Chapter 5: In This Chapter  Listing Real Estate  Offers and Contracts  Mechanics of Making an Offer  Common Contract Points  Disclosures  Between Contract and Closing  Due Diligence  Insurance—Title, Mortgage, and Property  Providing Lists of Other Professionals  What Happens at Closing  Closing Costs  Financing  Foreign Clients Should Expect To… Page 88

Listing Real Estate  Know your market  Ask questions  Have excellent listing presentation  Have testimonials, sample marketing materials, and marketing plan  Demonstrate how you are different  Explain global marketing  Explain Web marketing strategies  Conduct CMA and price realistically  Commercial real estate High level of market, property, financial analysis Page 88-90

Offers and Contracts  Advise buyer and provide guidance, but buyer is ultimate decision maker  Factors to consider: Price of similar properties Property condition Length of time on market Supply and demand Seller’s motivation Terms Return on investment Page 91

Important Points About Offers  Verbal promises not enforceable  Offer is first step in negotiations  Multiple counteroffers not productive  Keep negotiations on friendly, win-win basis  Once seller accepts, offer becomes binding contract  Buyer and seller cannot “take back” accepted offers/counteroffers  Offers combine price, terms, and conditions  Move quickly when right property is found Exchange of funds  Attorney review is standard procedure  Pre-closing walk-through Page 91-92

Mechanics of Making an Offer  Standardized contract form All parties must agree to changes  Earnest money in escrow  Agent presents offer Buyer does not participate  First step in negotiations  Avoid “negotiations fever” Page 92-93

Common Contract Points  Date of execution  Parties  Property description  Purchase price  Provisions covering zoning and so forth  Fixtures and personal property  Apportionment of property expenses  Date and location of closing  Name of broker who brought sale  Person to whom and how contract contingencies will be sent  Seller’s right of cancellation  Signatures  “Time is of the essence”  Contract contingencies Page 93-94

Multiple Offers  Consider what makes an offer attractive: Flexible timing Financially qualified buyer Few or no contingencies Large earnest money deposit  Individual or group presentation  Seller not required to disclose multiple offers Page 94-95

Disclosures  Property disclosure requirements differ by state  Legal consequences for failure to make disclosures  Lead-based paint  Megan’s Law  Asbestos  Radon  Other hazards  Stigmatized properties Page 95-97

Fourteen Points for Disclosure  Defects in roof  Defects in electrical system  Defects in plumbing, water heater, septic  Defects in heating and A/C  Defects in swimming pool  Defects in foundation or basement  Defects in appliances  Disputed boundaries  Pending changes in zoning and assessments  Pending liens  Easements  Presence of hazards  Infestations  Location in floodplain Page 97-98

Between Contract and Closing—Seller  Escrow agent  Condo or homeowners association documents  Preliminary title report  Satisfaction letter from lender  Appraisal and inspection (make property accessible)  Final utility readings and payments  Home warranty policy  Contingencies  Deed  Transfer taxes  Final walk-through (make property accessible) Page 98

Between Contract and Closing—Buyer  Earnest money  Mortgage  Contingencies  Home appraisal  Property survey  Property inspections  Verification of employment, financial information  Homeowner’s and hazard insurance  Title insurance  Loan approval  Utility accounts  Final walk-through Page 98-99

Due Diligence  “Vetting” the deal  Examination of property and relevant documents  Evaluation of information provided by seller  Attorney, property inspectors, other specialists involved  Commercial real estate due diligence involves high levels of market, property, and financial analysis Page 99

Title Insurance  Protects against: Obstacles in obtaining clear title Losses if title defects make property unsalable  Covers some legal expenses to defend against claims  Owner’s Title Policy  Lender’s Title Policy Required for mortgage  Premium is one-time fee at closing  Cost varies but ranges 0.5-1% of purchase price Page

Other Types of Insurance  Mortgage insurance  Home warranty  Property insurance  Flood insurance National Flood Insurance Program  Windstorm insurance Wind mitigation Page 101

Loss History Report  History of insurance claims in preceding five years, regardless of ownership  Important pre-closing step  LexisNexis® C.L.U.E. report  ISO A-Plus report Page 102

Providing Lists of Other Professionals  Provide list but do not make specific recommendations  Some firms provide ancillary services but consumer is always able to choose  RESPA prohibits kickbacks and undisclosed referral fees  Finding the right attorney Page

What Happens at Closing  Buyer completes walk- through 1-2 days before  Date and location of closing specified in purchase/sales contract  Parties meet to finalize transaction Page

Parties Present at Closing  Buyer  Seller  Attorneys for the buyer and seller  Buyer’s and seller’s real estate representatives  Lender representative  Title company representative Page 104

Buyer and Seller Responsibilities Buyer Signs deed and mortgage commitment Endorses check for balance due to seller Pays balance of down payment and closing costs Receives keys to property Seller Brings necessary documents (e.g., utilities and taxes paid) Signs deed over to buyer Presents keys to the property to buyer Receives net proceeds of sale Page 104

Filing of Deed  Filed by title company with Recorder of Deeds  Buyer should obtain official copy after it has been filed Page 104

Closing Costs Buyer  Mortgage fee and points  Credit report fee  Inspection and appraisal fees  Plat sketch  Homeowner’s insurance premium  Transfer tax (if shared)  Title exam and recording fees  Title insurance policy  Escrow fees  Attorney’s fees  Closing fees  Prepaid interest Seller  Abstract or title search fee  Loan payoff fees  Deed preparation  Sales commission  Title insurance  Repairs or cash payment for repairs as agreed  Transfer tax  Attorney’s fees  Closing fees Page 105

HUD-1 Settlement Form  Shows breakdown of costs paid by buyer and seller at closing  Required for transactions that involve federally insured financing  Published by U.S. Department of Housing and Urban Development (HUD) Page 105

Closing Delays  Missing paperwork or errors  Down payment source changes  Incorrect information  Title defect  Pending judgment or lien  Lack of property insurance  Lack of approval by condo or homeowners association  Incomplete contingencies  Required inspections not made  Invalid powers of attorney for those acting on behalf of parties  Property defects  Seller’s move-out date changes  Foreign funds not transferred or exchanged  Lender rejections or requirements  Property appraisal below loan value Page

The Hurricane Box  Insurers suspend issuance of new policies  Gulf States affected  Closings delayed Source: U.S. Geological Survey Woods Hole Science Center Page 107

Types of Mortgages  Interest-only loan  Buydown mortgage  Graduated payment mortgage (GPM)  Convertible adjustable rate mortgage (ARM)  Fixed-period ARM  Two-step mortage  Option ARM Page

How to Make a Mortgage Payment  Monthly installments  Portion of principal, interest, property tax, mortgage insurance  Taxes held in escrow and paid by lender to taxing body  Borrowers receive statement or coupon book Page 109

Method of Property Purchase  Foreign buyers less likely to finance Difficulty obtaining mortgage Unable to avail themselves of MID tax benefits Pooling family money Source: 2010 NATIONAL ASSOCIATION OF REALTORS ® Profile of International Home Buying Activity Page

Foreign Clients Should Expect To…  Divulge financial information  Transfer funds  Make payments by wire or cashiers or bank check  Obtain Taxpayer Identification Number (TIN)  Obtain proper immigration and/or visa documents  Complete all transaction process steps  Act quickly when property found Page

Foreign Clients Should Expect To…  Understand purpose and scope of disclosures Confidentiality  Understand due diligence process  Expect involvement of other professionals  Plan ahead on how to hold title  Confer with tax planner in home country  Commercial investors should: Consider letters of recommendation Find a qualified commercial practitioner Page

EXERCISE: MATCHING— TRANSACTION TERMINOLOGY Page