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Agents: Avoid the Traps and Stay on Track
By:
Gregory Braun, Partner
It always amazes me how residential transactions can go bad so quickly (for attorneys and realtors alike), yet these squabbles and traps are often predictable and avoidable. In some circumstances, unavoidable petty differences of opinion among the parties can create a rift. Other times, however, deals head south due to significant oversight of important matters. What should be the culmination of the American Dream, purchasing a home, then becomes the fight of the one’s life. In an effort to prevent blown closings, bad closings, legal liability, hard feelings between buyers, sellers and/or realtors, damaged relationships and sometimes digging into one’s own pockets to pay for the costs of mistakes, I offer the following common deal traps and how to avoid them.
1. Promises. All
promises made by the parties should appear on the contract, or at
the very least, provided to the attorneys in writing when sending
over the contract. For example, the seller’s oral agreement to install an alarm before the closing or to pay moving costs should be documented. The promissor often forgets, but the promissee rarely does. Since moving cost reimbursement is a cash offer, it needs to be termed a “seller contribution”, not moving costs credit, in order to be Fannie Mae/Freddie Mac compliant. Remember, if you type changes into the printed
contract, highlight the change so everyone (especially the
attorneys) can see it.
2. Cloning. Just
copying the old listing and then not verifying each fact
independently is a mistake. For example, Unit 3 has a garage and a wood burning fireplace, while Unit 1 has a parking pad and a gas fireplace. Cloning may make inputting data faster, but cloning the listing for Unit 3 for use as the listing for Unit 1 can leave the agent for Unit 1 facing major damage control at the closing table.
3. Zoning Certifications.
Order the Chicago Zoning Certification on a 2-5 unit properties
as soon as possible. If the agent does not order it, the seller’s attorney should order it quickly. I have seen a deal where the MLS listing sheet stated four flat and the Seller’s attorney even agreed in the attorney review to provide a four unit Zoning Certification. But it turned out that the last building permit of record reflected only two units. Absent an expensive zoning change or going through a review process, the transaction could not go forward, and all the effort and expense was wasted on the day of the closing.
4. Exclusions.
Both the buyer and seller should verify the Personal Property
included in the sale. The most common examples of items fought over include mirrors (even if they are hung like a picture and not attached), dining room/specialty lighting fixtures, curtains, swing sets, television brackets, surround sound speakers and shelving. On the flip side, disputes can arise where the seller leaves behind items the buyer does not want, like old paint cans and extra roof shingles.
5. Monetary Credits.
Properly document all monetary credits on the contract or a
rider. While it is not uncommon for lenders to approve closing cost credits, the credits, especially large ones, need to be cleared with the lender. Most lenders require an appropriate amendment signed by the parties. An example of acceptable language might be "Seller to contribute X dollars toward closing costs and pre-paids." The percentage allowed by the lender will differ based on the type of loan and the percentage of down payment. Credits cannot be used towards a down payment.
6. Short Sale.
Determine if the seller is upside down (will need to bring money to
the closing to cover shortages on seller closing costs) and in a
short sale situation. The listing agent should determine whether the proceeds will be enough to pay off the loans...this day in age you have to ask. Look at the mortgage statement (or statements, in the event seller has a second mortgage, including a home equity line of credit) or have the seller's attorney make a calculation. The agent should ask the seller in a couple ways whether he or she has a second mortgage, as it’s amazing how often we'll ask people if they have a second mortgage and they'll mistakenly say no, thinking that a line of credit doesn’t count. Also, self-employed sellers often don’t realize that they have their house added as collateral for a business loan.
7. Condo Associations. Repair
flaws in the association before you list or ask about the
association before you make an offer.
For example, lawsuits, special assessments, low reserves, rights of first refusal, delinquent assessments, bad budgets, high rental percentages, low presales or owner occupancy, improper insurance and high commercial percentages can make loan approval challenging, even if the buyer has perfect credit and a provides large down payment.
8. Inspection. Inspect the home before your list it. Some flaws can’t be fixed, such as a bad layout (which is factored into the sales price). Others, like missing shingles or electrical repairs can, and should, be fixed ahead of time to sail through the inspection. Failure to make obvious repairs may cause the buyer to cancel the contract or the parties to fight over repairs. Easily discoverable and repairable items, like torn screens or broken windows, can lead inspectors to believe that the home should be examined more closely.
9. Condo Disclosure.
Provide the 22.1 Condominium Disclosures ahead of time.
This includes minutes and budgets. Sometimes, the attorney delays in responding to the request or the association delays in issuing the disclosures. Delay can lead to the deal being cancelled down the line by the buyer, as disclosure is a contingency of the deal, whether stated or not, and the buyer has an implied right to terminate based on the disclosures. Word to the wise seller - extinguish the cancellation right by providing the disclosures as soon as possible.
10. Screen the lender. If you represent the buyer and do not know the reputation of the lender, call to inquire about the process and if they are familiar with your specific deal.
You do not want to scramble to find a new lender at the eleventh hour because the first lender (whether it be a bank or a mortgage broker) was not comfortable with the project, the buyer, the type of loan or just plain didn’t have the appropriate options
11. Screen the Attorney.
In today’s market, there are so many facets to closings it is important to hire a full time real estate attorney to handle tasks such as clearing title, lending issues and disclosure issues which are typically part of every deal. If you are not familiar with your client's attorney, introduce yourself to the attorney and find out if he or she is familiar with your type of transaction (home, condo, co-op, multi-unit, short sale, commercial, environmental issues, etc.).
12. Who has the keys?
The buyer wants keys at the closing. Not just the front door
key, but every key including the mailbox key and every fob and code
number and all the garage door openers. ).
I have been told that the doorman has the keys, and while this was true, the doorman was not authorized to give the keys without a questionnaire that the seller had failed to complete. In elevator buildings, confirm that your client has reserved the elevator, paid any move in fee and has written confirmation of the same (so again, the doorman does not turn away the buyer).
13. Real Dates. Keep two things in mind when setting dates in the contract: first, make sure the inspection, attorney review, mortgage contingency and closing dates fall on a business day; second, make sure the time limits are reasonable. The mortgage contingency should be at least 30 days and the closing date should be no sooner than 45 out.
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