or at least there shouldn't be, because to lock your loan would defeat the entire purpose of "wait and hope." On the other hand, in those situations the market has a distinct tendency to rise, and when it does, you pay the new rates that are even higher than what was really available at the time and that you could have had if you has listened to the guy who told you that rate really wasn't available. If the rate is locked and the rates go up, I don't care and neither does my client. If the rate is locked and the rates go down, a broker can offer a lender a choice between losing the loan and giving their client the better rates, and resubmit it elsewhere if they take the former choice. If the rate is not locked, you are stuck with whatever happens in the market. Period.
The point of this article is that it is likely to save you money to get everything done right away, and even if the other side in the transaction doesn't, it puts you in a much stronger position from the point of view of negotiating, or from the a legal perspective if the whole transaction goes down in flames. Yes, an appraisal is somewhere between $300 and $500. Yes, a building inspection is about the same. Yes, the other reports run into some significant money, as well. But delaying will cost you more, which may be measured in terms of small percentages of the overall transaction, but when you do the math, it works out to thousands of dollars, not mere hundreds.
Don't wait for the deadlines. Definitely don't wait until after the deadlines. They are there for a reason, and they will cost you money. Get it done right now, and if your agent or loan provider will not or can not, document it. Loan providers you can drop any time until you sign the documents and often afterward, but you typically are stuck with agents once the transaction begins, at least until it finishes. Nonetheless, wouldn't you really rather that agent (or their insurance) was liable to cover your losses plus the cost of recovery? Document their failures to indemnify yourself.
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