Friday, January 26th, 2007
I get many people email me about a property that states in the remarks section that the property is being sold as-is with no termite letter. Many first time home buyers seem to get really nervous when they see these statements. They are expecting the home to be in total disrepair.
Most of the time these statements are in listings that are bank foreclosures or corporate relocations. All that it means is that the bank or relo company is making no claims about the condition of the home because they don’t have any actual knowledge of past events. They took over the home in the condition thta it is in and they are just saying that they don’t make any guarantees.
It really doesn’t change a thing. You negotiate a contract with the right to inspect. Usually you use the inspection clause that allows you to terminate during the inspection period for whatever reason you want. You do your inspection and if you find anything that is significant, you just renegotiate the contract taking those things into account.
The risk you take is that if there is something that is not able to be found by doing an inspection, there’s no possibility to be able to possibly sue the seller for failure to disclose a hidden defect.
Bank foreclosures usually never make any repairs on anything. Corporate relo companies many times will do an initial inspection of the home before they put it on the market to allow them the possibility of fixing problems ahead of time. Sometimes they will agree to pay closing costs in lieu of any repairs that are needed.
So don’t automatically fret over buying something as-is. It good turn out to be a great opportunity.
Posted in Miscellaneous, Atlanta Home Buyer traps | No Comments »
Thursday, January 11th, 2007
My previous post touched on just one part of the contract changes. Our broker just sent us a report and encouraged all agents to take the courses that go over all the changes.
Seth Weissman is the attorney who has written the book on the Georgia real estate contracts. I have attached below his report on all the new changes to the contract. It’s a bit long but it shows you just how much has changed.
There are a lot of things that one needs to know about completing a good and enforceable contract. It should be interesting to see how it affects transactions.
The 2007 GAR Purchase and Sale Agreement Hits the Streets
It’s a new year, which means that a new version of the GAR Purchase and Sale Agreement has been released. There are more significant changes in this year’s contract than in previous releases. This article will review these changes and explain why the GAR Forms Committee decided to make them.
1. New Organization to GAR Contract.
The GAR Purchase and Sale Agreement has been reorganized so that most of the significant deal points are on the first page of the Agreement. The purchase price, the amount of the earnest money, the date of the closing, the seller’s contributions at closing and the method of payment are all now on the first page of the Agreement. This should make it easier for REALTORS using the GAR Purchase and Sale Agreement to immediately see and understand the important terms of any offer being presented.
2. Changes to Earnest Money Section.
The earnest money section of the GAR Purchase and Sale Agreement was divided into two sections in the new Purchase and Sale Agreement. The first deals with the amount and deposit of earnest money (paragraph 3). The second deals with the entitlement to and disbursement of earnest money (new paragraph 15). Other than breaking the old section into two sections, the earnest money paragraph was not changed.
3. Right to Unilaterally Extend Closing Date Modified.
In earlier versions of the GAR Purchase and Sale Agreement, either the buyer or seller could unilaterally extend the closing date if there was a problem with either the title or the loan. In the new contract, the closing date can be unilaterally extended by the buyer or seller if there are either title problems or the closing attorney or buyer’s mortgage lender (including in “all cash” transactions) fail to timely complete their respective obligations. The idea behind this change was to narrow somewhat the type of loan problem that can be used to extend the closing date more to situations where the delay was the result of a problem with the lender or closing attorney rather than the borrower.
In addition, the right to extend the closing date in the new contract expires once it is exercised. Therefore, the new language provides that “exercise of this right by either party shall cause the unilateral right to extend the closing date to terminate and no longer be a part of this Agreement”. To ensure that the parties have a full seven (7) days to resolve any problems caused by the exercise of the right to extend the contract, the extension period is set at “seven (7) days or such shorter period as may be agreed to by the parties in writing”. In this way, while the parties can mutually agree on a shorter time frame, neither party can cut off the other party’s right to extend the contract by exercising it first for a short period of time (for example, for one day).
4. Seller’s Contributions at Closing.
In the old version of the GAR Purchase and Sale Agreement, the Seller’s Contributions at Closing section was a subparagraph of the financing contingency. As such there was no place for a seller to make a contribution towards closing costs in an all cash transaction. This was changed in the new contract by making the Seller’s Contributions at Closing paragraph its own stand alone section. As a result, the seller can now make a contribution to the closing cost in both “all cash” transactions and transactions in which the buyer is obtaining mortgage financing.
5. Method of Payment.
The most significant change in the GAR Purchase and Sale Agreement was to the Method of Payment section. Under the old version of the GAR contract, the buyer had up until the date of closing to be approved for any loan to which the agreement was subject. This approach created numerous problems for sellers and REALTORS® when buyers who were initially pre-qualified or approved for a loan found out shortly before closing that the loan had been denied.
The consequences of buyers not obtaining or losing their financing fell squarely on the shoulders of the sellers under the old contract. This is because while the buyer received back his or her earnest money, the seller was often saddled with thousands of dollars of unrecoverable costs to pack up and move his or her home and/or purchase another property.
In an effort to solve this problem, the GAR Forms Committee modified the financing contingency so that the buyer now has a negotiated period of time, referred to as a Financing Contingency Period, to determine if he or she has the ability to obtain the loan(s) described in the contract. If the buyer does not have the ability to obtain the loan(s), the buyer must present to the seller a letter of loan denial (setting forth all of the reasons why the loan was denied) prior to the end of the Financing Contingency Period. If the buyer does not provide the seller with the required letter of loan denial, the loan is deemed approved and the financing contingency is removed from the contract.
This approach is similar to what many builder contracts already provide. While it should improve life immensely for sellers, it will definitely create some new issues for buyers. For example, if a lender verbally denies the loan but fails to timely provide the required letter of loan denial, the buyer is deemed to have the ability to obtain the loan. Similarly, if the lender neither approves nor denies the loan during the Financing Contingency Period pending the receipt of additional information from the buyer, the buyer is deemed to have the ability to obtain the loan and the financing contingency is terminated. Finally, if the lender approves the loan during the Financing Contingency Period but later denies the loan, the buyer will now be in breach of contract if the buyer fails to close on the purchase of the property.
Clearly, the new language creates significant disincentives for buyers to pursue mortgage financing from anyone other than a reputable mortgage lender. More than ever, buyer will need to work with lenders who deliver on their promises. More buyers will also likely start the loan approval process before they ever sign a contract to ensure that they know whether or not they can afford a property. Buyers are also likely to try to negotiate longer Financing Contingency Periods so that they have enough time to get letters of loan denial should that become necessary. For that matter, a buyer can effectively give themselves the same protection they have now by having the Financing Contingency Date expire on the date of closing.
Smart buyers will also likely select a Due Diligence Period in Paragraph 10 of the new contract that is equal to or longer than the Financing Contingency Period. In this way, if the buyer cannot get a needed letter of loan denial, the buyer can simply terminate the contract under the Due Diligence section of the contract. In many respects, the buyer does not need a financing contingency at all so long as the buyer has a due diligence period of sufficient length for the buyer to arrange for financing and do all necessary inspections.
Under the new financing contingency, the buyer is also not required to apply for a loan within a specific time frame, or for that matter, at all. This is because if the buyer does not produce a letter of loan denial, the buyer is deemed to have the ability to obtain the loan.
One point which should be emphasized is that just because the buyer is denied the loan within the Financing Contingency Period, does not necessarily mean that they buyer automatically gets back his or her earnest money. So, for example, if the basis for the loan denial is that the buyer lacks sufficient funds to close, the buyer would be in breach of the provision in the GAR contract because the buyer warranted that he or she had sufficient funds to close. In such a situation, the buyer would not be entitled to a return of his or her earnest money. This concept did not change from previous versions of the GAR contract.
The other major change to the financing contingency is that the contract now includes a place for the buyer to describe both a first and second mortgage being sought by the buyer. This change was made to reflect the growing reality that more buyers are seeking both first and second mortgages in order to purchase real property. The buyers’ ability to obtain a loan is then tied to whether he can obtain all of the loans described in the contract.
6. Closing Attorney Section.
The closing attorney section of the GAR Purchase and Sale Agreement was modified so that the parties can negotiate the selection of a closing attorney in both “all cash” transactions and transactions in which the buyer is seeking mortgage financing. The revised closing attorney section also includes a disclaimer that the closing attorney is representing the lender in a closing in which the buyer is seeking mortgage financing. Finally, this section of the GAR contract now includes a check box for the parties to negotiate who the closing attorney will represent in an “all cash” transaction.
7. Revised Inspection Section.
The inspection section has now been broken into three categories. In addition to the buyer’s traditional right to inspect the property, a new section has been added imposing a duty on the buyer to inspect the neighborhood. This section includes an acknowledgement by the buyer that he or she has had the opportunity to become acquainted with neighborhood conditions which could affect the property including such things as landfills, quarries, high voltage power lines, cemeteries, airports, prisons, stadiums, odor producing factories and crime.
8. Termite Inspection Is Now The Responsibility Of Buyer.
The other major change made to the GAR Purchase and Sale Agreement was to shift the responsibility for inspecting for termites and obtaining any Official Georgia Wood Infestation Report from the seller to the buyer. Termites are now treated like any other condition in the property for which the buyer has a right to inspect. The seller no longer has an obligation to provide the buyer with an Official Georgia Wood Infestation Report at the closing indicating that the property is free of any evidence of active infestation from termites and other wood destroying organisms. Instead, the contract now provides that “buyer shall be solely responsible for inspecting for any wood destroying organisms and obtaining an Official Georgia Wood Infestation Report that may be of interest to buyer or required by buyer’s mortgage lenders.” Buyers should therefore immediately determine if their mortgage lender will be requiring a “clean” Official Georgia Wood Infestation Report at closing. Similarly, just as the buyer normally arranges for a home inspection as soon as a property is put under contract, the buyer should now be encouraged to also arrange for a termite inspection of the property. If the inspection reveals termite infestation or damage, the buyer can, depending on the repair option selected by the buyer, request that it be treated or repaired. So, for example, if the contract provides for a due diligence period, and termites are discovered during the due diligence period, the buyer can seek to have the seller treat the same by timely submitting to the seller the GAR Amendment to Address Concern with Property form. Similarly, if the “Property Sold With Right to Request Repairs” section marked, the buyer can request that termite damage be treated and/or repaired as a Defect in the property. The term “Defects” in this section has been revised in the GAR contract to specifically include infestation and damage from termites and other wood destroying organisms.
9. Due Diligence Period
The Right to Terminate Period in the former GAR contract was renamed a “Due Diligence Period” in the new contract to make it consistent with the GAR Commercial Purchase and Sale Agreement (which uses that reference). This section also now includes a check-box where the buyer can warrant whether or not he or she has: a) other property under contract and b) the right to enter into other purchase contracts during the Due Diligence Period.
10. Lead-Based Paint Section Modified
Another major change to the GAR Purchase and Sale Agreement was in the area of lead-based paint. The previous GAR contract provided that the buyer would have a period of not less than 10 days during which the buyer could inspect for lead-based paint and lead-based paint hazards. This provision was somewhat confusing because the inspection right was not accompanied by a corresponding right to request repairs if lead-based paint or lead-based paint hazards were discovered. The new GAR Purchase and Sale Agreement includes an express waiver of all of the buyer’s rights under federal law to test for lead-based paint and/or lead-based paint hazards for 10 days from the binding agreement date and not be obligated under any purchase contract during this time period. Instead, lead-based paint and/or lead based paint hazards are treated like any other potentially adverse property condition that the buyer can address to the extent and for the length of time of any due diligence period or right to request repairs negotiated into the contract by the buyer.
The Seller’s Property Disclosure Statement was also modified to eliminate the lead-based paint disclosures required under feral law. These disclosures are now provided in an exhibit that must be attached to all contracts where the property was constructed prior to 1978. The Seller’s Property Disclosure Statement continues to include a question on whether the property was constructed prior to 1978. If the answer to this question is “yes” or “don’t know” the seller is instructed to attach a Lead-Based Paint Exhibit to the contract in which the appropriate disclosures are made.
11. Title
Two changes were made to the Title section (Paragraph 12) of the GAR Purchase and Sale Agreement that are worth noting. First, there is now a checkbox for the parties to indicate whether or not a survey is attached. Earlier versions of the GAR contract merely provided that, “If a survey is attached…” making it somewhat unclear from the face of the contract whether or not a survey was actually attached.
The second change was made in the Warranty of Title section, where the following sentence was added to the contract, “The deed of conveyance and owner’s affidavit in this transaction shall be prepared by the closing attorney referenced herein and the cost thereof shall be treated as a closing cost.” In many parts of Georgia, particularly outside of the metro Atlanta area, closing attorneys charge the seller a separate fee for the preparation of the deed of conveyance and owner’s affidavit. By making the cost of preparing these items a closing cost, the seller will not be responsible for the cost of preparing these items above and beyond the amount of the seller’s contributions at closing.
12. New Disclosure Added Regarding GAR Forms
A new disclosure has been added to all major GAR Forms to protect GAR from possible claims from users of the forms that they did not in some way meet their needs. The new disclaimer states that the forms are provided “as a courtesy to the parties”. It goes on to state that the forms are “not required to be used in any transaction, [and] may not fit the needs, goals and purposes of the parties…” This disclaimer language should hopefully make it clear that GAR is not guaranteeing the appropriateness of the forms in every (or for that matter any) real estate transaction. The disclaimer also provides that while the GAR forms can be altered or modified by the parties to a real estate transaction, at their own risk, the form “may not be reproduced with sections removed, altered or modified unless the changes are visible on the form itself or in a stipulation addendum exhibit or amendment thereto”. This change was made to try to make it clear that parties are not allowed to excise provisions from the GAR contract and then reproduce the form where the excised area might not be readily apparent to other parties using the form.
13. Miscellaneous Changes
Several changes were made to the GAR Purchase and Sale Agreement to address minor but occasionally frustrating situations. So, for example, a reference was added in paragraph 19(e) that “all references to time shall mean the time in Georgia”. This change was meant to eliminate any debate over which time applied when a party is temporarily located in a different time zone when some obligation under the contract is to be performed. Language was added to paragraph 19(h) that filling in the binding agreement date shall not be deemed a counteroffer.
14. Notice Section
Changes were also made to the notice section of the GAR Purchase and Sale Agreement. Specifically, e-mail was added as an acceptable means of giving notice. However, notice may only be sent by e-mail (and for that matter by FAX) to a listing or selling broker to the extent that a FAX number or e-mail address is provided in a contact information section that is part of the signature page of the GAR contract. If no FAX number or e-mail address is provided, then notice by that means is not permitted. So, for example, let’s assume that the selling broker knows the e-mail address of the listing broker, but the listing broker does not include his or her e-mail address on the signature page of the contract. In such an event, notice may not be sent to the listing broker by e-mail.
The “contact information section” is also now for the “listing broker/licensee” and the “selling broker/licensee”. Whether the FAX number or e-mail address of the broker or licensee of the broker is included is a matter for the parties to decide for themselves. This is different than in earlier versions of the contract where only the broker’s FAX number could be used in the contract.
Conclusion
Changes are continually being made to the GAR Forms to try to protect REALTORS®, fairly balance the rights of buyers and sellers and eliminate issues that could derail real estate transactions. Hopefully, the new GAR Purchase and Sale Agreement accomplish these goals.
Seth Weissman
Posted in Miscellaneous, Contracts | No Comments »
Monday, January 8th, 2007
The Georgia Association of Realtors, GAR, has made some really significant changes to their contract. I plan on writing a series of posts on the more significant items. This is the contract that most real estate deal are done with. One of the major responsibilities that an agent has is to make sure their clients complete the contract correctly in order to have a legally binding contract.
The biggest change to the contract, and I really like it, is the Financing Contingency Period. It used to be that contract was contingent on the financing all the way up until the day of closing. Many a deal has fallen apart because the loan was denied at the last minute. Sometimes buyers would get cold feet and get the lender to give them a loan denial letter in order to get out of the contract with their earnest money intact. Not any more.
Just like there is an inspection period after which you are buying it as-is, there is now a financing contingency period, after which you lose your earnest money if your loan gets turned down. You now will negotiate a period of time in which your financing contingency is good for. This is the only time where you can show that you have been denied for the loan and be able to get your earnest money back. So if your loan isn’t approved or still has some conditions to be met, you better be confident that it will be approved before closing or you risk losing your earnest money. You could always do this but it required the effort of writing it into a special stipulation.
I see this as a very good thing for everyone involved. It’s going to take more upfront planning and some quicker turn around times for buyers to meet the negotiated timelines. I see buyers making sure they are really preapproved before they negotiate a contract. If the appraisal is done after this time period, you better make sure that the contract is contingent on the home being appraised for at least the purchase price. Anything that the lender requires, the buyer is responsible for obtaining during this period, including the termite letter and flood certification. If that might be a problem, you need to address it upfront in a special stipulation. After a contract is negotiated, it takes the agreement from both parties to make changes to it.
It has usually been accepted that one needed the entire time to work out the loan details. Not too many sellers placed time limit demands for final approval of the buyers loan. If you did, it was a special stipulation that had to be added. Now that it is part of the regular contract that needs to be negotiated, I think a 10-14 day window is what will seem to be acceptable. Will lenders be able to get it done so quickly?
I think this will really hurt the mortgage brokers who don’t have in-house underwriters. I know as an agent I’m going to make darn certain my buyers know the risks involved if their loan isn’t denied in time. Their lender better let them know exactly what documents are needed and they better be able to get them quickly. Brokers who have to send out the package to an underwriter in another city will really be pressed for time.
One technical thing is that the denial must be for the loan that is described in the contract. If they apply for a different loan, they better make certain that the contract is amended to reflect this. Just another little detail that a good agent worth their commission will need to keep track of. Know the details or risk losing your earnest money.
Posted in Miscellaneous, Contracts | No Comments »
Wednesday, January 3rd, 2007
I saw Rocky Balboa, the movie, this Saturday and then saw a real life Rocky moment on Monday night when Boise State beat Oklahoma in the Fiesta Bowl. I love really good competitive sports because they bring out moments that test the character of the players involved. Many of those moments are analagous to things that test us in our ordinary lives.Rocky’s message was about how you pick yourself up and continue after you get knocked down in life over and over again. The trainer for Rocky’s challenger had a great line. Roughly, you don’t really know who you are and what you’re made of when life is easy and you are winning without really trying. You get to know your true character when you get hit so hard you can’t breathe and your opponent is relentless in their pursuit to knock you out. Do you have the courage to face the challenge and give it all you got or do you just give up?
Boise State took two big punches in the last two minutes of their game that should have put them out. They were the underdogs just like Rocky and could have walked away feeling good about playing pretty good against the traditional powerhouse Oklahoma. Instead, with one minute left, they picked themselves up and pulled out all the stops. On a fourth and 18 at the 50 yard line, they executed the most beautiful hook and ladder play that I have ever seen to send the game into overtime.
Oklahoma pounded them with a 25 yard touchdown run on their first play in overtime. Boise State fought back and scored their own touchdown. But instead of going for the easy kick to tie the game, they opted to try to win it all with a two point conversion. I loved it. All or nothing. Then they pull out a play I had only heard about but never had seen in a real game, the old statue of liberty play. It reminded me of the original Rocky when he waited until just the right moment to deliver his rib busting punch.
Then the player who scored the winning points went running over to the cheerleaders and proposed to his cheerleader girl friend. Can you say, YO, ADRIAN!!!!
Here’s a link to the video of the key moments at the end of the game. It doesn’t get any better than this.
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This is the map I created by copying and pasting together 90 pages from my map book. It is about four feet by 8 feet.
What do most people do when they see a listing without a picture. Most of the time they move on to the homes that have pictures. That’s what most real estate agents also do.
What's happening in the Atlanta real estate market? I'll tell you my humble opinion on things going on in my small part of the world. I'll let you know details about the subdivisions that I specialize in and details about the really nice homes that come on the market.
