Have You Tried Hiring an

Appraiser? The trouble with hiring an appraiser is that it usually takes too much time and is too expensive (typically $150 to $300). But if you have the time and want a professionally acquired figure for the true market value of the property, you can call in an appraiser. And if the

appraisal comes in low, it can provide ammunition to blast the seller down from a high asking price. Appraisers usually work on a fee basis for lenders. Chances are that if you’re going to get a mortgage on the property, you’ll need an appraisal anyway. This way, you’ll just get it sooner. However, not all appraisers are approved by every lender. If you intend to save money on an appraisal by using it for both setting the price and obtaining a mortgage, be sure you know in advance which appraiser your lender uses. Also, cut a deal with the appraiser so you don’t get charged twice. Finally, remember that even if you ultimately don’t purchase the property, you’re still liable for the cost of the appraisal. Appraisers can be recommended by lenders. They are also listed in the yellow pages of your phone directory. Those who have MAI (American Institute of Real Estate Appraisers) or SREA (Society of Real Estate Appraisers) designations are members of professional appraisal organizations and have usually completed extensive courses in appraising.

Have You Tried an Appraisal Offer? A daring approach is to make an offer with the price contingent upon an appraisal. In other words, you’ll agree to accept whatever the appraiser says the property is worth if the seller will likewise accept it. (Usually there are “outs” included, which provide that if the price is above a certain point, you won’t accept or if it’s below a certain point, the seller doesn’t have to go through with it.) An offer contingent on appraisal (described above) is sometimes done with investment properties, but rarely with houses. Nevertheless, if you have a seller who’s convinced that the sales price is right and won’t budge, it’s another alternative. Just be sure that you agree in advance on who the appraiser is and who is to pay the appraisal fee.

What You Should Worry About in the Purchase Agreement The whole process of buying a home is defined by the purchase agreement (also sometimes called the “sales offer” or “deposit receipt”). It’s the governing document of the transaction. Once your offer is accepted, it becomes what ultimately determines how the rest of the sale is handled, what you get, for how much money, and on what terms.

How We Got to Today’s Purchase Agreements In the old days in real estate, the sales agreement was usually just one page long. It had very little printed material and was composed mostly of empty spaces that the agent filled out. That has changed dramatically. Over the years dissatisfied buyers and sellers (a small minority, but with important implications) have gone to court, fighting over various issues such as contingencies, deposits, and damages. What they discovered was that the sales agreement, drawn up not by an attorney but by a real estate agent, might not hold up. In fact, in some cases the agreement was downright defective. This resulted in additional suits, sometimes against agents, almost all of whom now carry a form of malpractice or errors and omissions insurance.

It also resulted in a new kind of sales agreement. The new agreement is usually created by attorneys and is frequently many pages long. Almost all of it is printed out the agent typically only checks boxes or fills in dollar amounts. In fact, there are very few places where the agent (or you) even have the opportunity to write anything new. The whole emphasis is on seeing to it that relatively little can be added or changed for fear that it may void or weaken the agreement.

Because the sales agreement is intended to be a legally binding document, you should have your real estate attorney check it over and explain the full ramifications of it to you before you sign it. In addition to legal considerations, which you should pursue with your attorney, there are important practical issues in the purchase agreement that involve the kind of a deal you’re going to get. These typically include the following areas: (If yours does not cover these areas, you should ask your agent or attorney why it does not?)

Practical Areas Your Purchase Agreement Should Cover  Price, down payment, and deposit  Specific terms for all financing  Street improvements or bonds (if any, who pays for them)  When you will be given occupancy?  How long does the seller have to accept the offer?  The term of the escrow (how long it will be open)  How you will take title (tenants in common, joint tenancy, community property, and so on; see your lawyer, since there are important tax and legal ramifications for how you take title)  Liquidated damages and arbitration in case of disputes  Any personal property involved

Foreign tax withholding (applies if the seller is a foreigner)  When and how the sellers will give you a disclosure statement about the property  Seller’s warranties  When and how you’ll be able to conduct a professional inspection  When and how a termite report will be issued  If soil or geological tests (found in areas with earthquakes or other soil problems) will be conducted)  If there are concerns about flood or water hazards (noting if the property is in any flood hazard area)  Other disclosures, such as zoning problems (indicating if the property is in a special zone, such as a “coastal zone,” which could affect your ability to build or add on)  If you get a Home Protection Plan (which pays for damage or problems with the heating, plumbing, electrical, and other systems, and who pays for it)  Energy retrofit disclosure procedures (local or state ordinances, for example, sometimes require additional insulation to be placed in the house when the property is sold)  How pro-rations will be handled  Other contingencies involved in the sale Many of the areas covered by the sales agreement, such as price, are obvious. Others are discussed in different sections of this article. Below, however, we’re going to look at some selected areas of a typical sales agreement that usually are of particular interest to buyers.

How Big a Deposit Should I

Give? Once you’ve settled on the price, the next consideration for most buyers is the deposit. The deposit is money that you put up at the time you make an offer on a piece of property to show that you are in earnest about buying it. (You’re putting your money where your mouth is, so to speak.) Hence the deposit is actually “earnest money.” It is supposed to demonstrate to the seller that your offer isn’t capricious.

An offer can be made without a deposit. However, a seller is less likely to accept it. After all, without a deposit you have very little to lose by not following through on the deal. Some agents will insist that you put up a big deposit. They argue that this will help convince the seller to accept your offer. While there is a germ of truth here, there is also a lot of chaff, as we’ll see shortly. You can offer any amount as a deposit.

Today, a good agent may suggest you simply put up $1000 to $10,000 “to make the offer official.” Of course, that same agent may insist that you be willing to increase that offer substantially once all contingencies have been removed. Agents often suggest that you offer 5 percent of the purchase price. On a $100,000 property that’s $5000. But on a $500,000 property, it’s $25,000. To my thinking, in today’s market any initial deposit of more than $5000, or $10,000 for a very expensive home, is a waste. You’re simply putting your money unnecessarily at risk. The reason is that, unlike in the past, today’s deals hinge on all sorts of contingencies. For example, the deal is rarely solid until you’ve approved a professional inspection report and the seller’s disclosures. If these contingencies aren’t removed, the deal doesn’t go forward and your deposit is normally returned. Thus, a large deposit today doesn’t mean what it used to. It won’t impress the seller’s agent. And it won’t impress a sharp seller. (They would be more impressed by a solid pre-approval letter from a lender.)

No matter how likely it is that your deposit will be returned, any money you put up is at risk. Therefore, it’s to your advantage to put as little at risk as possible. Remember, you can agree to add to the deposit later, after you’ve removed the contingencies.

Sellers may demand in the purchase agreement that once the offer has been accepted and you’ve had a chance to inspect and approve the property and disclosures (and perhaps once financing has been arranged), you will put up an additional amount of money in the deposit. This could be a substantial increase. Increasing the deposit has two important effects. It assures the seller that you are serious (in earnest) about completing the transaction. And second, it means that you might lose your deposit, since you’ve already cleared the contingencies that might otherwise allow you to gracefully get it back. You won’t want to increase your deposit unless and until you’re sure you want to and are able to go through with the purchase. On the other hand, refusing to increase your deposit, as agreed to in the purchase offer, could nix the deal.

Must a Deposit Be in Cash? A deposit doesn’t necessarily have to be in the form of cash. It can be a promissory note or a check that all parties agree not to cash or even personal property such as the title to a car or boat. Cash (cashier’s check), however, talks the loudest when you’re trying to convince a seller to accept an offer. Sometimes sellers will specify in a listing agreement that they will accept no offers with less than, for example, a $5000 cash deposit. Remember, however, everything is negotiable. You can always offer a smaller deposit in a different form. However, if the seller is demanding a $5000 cash deposit, the agent may not be required to submit lesser offers, depending on how the listing agreement was signed. Most agents, however, will submit any and all offers.

Will I Get My Deposit Back? At this point, I’m sure some readers are wondering, “What’s the big deal, anyway? Why not put up a bigger deposit?” Too often buyers simply assume that everything is bound to turn out okay. If the deal sours, they’ll get their money back. In most cases, this in fact is the way it does turn out. But not always. Sometimes when things go bad, they can go bad very quickly and very badly, particularly in terms of the deposit.

There are at least two problem areas you should know about: 1.)Who gets the deposit? 2.) How do you get it back if the deal falls through?

Who Holds the Deposit? The seller is entitled to the deposit. However, the seller is the last person in the world you want to give the deposit to. The seller might immediately spend the money, then later on, if the deal falls through, might not be able to refund it to you, even if you’re entitled to get it back. It could require the services of an attorney and a lawsuit to secure the return of the deposit from the seller, and that could be very costly. In other words, giving the deposit to the seller could be like dropping it down a deep hole. You want the deposit to go to a neutral party who will not frivolously spend the money, but who will hold it and have it on hand to pay you back, if necessary. The first most likely candidate here is the agent.

Real estate agents are required to maintain trust accounts for any money they receive. In other words, they can’t commingle (mix) your money with their own, but must hold it in a separate account in trust for you. This is to keep them from spending your money. While that sounds safe, the problem is that, in theory, the deposit belongs to the seller and if the seller demands it, the seller’s agent is supposed to hand the deposit over. Most agents, however, are as wary of the seller as you are and will do everything possible to hold the money in trust until the deal closes.

In many states the most common reason for real estate license suspension or revocation is the commingling (mixing) of the agent’s funds with yours. It’s not that agents are all that dishonest; it’s that they are sometimes lousy accountants. To ensure that they don’t lose their license, agents will almost always bend over backwards to repay any money stuck in their trust account. Further, many states have special recovery funds. If you lose money through the carelessness (or fraud) of an agent, you may be able to recover it from the state, even though it could take years. Check with your state’s department of real estate.

Today, many good agents realize that accepting a check for a deposit puts them at great risk. If the deal doesn’t go through, both the buyer and the seller may demand the money, leaving the agent in the middle. To avoid this, many agents suggest you write the deposit check to an escrow company that you agree in advance will handle the escrow of the property if and when the seller accepts. In other words, give the deposit to a neutral party. Sound good? There is also peril here. If after the seller accepts, the deal still falls apart, even through no fault of your own, it might be hard to get the deposit back even from a neutral escrow. The reason is that escrows simply handle the documents and funds in a transaction. In order for an escrow to operate, both buyer and seller must agree to the escrow’s instructions. If, for example, you tell the escrow to return your money and the seller tells the escrow to hold onto it, there’s no agreement. And your money remains in limbo. This affects you more than the seller. After all, it’s your money. Sometimes in this situation sellers are content to let the money sit in an inactive escrow for months just to “punish” a buyer for a deal that falls through. Fortunately, calmer minds usually prevail and sellers eventually will agree to release your funds, once they become convinced that there’s no way they can get the money and that to continue to hold it might result in a lawsuit against them.

Making your check payable to an escrow does ensure that it goes to a neutral party. It does not, however, ensure that you’ll get it back quickly, easily, or at all.

What must be obvious by now is that putting up a deposit is sometimes a tricky thing that can have significant consequences. How do you get the deposit back, for example, if the deal doesn’t go through? There are at least two considerations here: First, why didn’t the deal go through? If it’s your fault, you may not be entitled to a return of the deposit. Second, if you are entitled to a return, how do you get the funds transferred back to you? Operating on the principle that the time to consult an attorney is before you need one, I advise you to seek the services of a professional real estate lawyer at this juncture. Chances are you’re going to need one anyway before the deal is concluded, and by bringing the lawyer in at an early stage, you could avoid much grief. (Most lawyers who deal in real estate have set fees that are much lower than for general legal work. Ask the lawyer in advance what the fees are.)