- February 16, 2012 at 6:49 pm #243441mary summersParticipant
For most people, buying or selling their primary home, vacation property or rental property can be among their most important and expensive business transactions. This article offers advice to avoid some common mistakes, but does not cover the process and challenges of obtaining a loan to buy the property, which is often a critical step as well.
1. Rely Exclusively/Primarily On A Broker. Real estate brokers are often helpful. They are experts at suggesting the initial asking price, marketing the property, and finding potential buyers. However, since brokers typically get paid only if a sale closes, they are biased towards closing the sale. This bias influences their advice, recommendations and guidance. Almost always, brokers will try to convince the buyer to offer more, the seller to accept less, and both parties to agree on key terms, so the sale closes and they receive a commission. For this reason, do not rely exclusively or primarily on the broker for objective advice, especially with the availability of online tools and experts to assist you.
2. Sign Real Estate Contracts Without Consulting A Lawyer. Most real estate contracts come on pre-printed forms prepared by broker associations, such as the California Association of Realtors (“CAR”). While the CAR forms contain the minimum legal terms necessary, they are also designed to protect the broker from potential liability and ensure the broker receives the commission. You should retain a lawyer to review and revise the contracts and advise you of the meaning and legal consequences of the key terms. We often advise clients to negotiate changes to the standard CAR contracts, and reasonable changes are often accepted. The broker will want the seller to sign an exclusive listing agreement, which is often quite generous to the broker. A qualified lawyer can help you negotiate better terms in the contracts. Beware of any broker who discourages you from having a lawyer review the contracts before you sign them. Although there is a cost to retaining a lawyer, that cost will pale in comparison to the large sum paid or received in this significant transaction. Using a lawyer will also minimize the potentially disastrous consequences of signing contracts you do not fully understand, or contracts that do not protect your interests.
3. Retain Third Party Vendors Based Solely Upon The Broker’s Recommendation. Brokers often have relationships with third party vendors, including mortgage brokers, lenders, home inspectors, building contractors, appraisers, insurers, home warranty companies, and escrow and title companies. Brokers often refer buyers and sellers to vendors that are supposed to act in your best interest, but are often grateful for the referral and want to help the broker receive the sales commission. Many broker referrals are competent and acceptable, but you need to check their references and see whether another vendor may better protect you and/or provide the same service at a lower cost. For example, most brokers are affiliated with specific escrow and title companies and prefer to work with them, but you can save $500-$2,500 (or more) by price shopping independent escrow and title companies, which typically charge less than broker-affiliated companies. Often, the broker-affiliated escrow and title companies will match the lower price.
4. Skip Or Pay Little Attention To A House Inspection. For buyers, a thorough house inspection is a key step in deciding whether to close, insist on repairs, and/or renegotiate the sales price. Almost always, you should not retain a home inspector recommended by your broker or rely upon prior home inspections. Instead, retain and pay for your own inspection by a reputable, licensed building contractor with at least ten years’ experience as a general contractor. Regardless, be sure to keep in mind that almost every inspection contract provides that the inspector is not liable for most errors or omissions. This means if the inspector misses something, the buyer may have little recourse against the inspector. Moreover, realize the inspector typically does not open up the structure to see the “bones” of the house. Rather, s/he only looks at what is readily visible. Be present during the inspection and ask the inspector questions as you follow him or her through the house. If the inspector offers a more thorough inspection at a higher cost, get it, because without it, you may not discover an expensive repair is needed until after you buy the house and the home warranty has expired.
5. Rely Solely On The House Inspection Report. Even a good house inspector may lack expertise in architecture, geology, drainage and engineering. If the house inspection report, the lack of expected building permits for improvements, the age of the house, your own observations, or other disclosures suggest there may be something wrong with the structure or the land, retain and pay for a separate engineering report, architect’s report, soils/drainage/geology reports, or other expert reports prepared by a qualified specialist before you close and within the contingency period in the sales contract. Ironically, these specialists tend to overstate the risks they find, but provide much more detail than a general inspection report. Have the seller or broker obtain the permit file from the local building and safety department, then have a contractor or architect review it to make sure all the improvements were permitted. Unpermitted improvements can be a nightmare for a buyer.
6. Neglect the Title Report and Title Insurance. For most home sales, a title company will issue a title report (which shows recorded liens and encumbrances), and issue title insurance. You should carefully review the title report yourself, or hire counsel to do so, and have the title company obtain copies of all recorded easements and encumbrances and make sure you understand their effect. If the lot is irregular or hilly, it is usually better to obtain an ALTA title insurance policy, which offers more coverage.
7. Neglect Dispute Resolution Provisions. The CAR forms have provisions regarding arbitration (instead of court litigation) to resolve disputes. If you are a buyer and do not have a written agreement with your agent/broker, you will not be entitled to insist on arbitration to resolve disputes with your broker. Since disputes often involve buyers, sellers, agents/brokers and/or inspectors, the same dispute resolution procedures should be put in all relevant contracts.
8. Pay Little Attention To Contingency Periods In The Purchase Contract. The main contract contains specific conditions to the buyer’s obligation to buy the house (e.g., the buyer must obtain financing, approve the condition of the house, and acknowledge the seller’s written disclosures) and specific time periods within which the conditions must be satisfied. These contingencies allow a buyer to cancel the sale and obtain a refund of his or her deposit. Many buyers and sellers expect their broker to follow up on these important conditions, and parties often fail to act within the express contingency periods or fail to get the contingency period extended. It is the buyer’s responsibility to act timely and have the contingency period extended if necessary, or else you may lose your deposit and/or be pressed to close on the purchase.
Please note many other issues can arise in any real estate transaction, but if you avoid the common mistakes described above, you’ll be way ahead.
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