- The Washington Times - Wednesday, November 15, 2006

Word on the street has it that while the market has slowed across the country, the most tedious task for agents these days is keeping the deal together once the buyer and seller have agreed to an offer.

During the not-so-distant seller’s market, if a buyer fell out of the transaction, no sellers worried. They would simply keep some or all of the buyer’s deposit funds, release the contract, take the next buyer in line and most likely get thousands of dollars more for the property now that it had aged on the market a few weeks longer.

Buyers now can do their own switching in place on the transaction to their benefit. Even with a contract in place, there’s nothing stopping them from looking around for yet another house and, if they see something they like, using one of several contract clauses to get out of the contract and into another house — and if it has seasoned long enough, for less money.

While we would all like to think that once everyone has signed a contract that it’s binding from the point of the signing, in real estate, such is not the case. Once you sign your name to the contract, there may be several points in the contract that allow one or both of the parties to get out of the agreement.

As you’re looking over the contract, note several paragraphs that should be in your agreement and make sure they get performed to protect yourself from a deal falling through the cracks.

One of those clauses is the financing contingency. You want to be sure that the buyer can actually perform on this one and the sooner the better. Look over the various aspects of this contingency — the deadline of when they are to apply, what kind of financing, interest rates and principal amounts.

There are various reasons why this contingency could damage the closing. Can the buyer qualify for the type of mortgage involved in the sale? Have they put down a certain mortgage interest rate or “market rate”?

A problem may arise if the rates change from the time the contract was written to the time the loan application is made.

If rates head upward, this could drop them out of qualifying for the loan amount. Of course, it would be best if the buyer would have applied for the mortgage before he’s even signed the contract.

Right behind this contingency is the appraisal. Make sure, as the seller, that you allow enough time for this appraisal to get done and then for the underwriting to approve the appraisal. Depending on your market area, 30 days should cover it.

Sometimes buyers are surprised when they get an appraisal listed on the property substantiating the offer price, but then have the appraisal thrown out by the underwriters.

This contingency can get pretty sticky for both the buyer and seller if home values are slipping. First of all, if the appraisal comes in less than the contract amount, someone has to make a new agreement on price or come up with more money.

For instance, if the contract is for $400,000, but the appraisal comes in at $385,000, there’s an instant shortfall in value of $15,000, and that could have several ramifications.

For one, the seller may be planning on that $15,000 to help the buyer with closing costs or to use it to purchase his next house. Meanwhile, the bank originally agreed to finance 80 percent of a property worth $400,000 — which would be $320,000.

Now the 80 percent loan-to-value will only allow a mortgage up to $308,000. Who’s going to come up with the additional $12,000?

Well, in a buyer’s market, this puts the seller over the barrel a lot more than the buyer. In essence, the buyer may need to be willing to cut the offer price by $15,000 and take the loss.

In addition, if the buyer still needs the closing costs, the seller may have to keep that money on the table to get the deal through.

Once the contract has been written, your real estate professional should be on top of the performance of the contract to ensure all points from contract to settlement are followed through and completed.

M. Anthony Carr has written about real estate since 1989. He is the author of “Real Estate Investing Made Simple.” Post questions or comments at his Web log (https://commonsenserealestate.blogspot.com).


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