Monday, March 17, 2014

7 Ways to Avoid Your Home Sales Contract from Falling Apart

You prepared your house for the market, listed your house with a Realtor, received an offer, negotiated the sale and agreed on terms- you're now under contract.  Chances are, you've just contracted to sell your primary residence and in order to move on, this deal has to close, and close on time.  Maybe you've made an offer on your replacement home and in order to close that deal, your current house has to close.  A lot is riding on all of this working out for you!  There are several ways your contract may fall through.  Following are some ways to help avoid a failed contract.

1.  Shorten the Due Diligence (aka "FREE LOOK") period.  In Atlanta, most of our Georgia Association of Realtors contracts are now "Option Contracts" with a due diligence period.  The contract states that the Buyer has made an option to purchase your house and has a pre-determined (negotiated by you and the Buyer) due diligence period.  At the end of this period (typically between 7-14 days) the Buyer will either exercise their option to purchase your house or void the agreement with no penalty or obligation to perform. The Buyer can walk away for any or no reason- leaving you vulnerable during this time frame.  My best advice is to negotiate the shortest time frame possible so that if the deal falls through, you haven't lost valuable time on the market and you can move forward to your next purchase faster and more confidently.

2.  Get a Strong Earnest Money Payment.  What is strong??  It's up to you to decide and negotiate the Earnest Money with the advice of your Realtor.  I would consider strong to mean enough money that if the Buyer defaults, you were adequately compensated for losing time on the market.  And strong from a Buyer's prospective is enough Earnest Money that they would be unwilling to default on their commitment to purchase.   

3.  Minimize Buyer contingencies.  The Buyer wants as many ways to get out of the contract as possible to protect their interests. Typically, besides the due diligence period just mentioned, the Buyer wants a Financing Contingency and an Appraisal Contingency.  If the Buyer has their current house for sale and has accepted a contract to sell, they may want a Contingency to Sell and Close on their current property.  If you have a hot property that received multiple offers, you're in the driver's seat here.  You may be able to negotiate that there is no finance or appraisal contingency.   I would not advise you to take an offer contingent upon the Buyer selling their property UNLESS you can verify that there property is already under contract with a pre-approved Buyer and that they are already past the due diligence period in their contract.

4.  Make Sure the Buyer is Pre- Approved!  The Buyer should be PRE-APPROVED for the mortgage based on the amount they are to borrow to buy your house.  Don't take an offer without verifying the Buyer has already submitted loan application and that their credit has been checked and that their employment and income is verified and they're pre-approved.  If the Buyer is confident that they will get the loan, they may be willing to not have a financing contingency (meaning they guarantee they can close- or they would forfeit earnest money).

5.  Be Willing to Make Repairs.  During the due diligence period, the Buyer will likely have a home inspection.  If there are repairs needed that cause the Buyer concerns, he will submit an Amendment to Address Concerns, which asks you to make specific repairs.  Be prepared for this before it comes up.  If you know there may be expensive repairs that may come up (ex: roof replacement, HVAC system aged at or near life expectancy, drainage issue, water intrusion in crawl space or basement), get estimates for these repairs before you even list the house for sale.  This way, you will know how much a big repair may cost and you are more prepared to answer the Buyer's request if it comes up.  Knowledge really is power, and the more prepared you are with estimates, the more control you may have to keep the deal together with regards to making repairs.  By the way, in my experience, the number one reason a deal falls through based on the inspection is water in the crawl space or basement.

6.  Have a VALID Contract.  Most people (and many agents) don't know that if your contract does not have a valid legal description of the property in the Purchase Agreement, there is not a valid contract. For this reason, I always attach a full legal description (usually found on the warranty deed) to the Purchase Agreement as an Exhibit- never take a chance by filling in the legal description because a typo or incomplete legal description could completely invalidate the contract. If a Buyer is trying to get out of a contract to purchase and goes to an attorney for advice, chances are the attorney will first check to see if there is a correct and valid legal description in the contract.  Also, if there is vagueness to the contract, it could be void.  An example would be that the contract has a financing contingency.  The finance contingency must state the loan amount, term, interest rate, rate type and source of loan.  If the interest rate is filled in as "to be determined" or "market rate", the vagueness would make the entire contract void.  

7.  Establish Good Will and a Win-Win Environment.  While you are negotiating your contract up front, if you approach with a mindset of establishing a win-win environment, your deal will be much more likely not to fall apart.  Through all phases of the contract, if you maintain an "everybody wins" attitude, your transaction will be much smoother due to the good will you've established up front.  You can absolutely negotiate the best possible terms for yourself and still maintain a win-win envrionment!   

-Jackson  Bass, Keller Williams Realty Buckhead

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