Real Estate Contract Contingencies

Contingencies

As we move into a market where buyers have more influence in a negotiation, let’s look at how contingencies are handled in a more typical environment.
In a seller's market most sellers would not accept the contingency that the buyer must sell their home in order to purchase the new one. A potential buyer would be expected to already have their home listed with an agent and, ideally, have an accepted offer on their home.
Other contingencies that buyers previously had to forego are becoming more common again. For example, a buyer may make their purchase contingent upon their capacity to obtain financing. A buyer may also want to predicate his offer on the home appraising at or above the sales price. Since the appraiser is hired by the lender and is independent of the actual transaction, this is not an unusual request.
Most other types of legal contracts are fixed at the time of offer and acceptance. Both parties are expected to fulfill their obligations and if either attempts to renegotiate any point, the other party can withdraw.
Real estate contracts differ in that they contain clauses that allow renegotiation within limited areas. For example, a contract may require a buyer to get a home inspection within fourteen days. The buyer is allowed a certain amount of time to review the inspection and request the repair of any noted deficiencies. At this point the buyer and seller renegotiate that aspect of the agreement. The seller then decides to make the repairs or not. During this process the buyer must decide whether it is worth losing the house over the issue or not, and the seller must decide whether it is worth losing the buyer and putting the home back on the market.
Contingencies are a normal part of a real estate transaction, but only in areas specifically noted in the agreement. An informed reading of the contract will allow the best decision at each point in the negotiation.

Improving Home Showings

Simple ways to improve a home showing

As we move into the Spring selling season here are some things to consider when preparing a home for sale. Critically view your home’s curbside appeal. The potential buyer’s first impression is of key importance, as the decision to purchase comes from the ability of the buyers to envision themselves living in the home. Any apparent, even minor, defect will distract the buyer from this idea. Sprucing up the landscape, especially in the front yard, is fairly easy and inexpensive. Add colorful and flowering plants. Water and fertilize grass well so that it is green and lush. Be sure bushes, trees and grass are well trimmed.
The front door should be in excellent condition. This is a home’s primary symbol; typically it reflects the home’s general condition and leaves an impression that can affect one’s experience in viewing the rest of the house. Give both the interior and exterior of the home a coat of paint wherever it is needed. Keep adjoining rooms in the same color palette to make the home appear larger and flow better. Hire a professional to paint windows and any other details. Repair leaky faucets, loose knobs and handles, crooked cabinet doors; anything that gives the wrong impression of the home’s condition. Install new light switch covers, especially in high traffic areas. Make sure closets, shelves and counters are as neat and uncluttered as possible. Remove all objects or papers that make a room appear disorderly.
Edit extraneous furniture and accessories, including family photos. If needed, use slipcovers to create a more unified space. Generally the emptier a room is, the more spacious it looks.
When the property is to be shown, be sure to open all blinds and drapes to brighten the rooms. If necessary, leave lights on in darker areas. Attention to these details before selling can substantially increase the value and limit the amount of time your home is on the market.

Cost vs Value / 2005

What Renovations Add Value at Resale?

The amount that a remodeling project adds to the sales price depends on the condition of the rest of the house as well as the value and condition of comparable homes nearby. In some cases, the value of a remodel at resale is more than 100 percent of its cost. This generally happens in markets where property values are rising rapidly, but it can also occur when buyers regard certain types of amenities as standard for the area. For example, in a neighborhood where most homes have an updated kitchen, remodeling may well increase the value of the home beyond the cost of construction. Conversely, having an outdated kitchen in this case could cause the home to sit on the market for longer and eventually sell for less than similar homes in the area.
Four renovations produce the greatest return in our region. Two projects, siding and window replacement, reflect the importance placed on appearance and efficiency; the others, kitchen and bath renovations, are consistent performers in almost all markets. In the eastern U.S. updating a 200 square foot kitchen, including new countertops, cooktop and wall oven but replacing only the cabinet fronts costs $15,172 on average and recoups 100.9% of this when the house is sold. Improving an outdated bathroom including replacing fixtures, a tub with ceramic tile surround, standard toilet, solid surface counter with double sink, recessed medicine cabinet with light, ceramic tile floor, and vinyl wallpaper will run $10,978 on average and add 104.4% at resale. Replacing 1,250 square feet of existing siding with new vinyl siding, including all trim will cost $7190 and recoup 103.7%. Replacement of 10 existing 3-by-5-foot double-hung windows without disturbing the interior trim will run $9831 and will recoup 90.4% of it’s value at resale.

Renovations can be a smart investment, but ultimately the best reason for a remodel is to enjoy the improvement of your home. If you would like a copy of the complete 2005 Cost vs. Value Report, please send an e-mail to sean@smre.net.

Disclosure Update

Recent Disclosure Changes for Maryland Sellers

For many years, sellers of single family residential property could either fully disclose known conditions and defects in their house, or they could opt to disclaim disclosure. In other words, sellers could advise their prospective buyers, in writing, that the "owner of the real property ... makes no representations or warranties as to the condition of the real property ... and the purchaser will be receiving the property 'as is', with all defects which may exist." Most chose to disclaim and recently, with situations involving competing offers, they have been able to turn down contracts with contingencies for home inspections.
As of October 1st, Maryland sellers must now disclose actual knowledge of any latent defect. The new law defines a latent defect as a material defect in a property, or an improvement to a property, that a buyer (or home inspector) would not reasonably be expected to ascertain or observe by a careful visual inspection and that would pose a direct threat to the health or safety of the buyer or a person living in the property. The law does not stipulate that a seller must investigate whether there are problems, pay for repairs or reveal everything about the condition of their house.
Additionally, if there is a real estate broker or agent involved in the transaction, and if he has personal knowledge of any latent defects, he is legally obligated to disclose those defects to the potential purchaser, regardless of whether the seller discloses or disclaims. The agent or broker cannot assist in fraud.
There are several exemptions to the new disclosure requirement. For example, new homes that have never been occupied (or for which a certificate of occupancy has been issued within one year before a sales contract is entered into) are not required to provide disclosures.
Additionally, if a trust or fiduciary party is involved in the administration of an estate, no disclosures are required.
There is a growing body of law throughout the country relating to disclosure requirements. As we emerge from a time when conventional wisdom held that the buyer should always beware, seller disclosure is becoming an important part of any real estate transaction.
Sellers should not be afraid to disclose known problems in their house. In my opinion it is better to disclose at time of listing, rather than be sued by a buyer after discovering not only that there are defects in the property, but that the seller knew, or even should have known, of before the sale.
I believe it is in the sellers best interest to tell the truth about the condition of their house, especially in a market that it is likely to sell in anyway.
This article is for informational purposes only and should not be construed as legal advice. Seek professional legal counsel if you have any questions regarding this matter. A copy of the new disclosure form can be found at: http://www.dllr.state.md.us/forms/default.htm - re.

Real Estate Bubble

THE GREAT REAL ESTATE CRASH OF 2005?

At the end of summer, areas of the local real estate market quietly shifted to one that is much more friendly to the buyer. Listings are staying on the market longer allowing for an inventory to accumulate. Additionally, typical contract contingencies that sellers had not seen in recent years are becoming part of the sale.

In my opinion the reporting on this subject has been exaggerated and alarmist. Though the run-up in prices has been extreme in some areas, economic fundamentals are still strong. Price stagnation is not an emergency and a respite in unsustainable increases is not a disaster.

The most likely future for housing is a soft landing. Although prices may decline in a few overheated markets, in most areas home prices will continue to rise, albeit at a modest, more sustainable pace than the past few years.

Take Las Vegas. The city was at the crest of the housing market two years ago, experiencing 52 % annual price appreciation. Price growth eased to 30 % last year, and in mid-2005 it stands at 15 %. That is a balloon leaking air, not popping.

This trend continues in other parts of the country. The D.C. area added 110,000 jobs over the past two years but only 57,000 new homes, keeping demand ahead of supply. With mortgage rates inching up, price appreciation is expected to slow to 20 from 10 % before settling in the 4 to 6 % range for the remainder of the decade.

The widely held comparison to the “dot com” bubble is not valid because the circumstance simply does not play out the same way. A large portion of residential real estate in this country is owner occupied and even if prices begin to fall a majority are not going to sell off their homes in a panic. For the most part, they will continue to live there and ride out an adjustment in the market.

In the long term things look very good: According to new studies from the Brookings Institution and VA. Tech, in the next 25 years the U.S. will need to build 200 billion square feet of homes, offices, factories and other structures to accommodate 70 million more people and to replace homes and offices erased by everything from natural disasters like Hurricane Katrina to plain old obsolescence. Researchers estimate that this massive build out will add up to a $25 trillion development market by 2030, more than twice the size of the entire U.S. economy today. Just something to consider the next time you notice a housing bubble headline.

Tax Benefits

Tax benefits of home ownership:

Most homeowners are aware that mortgage interest and real estate taxes are deductible. To claim these, as well as others discussed here, you must itemize on Schedule A, form 1040 (and under IRS rules, if you itemize you are not entitled to the standard deduction). If you purchased or sold a home in 2005 here are some guidelines for you to become familiar with.

You should have received a statement from your lender by the end of January indicating the interest you paid during the year. If your home loan is with a private party you may still deduct the interest as long as the loan is secured by your home. You can deduct a late payment or pre-payment charge as long as the charge was not for a specific service received in connection with your mortgage. You may also deduct any points you paid, except in refinances or second homes, if you meet certain requirements. Real estate taxes, typically made by your lender from the escrow account, are entirely deductible.

Save receipts and records for all improvements you make to your home. You cannot deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home. This serves to reduce any potential taxable gain that you may have from the sale of your home. Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if have lived in the home as your principal residence for two out of the last five years.

The following are not deductible: homeowner’s, fire, title or mortgage insurance premiums; principal mortgage payments, settlement costs or HOA dues.

Take a copy of your closing statement and any other expenses that might apply to an experienced accountant so they can help separate deductions from costs and eliminate non-deductible items.