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NEGOTIATING A BETTER REAL ESTATE CONTRACT - SELLER CONSIDERATIONS part IV

These days, it (still) is really very hard to find Buyers who are willing to submit a written purchase offer.
and perhaps a somewhat less obvious truth:
That's just half the battle.
Its just as hard (harder?) to get contracts to close. Doubt me on that one? Ask any realtor or real estate lawyer, mortgage broker or loan officer. Ask at the title companies too. They will all likely sigh heavy and confirm it. A great many contract are taken that never close. Even the contracts that can and do close have their problems.

However, with care and caution, savvy Sellers, and the real estate agents & attorneys that represent them, can minimize the risks of delay, and the disappointment of failed closings.

This series explores some steps proactive sellers can take to improve the odds

Tip #4
THE TERMS OF THE MORTGAGE CONTINGENCY SET THE TONE OF THE TRANSACTION - SET REALISTIC EXPECTATIONS

When I review a new real estate contract, one of the very first things I do is look the mortgage contingency over. It is a pretty good litmus test to show me how serious the Buyer is about making a deal and how realistic every one's expectations are going to be. There is often a shocking disconnect between the mortgage terms in a buyer's offers and the reality of the current marketplace. Closings are routinely delayed (or cancelled) as a result of last minute disclosures that a loan has not been approved, or because a lender is not ready to close on the appointed date.

Sellers who are proactive on the buyer mortgage financing are having much better success in getting loans closed on time, and with a minimal fussing and last minute aggravation.

The mortgage contingency is allows the Buyer to make a contract conditional - the deal will only go forward if that Buyer can get mortgage financing on the terms expressed in the contingency. This is, quite understandably, an important protection for Buyers. Few can afford to make an all cash purchase. Precious few want to take the risk of being obligated to close if there is uncertainty about the mortgage.

Buyers can specify (a) the amount of the desired loan; (b) the repayment period; (c) the maximum initial interest; (d) the points/origination fees that he will accept; (e) the type of loan (fixed or adjustable rate; FHA, VA, or Conventional); and (f) the length of time necessary to obtain that loan. If a Buyer cannot secure the specified loan, within the specified time period, she may be able to cancel the deal.

Sellers must allow for a mortgage financing contingency in order to make a deal, but setting contract terms that are not realistic only causes trouble and frustrations.

Common problems relating to these terms include:
  • stated interest rates that are at or below current market rates. What good is it to accept a contract that requires a 4.75% loan when current market pricing is 50 more basis points higher?
  • contingency expiration dates that are (obviously) too short. Most of the major banks that engage in direct retail lending (Chase, Bank of America, National City, etc) are taking 30-45-60 days to approve loan applications. Mortgage brokers that have to underwrite loans have long processing times as well. FHA loans, "non-warrantable" Condominiums, new construction? Same deal. So what is gained by accepting an offer that sets the contingency date as 10 days from contract acceptance? The Buyer is going to (necessarily) ask to extend the deadline (then again, then again) for the month or two everyone knows it is going to take to gain the loan approval.
  • contingency expiration dates that are on (or after) the closing date. If Sellers are willing to take their property off the market and close only if a Buyer can get a loan, then this isn't a real concern. In the real world however, Sellers want some assurance at some point that the contract is going to close. Sellers rely on that assurance to finalize their move out plans and to firm up their purchase closings or rental arrangements. If a loan contingency date goes to deep into the closing time line, Sellers take too much risk and loose any reasonable assurance of a closing.
  • closing cost credits or possession arrangements that exceed loan guidelines. Sellers seeking to make deals quite often agree to pay some Buyer closing costs or credit for some other consideration. These concessions become integral parts of the deal. But again, why agree to these types of monetary adjustments if the Buyer's lender will not allow them? Too often, unwary Buyers and Sellers do not learn of a lender's rejection of credits until they arrive at the closing table. At that point, there are NO easy work-arounds. No one likes these types of surprises. They are much better addressed during the contract formation period.
There is a seductive temptation to accept mortgage contingency terms that seem "too good to be true." Very often they are. After all, the burden falls on the Buyer to "watch the clock" and to either get a lender to meet a deadline or to ask for appropriate extensions. More sober and realistic contingency terms seem far more preferable. Every time a Buyer must ask to extend a deadline a Seller must expend time and effort to respond. Every time a contingency deadline is pushed back, that Seller must take on additional risk - closer to an impending closing date - that the deal will not come together. The longer the contingency remains open, the longer the property stays off market, and the greater the likelihood of a lost opportunity to find a more qualified Buyer.

Prudence dictates a realistic evaluation of any proposed loan contingency. Ask me how I can help you undertake that evaluation.

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