Erin Finke of The Yi Team at Fairway Independent Mortgage Corp and Alexandra Ross of Ross Residential RE/MAX are talking about the safety nets and contract contingencies that you can build in to a home offer to protect you whether you are the buyer or the seller.
Scroll down for the transcript and links.
We are back! I am eating so I’m so sorry if you hear me chomping.
Yesterday was Memorial Day. Honestly I don’t get why you say “Happy” Memorial Day. Which is a day to remember those who served. So how to me that is not “happy”.
To me it’s “Honorable” Memorial Day but not “Happy”.
It’s an “Honorable Memorial Day”, not “Happy”.
Why do you say it, though?
I think it’s just a way, a salutation to acknowledge the holiday. Kind of like saying “Happy Labor Day”, “Happy Veterans Day”.
Veterans Day is celebrated for those who are still alive.
Memorial Day is for those who have passed. If anyone is listening, can you explain it to me?
There is Chong. Chong is looking through the glass of the conference room again..
Hi, we are recording. We have a guest speaker so make sure its ..we’re live right now.
Hey! How’s everybody doing?
Do you know why they say “Happy Memorial Day”? To me it’s not happy. Shouldn’t it be “Honorable Memorial Day”?
I agree with you.
Do you know the origin of why they say “Happy Memorial Day”?
I don’t. I’m old, but I’m not that old.
I didn’t think you were that old!
I just thought of something when Chong walked in here. My husband loves trivia and he said to me the other day, did you know that in Korea, that when you are born, you are one year old?
I am Korean.
I know you are.
So that would make me 63. Just kidding.
No it wouldn’t.
Isn’t the Korean calendar different than the Eastern?
So when you were born were you one? And then you turned your age…I don’t know. Dammit. I’m going to go back and figure it out.
I’ll ask Chong. He’ll know because he’s Korean.
I am Korean, kinda. No, we actually, we the Koreans. we use a different calendar.
Did you not know this? Because their birthday isn’t the same as the birthday they celebrate in Korea. I know this with your sister.
It kind of changes.
So, when I came over here, my birthday isn’t really June 27th, in case anyone wants to give me any treats.
But it’s really a different date. I don’t remember exactly what date it is. But when we came over, the date on my birth certificate is June 27th. So that’s how it just was.
So you could be older than you know?
It’s like leap year.
But the opposite.
But it’s like 20 years less. So I’m really 30.
Haha! Your’e a time traveler!
Yeah, it’s really weird. I don’t know about that one thing, I have to ask my sister.
Derek loves to find these random facts that he finds on the internet. If he found it, I thought well, then it has to be true. I thought, I’ll have to ask Chong. He’ll know.
That’s right. I’m all knowing. All knowing that I know nothing!
Do you want to talk about….I’m eating, everyone knows I’m eating. its fine.
We’re talking about contract contingencies today.
Okay that’s the topic, we haven’t said it yet.
Nice segue Erin.
Oh, hi you guys. We’re talking about contract contingencies.
Ok, I’m going to go then. I need to go talk to a good client of ours. and make sure that they’re taken care of because that’s what we do. And Alex Puderbaugh Ross, because you are married.
Wow, that’s like the 2nd person to say that in a week.
You didn’t let me finish. Puderbaugh Ross. It’s Alex Ross everyone.
I’m not a law firm, I dropped that.
Finest realtor that I know. And I want you to know that it’s a pleasure to spend 37 seconds with you. And goodbye everybody. Chong out
bye. This is why I think we need a red light, or a sign, that says “on air”.
You’re welcome for us wasting however many minutes of your time.
Last week we talked about deposits. This week we’re going to talk about contract contingencies. We’re only going to touch on 3 or 4 of them because there are a lot of contract contingencies that are available. It also depends on if you’re doing residential, commercial, land, leasing, whatever it may be.
So, we’ll start with the most common contract contingencies which are financing, appraisal, home inspection. Those are the top three. And then next one would be home sale contingency after that. So that makes four. There are more we could bore you with . It’s three pages worth.
Can you make your own contingency?
Yes, you actually can too. You can make, for example, on commercial or, we’re doing one right now where they’re buying the lot next door which has a house on it. But it’s contingent upon permits. So you can make anything contingent.
That makes sense. You need a permit for them to do. The point is that the seller and the buyer have to agree on the contingency. That’s what a contract is. It’s where two parties are agreeing to terms. That is what a contract is. And what’s in the contract, there are layers of different agreements, and one section is contingencies.
So if we’re talking about real estate for the purposes of living in it, in a residential contract there are at least two pages of available contingencies and place to write in your own.
So you want to discuss financing contingencies first. it’s the most common if you are getting a loan.
Why don’t we start with the shortest contingencies? Like milestones. so you go under contract to purchase a home and then you have how many days? For home inspection.
HOME INSPECTION CONTINGENCY
Depending on what your schedule is and how strong of an offer you can put anywhere from 5 to 12 days. That’s not 5 days everything needs to be done. Everyone is agreeing for 5 days for the buyer to perform a home inspection by a licensed home inspector at their cost. And then the report comes back and any items you want repaired or a credit. For we then have to make an addendum for it and include the inspection report. And that needs to be sent off within that 5 days.
From there, then the sellers have X amount of days to go back. Now, you can go back and forth and back and forth. Ideally your’e not going to want to. That takes, if you’re doing 5 days, that takes 8-10 days to negotiate by the time your’e done.
The other thing that we should talk about that isn’t a contract contingency per se, but it’s more of a law, is HOA docs and condo docs. That’s not a contingency, that’s actually a law.
That’s only for a property that has an HOA (home owner’s association).
For example, if you’re in an HOA and you want to paint your front door fuschia and you find out that front doors can only be espresso and green, you can walk (out of the contract) for that reason. You don’t have to say why, you just can walk. Now sometimes people may throughout that home inspection contingency time period and they still have time to read the HOA docs, they might leave the contract because of the HOA docs.
If your agent knows what they’re doing they’ll time it so they get the HOA docs a little bit later.
It’s interesting that we’re talking about the amount of time and how generally speaking its between 8 and 10 days after ratification the home inspection comes in and everything goes well. The buyer doesn’t ask for much, or the seller agrees to whatever repairs, that seems like a general timeline.
And those repairs have to be made prior to settlement, just to note.
Right, of course. As a tidbit, the lender has ZERO to do with your home inspection. In fact, the lender doesn’t want to know anything about your home inspection because it has to do with property condition.
This has happened a gazillion times. We get an addendum from a real estate agent that says after the home inspection the seller has agreed to credit the buyer $2000 towards their closing costs due to repairs. Generally speaking, that will come in with the home inspection, but I don’t want to see it. Because if I stick that into the file, the underwriter is going to say, “well it looks like they need to have a roof repaired”. What a lot of people don’t understand is that the property itself is the collateral for the loan. So any defects in the property, we don’t really want to muddy the waters with that.
You have to then disclose because that information was shared to you.
And I can’t unsee it.
As opposed to just a credit for general repairs. Or addendum that money that’s going towards closing costs, and no mention of the home inspection.
There are a lot of situations where maybe they’ve capped their closing costs. So let’s say they’re only putting down 5% so they’re capped at 3% of the sales price concession. There are other things that need to happen then. Maybe reducing the sales price.
There are ways to play with the numbers instead of if you’re capped and you can’t accept anymore credits, you can reduce it. We’ve done that actually on a house in Frederick. We reduced the sales price by $3000.
So it all ends up being allocated somewhere whether it be in how much you’re paying for it, or lowering your costs at closing.
So those are the first two contract contingencies. I think you mentioned HOA docs. The next one is usually appraisal. Appraisal is usually the shortest compared to financing. Financing takes a little longer.
Generally speaking these days, it’s a week or two for financing. And that’s just to deliver the conditional commitment. And what we mean by that is you have a specific amount of time to deliver a conditional commitment to the seller. And that just means that you have followed through with your end which was making a loan application, and then providing that your loan has been approved by underwriting.
Now, on that conditional commitment is a detail listing any conditions that are currently outstanding from the approval. Let’s say you haven’t set up your insurance yet, or we need an extra pay-stub, its going to be listed on that commitment.
So for financing, what are people writing up for financing contingencies? What are agents writing for you guys?
Generally 20 days. I’ve seen 7, I’ve seen 10.
I usually do 21, and that extra day, because you never know if there’s going to be a holiday, for weekends which are really then lost. And then 14 for appraisal unless I know we need to close within a short period of time.
And if we’re closing in a short period of time, and that’s the thing we’ve talked about before, every deal is different. Every situation is different. So we do need to have a conversation about what it is that makes sense for this transaction. Is it going to be a transaction where we’re competing and we need to be super aggressive on how quickly we’re going to get the appraisal back to ease the seller and let them know that we passed that milestone? Or are we going to close? Let’s say the sellers find another property and they’re looking to move on, they need the funds from closing. They need to know they can sign their contract because they know our loan is approved. It’s a domino effect.
There are so many variables.
It’s so funny that you say that because on our side, when it comes to listings, only because we’ve been handling a little more lately, that appraisal, you know you’re going to have a little bit of wiggle room, and as soon as you get it your’e like, you know you’re going to get it, home stretch.
Because it really is a milestone of getting past a really large piece of the puzzle. That is, your loan is approved. Now, it’s not a guarantee that you’ll go to closing, because if you can’t deliver the conditions then you can’t deliver the conditions. Generally speaking, that’s not how it goes. However, we’ve seen it happen before.
But to the point of what’s involved in the contract contingencies for financing, let’s say we have the loan approved, but we don’t have the appraisal yet. So here’s where it gets tricky. And things are happening a lot faster these days. So let’s say we go under contract on a Sunday. The loan file starts on a Monday. They sign all of their disclosures on Monday. Send everything to processing on Tuesday. It’s submitted on Wednesday, and it’s approved on Thursday.
But you’re still waiting for…
We just ordered the appraisal on Monday! So that’s only a couple of days. We’ve got a loan approved without an appraisal.
No one is really moving that fast for appraisals.
Right. So generally speaking, 7 to 10 days is industry standard right now, for a non rushed appraisal.
We can always give them a target date, and they have to accept the target date. 5 out of 10 times they’ll say, “I just heard back from the listing agent, this is the earliest that I can get there, please push out the date”. And of course we can make sure we meet the appraisal contingency. But, we all stay on the same page on what the contingency is.
These contract contingencies can always be lengthened. If for some reason, like you just said, the appraiser just got the request, or there is a delay, it’s very easy to extend.
It’s a matter of everyone pulling in the same direction. So if a listing agent says “well, I get the appraisal done in a week”, you got it. we’ll make sure that’s taken care of. Then you have to answer your phone and give the appraiser access to the property for him to do the appraisal. And you can’t expect him to do it on the 7th day, and complete the report the same day. The reports are 40 pages long! So he needs to have access a couple of days before the contingency expires so that he can deliver the report. Not only that, but the report has to be reviewed by underwriting to make sure the appraiser did his due diligence.
Then if it comes in too low, it’s a pain to argue, but that’s a whole other can of worms. That’s a whole other podcast!
If it comes in low, is it a flawed appraisal or is the property really not worth what they agreed to pay for it, based on the data. the data is the homes that are sold around it?
To summarize, our first few are HOA and condo docs, and home inspection docs are your first contingency. And then next would come appraisal and then financing afterwards. The last one that we haven’t touched on yet is home sale contingency.
HOME SALE CONTINGENCY
Home sale contingency is if you have a home and your’e selling it. It is either listed for sale currently or not listed for sale. And you’ve found a home and you want to move forward on it. But you can’t move forward on it unless you sell your home. or unless your home goes under contract.
So a settlement contingency versus a home sale contingency.
That has a lot to do with being competitive in this market. If you’re in multiple offer situation, and you have someone who is writing with no contingencies but writing the exact same dollar amount net to the seller, but you have a home sale contingency.
As a seller I’m going to pick, as an agent I’m going to advise.
So that would mitigate some risk to the seller, correct?
Correct, so then we’re back here in 30 days .
If the home doesn’t sell, or maybe it’s listed too high, or whatever. It’s a matter of if you’re able to write non-contingent and you are comfortable with doing that, that’s something you can discuss with your realtor.
I feel like we could talk about this all day and I do want to unpack the home sale contingency and maybe some stories in another podcast. Also if you guys have questions that you’d like us to go a little more in depth on each of these topics, or if you have an example of contract contingencies that you’re wondering what you can write in yourself, please let us know. We’d be happy to go over these different scenarios.
Because I think each one could be it’s own podcast. We just don’t know what you want to know.
Because some of contract contingencies can get really dry.
Okay, on a random note, this is random, so in our neighborhood I, one of the reasons why we love our neighborhood, why we bought into the community is that everything is very uniform. They take care of everything. You’re not supposed to change the aesthetics of the outside of your house. You’re not supposed to change the landscaping, they do everything.
Oh god, what did you do?
I didn’t do anything! Someone two streets over from me took it upon themselves to, all the railings are this gray color, like this charcoal color. Every railing in the neighborhood, if you have a railing because not every house does…
Like walking up or…?
Walking up. Has to be this specific color. So everyone matches. So everyone’s door is maybe a different color. They painted their railings to match their door and it’s driving me bonkers!
Wait, what color is it?
Red. it’s like crimson red. It’s driving me bonkers.
Why would you paint your railings red?
Because they wanted to match the door.
That doesn’t make any sense.
I went as far as looking into my HOA docs and read it.
They’re listening to us, they know it’s you.
Well, if you’re listening, I don’t like it.
You need to look at your HOA docs.
Because I bought into a community knowing that everything is going to be the same.
And I don’t have to worry about and that my value is there. Now everyone is going to have different colored railings!
No, they’re going to get cited. It’s a new community.
Well, because I’m going to complain.
That’s the whole idea about an HOA. You’re supposed to follow covenants. They got the same docs you did that say what color your railing should be.
HOW DO YOU TAKE YOUR COFFEE?
So ending with coffee, I tried a new coffee.
I tried a new coffee too!
No, you tell me first!
No! Because it’s really not that exciting. It’s called Rise Up.
Mine isn’t that exciting either, but I tried a new place in Minnesota over the weekend.
Can you say Minnesota like you’re from Minnesota?
When I talk about Minnesota I get a Minnesota accent. So sometimes when I go to the grocery store I get eggs at the Minnesota grocery store, I’m like “Can I get the eggs please?”
You sound s little Jersey.
It is a little Jersey!
So in Minnesota there are not a lot of Starbucks. There’s a place called Caribou Coffee.
Yeah, that’s huge out in Seattle too, right?
Um, I don’t know. So over the weekend, my little sister-in-law got married. She used to work at Caribou Coffee where she met her husband now. Super cute. So I asked her, “how do you take your coffee”? Because I’ve only stayed with her a couple of times, every time we go to Minnesota. So she has a vanilla latte with almond milk. It was delicious. It wasn’t that sweet, it was just a really good. If you’ve followed us from the beginning I usually have hazelnut, but the vanilla was really just smooth, not super sweet coffee. It was nice and was just different. So I had the vanilla latte and it was just delicious.
So what was the coffee that you had?
It’s called Rise Up, out of DC. On the weekends we make french press if we don’t go to the coffee place around us. And it was really good!
What kinds? Just a regular?
We made an espresso blend. Josh likes it very strong.
Like his woman. Haha.
Okay folks, I have appointments.
And I have a showing. Have a wonderful rest of your day. And it you have questions or if you have the answer to why we say “Happy Memorial Day”, let us know. Or any other fun facts.
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Contact Erin Finke at email@example.com, and Alex Ross at www.rossrem.com.
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Coffee and Jam is a weekly podcast discussing all things about real estate, mortgages and home ownership.