For Sale
Putting Your House On The Market
The first step toward putting your house up for sale is to meet with a real estate agent at your home. What we call the “listing appointment.”
But beforehand, it’s important to understand “who’s who” and how brokers may cooperate to sell your house.
Listing Broker or Listing Agent. An individual real estate broker whom the seller hires to represent the seller through a contract called a “listing agreement”. The listing agent is associated with the listing broker. The listing broker is directly paid the listing commission and then splits the commission with the listing agent. (Although the broker and agent may be two different individuals, the term “broker” is used throughout the Guide for simplicity.)
Selling Broker or Selling Agent. In a “cooperative” sale, the house is listed by one broker and a buyer is provided by another broker. The selling broker receives the selling side of the commission. If the listing broker also produces the buyer, then the listing broker receives both listing and selling sides of the commission. A selling broker may have a signed buyer representation agreement with a buyer and, therefore, represent the buyer and not the seller. If the buyer’s agent is a Long & Foster agent, Long & Foster becomes a disclosed dual agent with the consent of both buyer and seller.
A Little Homework
Before the listing appointment both the home seller and the listing broker are busy. While the home seller collects a list of documents requested by the broker, the listing broker studies recent neighborhood sales of homes comparable to yours, and also comparable homes currently for sale.
There’s No Place Like Home
At the listing appointment, the listing broker will want to inspect the house and yard to become familiar with its special features.
You have probably enjoyed living in your home and have been pleased with its many unique features. Your listing broker will want to tell prospective buyers about the special features of your home and neighborhood. Be ready to be specific about schools, day-care, nearby Metro, and other desirable community features, as well as home features not readily apparent.
Remember, prospective buyers will be “comparison shopping” and keenly aware of subtle differences in houses for sale in the area. Be sure to tell your listing broker why yours is special-from any home remodeling to afternoon winter sunshine.
Demand Sets Price
After conferring with the listing broker on market conditions, comparable nearby sales and listings, and available financing, the home seller will set the listing or “asking” price for the house.
A common definition of market value is: “What a ready, willing and able buyer will pay, at a price a seller will accept.” Metropolitan area buyers are sophisticated. They’ve already been shopping, and when they see your home they’ll be comparing features and financing.
There’s a rule of thumb that says: “A house priced more than 5% over market value discourages offers.” Buyers who can afford the price can get “more house” for their money elsewhere. Buyers who cannot afford the price simply won’t look. This is why we say, “A house priced right is half sold.”
A fair market value will be determined by comparing the property with similar properties which have recently sold and (in some cases) with similar properties currently on the market. Experience in the industry has proven this “market analysis” approach is more accurate than the “replacement cost” or “potential rental income” methods.
Sample “Net Sheet”
Based on this sales price, the listing broker will go through a worksheet that estimates the “net cash” from the sale. Simply, this exercise subtracts anticipated charges paid by the seller from the sales price. A copy of the “net sheet” is left with the home seller. (An itemized list of typical selling costs is presented in the “Settlement” chapter, which is the stage when these charges are paid.)
Financing Strategy
No sale can be completed without financing. That is why it is generally to the home seller’s advantage to appeal to the greatest number of home buyers by accepting the greatest range of financing plans. The listing broker will explain the basic differences between VA (Veterans Administration), FHA (Federal Housing Administration) and conventional financing, as well as explain “discount points.”
What Is a Point?
A point is one percent of the amount of the buyer’s mortgage loan. For example, if a loan is $100,000, one point is $1,000. Lenders charge points to increase the yield on their loans. On all loans, home buyer and home seller may share the charges by mutual agreement.
Property Profile Folder
To enable the listing broker to prepare a folder of information on the property, the home seller needs to provide a number of documents and information specific to the location and jurisdiction. (This Property Profile is often left in the home for the convenience of prospective selling brokers.) Because the list is long, you can understand why it’s best to collect the papers before the listing appointment. These materials may include:
Pay-Off Notice. A letter signed by the home seller and mailed to the lender by the listing broker to notify the lender of the intention to pay off the mortgage in order to minimize prepayment of interest penalties to the seller. (Home seller should provide the broker with the lender’s address, loan balance, assumability, years remaining on present mortgage, P.l.T.I. and the interest rate, if possible.)
Well and Septic Inspection. If property is on septic/well, current inspections by local health authorities are required while home is occupied. Listing broker will usually arrange after contract is ratified.
Order Lender Appraisal. Lenders usually require an appraisal to assure that the property is adequate collateral for a loan. Appraisal may be ordered before (paid by seller), but is more often done after an “offer to purchase” is accepted (paid by buyer).
Assessments/Easements. Listing broker will ask home seller if any tax assessments or easements exist on property that must be paid or included in purchase contract and passed with the land when sold.
Property Taxes/Condominium Fees. Home seller provides record of property tax or condominium fee payments which buyer will reimburse a pro-rata share to home seller at settlement.
Inspections. VA/FHA and most lenders of new mortgages require a termite inspection certificate that shows house is free of infestation. If home seller does not have a current certificate, then listing or selling broker (depending on area) will arrange inspection at home seller’s expense.
Sometimes a home inspection and radon testing will be ordered. Home seller should also provide all information as to the physical condition of the property, such as the presence of fire retardant plywood.
Utilities. Home seller should provide record of past 12 months utility bills, including gas, electric, sewer, water, and trash where applicable. Most buyers will want to know history of utility costs.
Helpful Documents. If possible, home seller should provide listing broker with deed, house location survey, condominium bylaws or home owners association documents, subdivision plat map, house floor plan, previous title search abstracts, legal description of property (subdivision, section and lot), home warranties on major systems, if still in effect, and copy of home owners insurance policy for endorsement in purchase contract.
What Conveys?
In anticipation of a buyer’s offer, the home seller must be ready to supply listing broker with a specific list of the personal property that is included in the real estate property for sale. Examples of items to “convey” may include: draperies, drapery rods, remaining heating oil, firewood, washer, dryer, refrigerator, stove, microwave, disposal, swimming pool chemicals, awnings, storm doors and windows, screens, venetian blinds, shutters, window air conditioner, etc. Home seller should tag or remove items which do not convey.
Listing Agreement
When the home seller is ready to put the house on the market, the listing agreement is filled out indicating a specific period of time the agreement is in effect (“listing period”), and signed by the seller. You’ve now hired a listing broker and listing agent.
Questions And Answers
What is a “Lockbox”?
A lockbox is a universal metal container for your house key that is hung on the front door and can only be opened by a special key carried by licensed sales agents. It provides access when the owner is away, thus assuring full exposure to prospective buyers.
Do certain geographical areas have unique home selling requirements?
Yes. Home selling requirements vary from county to county. Investigate special taxes or other requirements applicable to the area in which you live.
Getting Ready
Clean Up, Fix Up, Or Toss Out
Today a home that stands out among similarly-priced, competitively-financed houses is the home that sells. Why? Because it makes a good first impression that lasts right to the settlement table.
You may not be able to improve the market value of your house (finish basement, remodel kitchen, etc.), but you can improve its market- ability. And usually this can be done with more elbow grease than hard cash. The key is to put yourself in the buyer’s shoes. In fact, if you drop by some open houses (you may soon be a buyer yourself), you’ll pick up some pointers. Then practice making your house as appealing and uncluttered as the home you wish to buy.
The exterior. Start here with “curb appeal.” Basics: A trim lawn, well-proportioned shrubs. Remove garden hoses, lawn tools, dog house, and toys from the yard. Check for flat-fitting roof shingles; straight lines on gutters, shutters, windows and siding; solid caulking around frames and seams. Fresh paint. Clear windows that give a glimpse of something nice inside. Clean, or even paint, front door. Keep walks and steps free of snow and ice. Extras: Brass door knocker. Seasonal door decoration. Wrought iron lamp post. Small landscaped courtyard. Flower beds.
The front hall. Aura and atmosphere give a hint of what’s deep inside. Basics: Light (from window, skylight, lamp or overhead fixture; perhaps use stronger light bulbs). For evening inspection, turn on every light in the house for glow and welcome feeling. Aromas (fresh and clean.) Here-and throughout the house-unmarred woodwork, spotless carpeting, fresh paint is often the best money ever spent (most appealing in neutral tone, since strong color is so subjective). Remove unsightly or worn throw rugs. Extras: Door chime. Bolt lock and chain.
The living room. Strive for lived-in, cozy feeling. Discard worn, chipped, frayed furniture. Add lamps if dark. Open curtains. Furnishings (also throughout the house) well placed and in good repair. Set out fresh flowers, perhaps put a drop of bath oil or vanilla on light bulbs for subtle scent.
The kitchen. Many buyers judge the house keeping by the oven and stove. Basics: Appliances are spotless and everything works perfectly. Replace or repair anything that sticks, squeaks or drips. Space (counter, cooking, cabinet, eating) kept open and uncluttered without countertop appliances. Clean butcher block. Floors and walls are inviting (light colors) and serviceable (resistant to grease and moisture).
The master bedroom. The second-most appealing room to a buyer (after the kitchen, before the garage). Basics: Uncluttered furnishings, defined areas (sleeping, dressing, sitting) by furniture arrangement. Show the true size of closets by removing or packing items that can be stored elsewhere (since you’re moving away), like off-season clothes.
Bathrooms. Practicality combines with attractiveness. Basics: Sink, toilet, bathtub, tile, even shower curtain are immaculate, no soap film. Fix leaky faucets-rust stains indicate faulty plumbing. Repair caulking and grouting. Minor flaws suggest neglect to the prospect. Lighting is soft (no harsh fluorescent) but bright. Extras: Potpourri for scent.
The recreation room. An atmosphere of relaxation, activity and fun pervades. Basics: Open space to accommodate an assortment of activities. Fireplace or wood stove clean with fresh logs. Extras: Track lighting. Ceiling fan.
The garage. Convenience is the key here (the perfect garage holds only cars). Basics: Uncluttered space. Sell, giveaway or toss unnecessary articles. Clean oily cement floor. Strong overhead light fluorescent or bulb). Orderly storage area, tidy workbench.
The basement. Organize, hang tools on peg boards, and put things on shelves. Cure damp smell by placing bag of limestone in damp area. Clean water heater outside, change furnace filter, make inspection access easy. Brighten basement by painting walls.
The attic. Yes, it’s for sale, too. Tidy it up. Light it up. Again, pack anything you’re going to move. Get rid of the rest. Be sure your energy-saving insulation is apparent and the air vent works.
Questions And Answers
Should we redecorate?
The big problem in major redecorating arises because it is very difficult to anticipate the tastes of strangers. Best to stick to fresh paint in very neutral colors and present a sparkling clean house without the redecorating expense.
Is it possible to over improve?
Yes. Your landscaping may be divine; you may have the only cabana and swimming pool in the neighborhood, but it may be difficult to sell a $160,000 home in an area of $130,000 homes. Consult your listing broker to determine if added improvement means added marketability.
Are “fixing up expenses” tax deductible?
Yes. You can reduce your taxable capital gain by “fixing up”,’ but only under strict guidelines. Check with your tax consultant for details.
Many states now require that sellers provide buyers with either a residential property disclosure or a disclaimer statement.
Showing
Leave The Selling To Us
While the home seller is actively getting the house ready to show, the listing broker is actively spreading the word that the property is available. Generally speaking, the listing is promoted to two groups: the real estate community and the buying public.
Many home sellers are surprised to learn that approximately 56% of all buyers come from referrals between brokers and their vast network of contacts. Approximately 17% of buyers come from inquiries stimulated by “for sale” signs in yards. The remaining 27% of buyers come from a combination of the real estate company’s reputation and image, open houses, and advertising or other promotional efforts. Obviously, the most productive source of buyers is working closely with other brokers, and this is where your listing broker begins.
MLS Computer
The listing broker enters a profile of your house in the Multiple Listing System computer. This profile includes everything from location and price to available financing and number of baths, from house style and heating system to special features and showing instructions. Now your house description is instantly available to the entire MLS membership. (MLS is a membership service available exclusively to brokers belonging to Boards/ Associations of Realtors®.) Also, some Multiple Listing Services publish a printed profile card, often with a photo, and these are distributed to all member brokers.
In addition, your listing broker announces the listing at regular office sales meetings, and points out noteworthy features. At Long & Foster, the listing office, as well as other Long & Foster offices, will “tour” the property. In addition, other real estate companies may also ask to tour your home. (Without the lockbox, your house is inaccessible to this large network when you are not home.)
Advertising
Already the yard sign is providing additional exposure to the neighborhood and prospects touring the area. Signs often create high quality inquiries because prospects like the area and the house and want to get a closer look inside. Your home and homes similar to yours will be advertised from time to time in major metropolitan and community newspapers for mass reach. Direct mail cards are used to target specific neighborhoods.
Long & Foster also advertises nationally and internationally for potential relocation buyers for your home in military and foreign service publications.
Our World Search™ staff visits military bases and foreign service posts worldwide to introduce the services offered by Long & Foster. Our entire Relocation Division receives about 300-500 leads each month, largely from broker referrals and corporate transferees.
When It’s “Show Time”
With all this activity, your listing broker and other selling brokers will be bringing prospective buyers to see your house. Brokers will make an appointment with the home seller, and will give you as much advance notice as possible. That will give you time to tidy up, make beds, light dark areas, perhaps pop something in the oven, like a spicy cake, pie, bread, or even a pan of cinnamon. Make every effort to accept all appointments-you never know when your buyer will walk through the front door. Also, have the property profile folder available with utility bills, MLS profile, house location survey, etc.
If You’re Home
If you’re home, greet the prospects at the door and politely excuse yourself and leave the selling to us. (Perhaps check the baking or take the dog for a walk.)
Buying a home may be the largest single purchase a family will make in a lifetime. It is a serious matter for them; therefore, too many distractions could spoil the sale. We have found over the years that a number of pointers make things a little easier for your salesperson and the buyers.
- Too many people present during inspection may make the potential buyer feel like an intruder, which makes it difficult for selling broker and buyer to be at ease.
- It’s better that you and the kids busy yourselves in one part of the house or outside, rather than tagging along. The broker knows the buyer’s desires and can better emphasize your home’s features.
- Let the broker and the buyer hear each other. Noise is distracting, so don’t have the radio or TV going. Quiet is the ideal condition.
- It is better to keep pets out of the house. Buyers may be timid around an unfamiliar animal.
- Chatting with a potential buyer may dilute the broker’s ability to present your home’s features in the best light. If asked a question, respond honestly, but diplomatically refer questions to the broker.
- The lived-in appearance makes it a home. There’s no need to apologize for its appearance. Let the trained broker answer any objections.
- Many a sale has been lost by trying to dispose of furniture and furnishings to the potential buyer. Wait until after the sale is made.
- Your listing broker is most qualified to bring negotiations to a favorable conclusion. Do not discuss price, terms, possession, or other factors with the potential buyer.
If You’re Not Home
Have the house ready and enclose pets in basement, garage or back yard. Selling brokers may leave their business cards or register at the listing broker’s office, depending on local custom. Be sure to keep any cards and give them to your listing broker as soon as possible for follow-up. When an open house is scheduled, plan to be away for the afternoon. Make the house accessible to the listing broker and be sure to leave word on how to contact you.
Seller and Broker Team
During the listing period the listing broker will periodically update the home seller on the mortgage market, new competitive listings and sales in the area, and progress in selling the home. The feedback between broker and seller is vital to exchange selling suggestions and maintain maximum marketability. The listing broker will follow-up with the other selling brokers and provide feedback to the home seller. This mutual teamwork becomes especially important later when negotiating offers to purchase.
Questions And Answers
Should I let anyone in to see the house?
If a prospective buyer calls or comes by unexpectedly without a broker, get their name and phone number. Do not show the home. Explain that it is not a convenient time. Call your listing broker so that the buyer can be qualified and identified prior to showing. This is for your benefit and protection.
If an offer is imminent, should we still show the home?
A property is either sold or available-there is no in between. However, if there is an accepted contract that contains a contingency, and back-up contracts are invited, then this must be made clear, and the house should be shown. Refer selling agent to your listing agent for details.
Offers & Contract
Signing On The Dotted Line
A buyer makes an offer by submitting a written and signed offer to purchase, which will become the sales contract when ratified by everyone’s signature. Once the seller and buyer sign the paper, they are bound by the contract conditions.
The “presentation of a contract” begins when the selling broker registers the offer with the broker’s own office and notifies the listing broker of the offer. The listing broker then arranges a presentation appointment with the home seller, and with the selling broker in some areas. (The buyer doesn’t attend the presentation.)
Either the selling broker or the listing broker presents the terms of the offer, depending on local customs. The listing broker acts as the home seller’s advisor. Part of the presentation is determining that the buyer is qualified financially to make the purchase. (Should either the seller or buyer be out of town, the contract is presented via telephone and confirmed later by Datagram or FAX).
Content of Presentation
Included in the presentation of the offer are a number of specific concerns. After all, once the contract is signed, it becomes the binding guideline for the transaction. Description of the offer will include, but is not limited to:
- Date, name and address of the buyer and seller, and legal description of the property.
- Amount of earnest money deposit, which will be held in an escrow account by the broker, unless otherwise noted.
- Sales price.
- Size of down payment, and how remainder of purchase price is to be financed. The offer should indicate the maximum interest rate buyer is willing to pay, and right to cancel without penalty if such financing proves unavailable.
- Proposed settlement and occupancy date, and daily rent provision for “post-settlement occupancy” if seller can’t vacate and becomes temporary tenant of buyer.
- Contingencies, if any, such as satisfactory review by attorney, structural inspection, appraisal, or sale of buyer’s present house.
- Other important provisions, including a list of items that convey with sale, stipulation that title must be insured, and who is to pay various settlement costs.
Seller’s Net Sheet
Taken all together, this offer is reduced to dollars and cents on a sample net sheet, similar to the exercise during the listing appointment. The estimated outcome is determined which allows the home seller to consider the “bottom line.”
Seller’s Action
A decision on an offer should be made at presentation, if possible. A home seller has three possible options.
- Accept the offer as written.
- Make a “counter offer” on unacceptable aspects. Counters are written in the margin of the contract or in addenda, and initialed by home seller. A purchase offer with counters is not a ratified contract until the home buyer accepts and initials the counters. Buyers can withdraw, accept or counter the counter offer.
- Reject the offer, if it is totally unacceptable. (Outright rejection, without a counter, should be the last resort.)
A contract exists when all terms including changes are ratified by initials of all principals. When the contingencies are satisfied, the contract becomes enforceable.
Multiple Offers
All offers registered must be presented to the home seller. They will be presented in the order registered. The home seller should hear each offer through and ask questions. No action is necessary until all offers are heard. If more than one offer is accepted or countered, an order of precedence must be established, such as primary, first backup, second backup. Be careful not to sell the home twice.
Questions And Answers
Is it best to turn down the first offers?
In any transaction, it’s normal for the seller to wonder
Could I have gotten more?” and for the buyer to wonder “Should I have paid less?” When your reasonably-priced house is put up for sale, the very first lookers may make an offer to buy. That doesn’t mean that you’ve priced your home too low. It means qualified buyers and their brokers have been looking-and waiting-for the right house to come on the market at just the right price. Your listing broker will advise you on all offers.
Does the sale of a condominium or a property within a Homeowner’s Association (HOA) require any special action?
The purchase offer for a condo sale or Homeowner’s Association property will contain, in compliance with the law, a requirement that the seller furnish the buyer with certain disclosure information and documents. Ask about condo and Homeowner’s Association resale procedures in your area.
Do buyers ever offer more than the listing price?
Rarely, but they do offer “above list” sometimes if they believe it makes their offer more acceptable than other competing offers. For the protection of all parties, it is best to include a separate statement signed by the buyers indicating the buyer’s awareness of the list price and their reasons for the higher offer.
What do you do if the property doesn’t sell?
The first step is to go over carefully with the listing broker why the property has not sold. Usually price, and property condition are the key. Study and analyze what has sold in your area and at what price. Then relist the house after adjusting for shortcomings. Another option is to withdraw from the market and rent until the market improves, or simultaneously offer for sale or rent.
When will yard sign be removed?
Placing a sign in the yard is always done by mutual agreement between listing broker and home seller. The law in Maryland, Virginia, and District of Columbia allows the sign to remain in the yard after contract ratification, even though “for sale” is changed to “sold” after contract acceptance. However, ask your listing broker about local sign ordinances.
If a buyer forfeits deposit, who gets the money?
If the buyer fails to make full settlement, the deposited earnest money may be forfeited only after a release is signed by all parties. In the event of forfeiture, the deposit will be divided equally between seller and the real estate brokers. but not to exceed amount of commission, or according to the sales contract.
Paperwork
Processing The Case, Etc., Etc.
The listing or selling broker (depending on local custom) oversees a contract through to closing and helps to place the financing, process the case, arrange various inspections and review financing and “points”.
At this stage, all contingencies will be satisfied and removed. The buyer will select a settlement and/or a title company, and the listing or selling broker will notify those firms and provide the vital information.
A number of professionals come into the home selling process during this period, including a housing inspector (if requested by buyer), well and septic inspectors, termite inspector, appraiser, and attorneys. Generally, a mortgage acceptance requires 30-45 days for conventional, 45-60 days for VA and FHA. However, on the chance that the financing falls through, the seller should keep the property in showable condition.
Termite Inspection
This inspection is required by most lenders and is specified in the contract, although it’s not usually required for hi-rise condominiums. The termite inspection is ordered by the selling or listing broker according to local custom. If existing coverage is in effect that might avoid an unnecessary inspection, the home seller should mention this to the listing broker. The seller is responsible for payment of the inspection, removal of any infestation if required, and the repair of damage if needed.
Loan Processing
Your listing broker will keep you informed about the buyer’s loan approval progress. Most contracts require the buyer to make a loan application immediately after contract ratification.
The lender’s loan officer takes the buyer’s application. A property appraisal is ordered to confirm that the property is adequate security for the mortgage (home seller should expect appraiser to call for inspection appointment). Lender verifies the buyer’s employment, income, deposits, credit rating and debts.
Upon receipt of all information and appraisal, loan officer submits application package for loan approval to the VA, FHA, investor or lender’s loan committee, as appropriate. VA, FHA, and occasionally a conventional lender, may specify requirements which must be met before loan will be made, such as repairs. Ask your listing broker about this situation. When the loan is approved, a commitment is issued to the buyer. Many contracts require loan commitment from the lender within a specified period of time.
After Loan Approval
After the buyer receives written loan approval, selling and listing brokers will coordinate a settlement date. Your listing broker will notify you to confirm the date, place, and time and will give you a checklist of everything you need to bring to settlement. Your listing broker will also let you know when you should notify utility companies to transfer accounts.
The home seller now can make definite moving plans. If the move is to another city outside the area, Long & Foster can arrange for you to receive destination area information from our affiliated broker. This out-going referral insures the seller of working with a broker of the same quality as Long & Foster, and makes the move easier by providing information prior to house-hunting trips.
Anticipating the Move
A number of items a seller might consider, now that settlement is set, include:
- Begin to use food in your freezer.
- Eliminate items you won’t be moving. (You may want to have a garage sale.)
- Check with your insurance agency if you want to purchase full coverage on moveables. Make sure your family car and household goods are adequately protected while enroute and initially after arrival. (If the seller plans to vacate the house more than 30 days before settlement, be sure hazard insurance covers risk during that period and until deed is recorded.)
- Obtain transcripts of children’s school records.
- Have birth and baptismal records made of all family members.
- Secure medical, dental and optometry records for family.
- The selling broker will remind the buyer to arrange for insurance coverage in at least the amount of the mortgage as of closing, and to bring a certified or cashier’s check made out to the settlement attorney or title company.
Unless otherwise provided in the contract, buyer gets possession at settlement. Seller should make plans to clean, remove trash and vacate the day prior to settlement, or in any case not later than settlement day. All appliances should be in good working order in time for buyer’s final walk-through inspection.
Walk-Through
Buyer’s Final Inspection
The purpose of the walk-through inspection prior to settlement is to determine if conditions in the contract are satisfied. The time for the buyer to inspect and note defects for correction by the seller is during the contract negotiation and prior to signing the sales agreement. Repair or replacement items should be noted in the contract. Most resale homes are sold in “as is” condition, however, mechanical, electrical and plumbing items should be in working condition.
It is up to the buyer to perform the inspection, not the seller who may or may not be present. The buyer should be accompanied by the selling broker and/or the listing broker. The home seller should be sure utilities are on so that equipment can be operated.
Room by Room
Expect the buyer to try all lights and switches; turn all faucets on and off, run shower, flush toilets; turn on furnace and CAC (in off-season buyer may hire professional to certify proper function); test all stove burners, oven at bake and broil; run some ice cubes through disposal to test blades; run dishwasher, washer, and dryer through complete cycle; and open and close all windows and doors. In short, to try everything, even keys and fireplace flue.
All deficiencies should be noted. If seller does not correct problems prior to settlement, funds may be withheld by settlement attorney for repairs. The selling broker will coordinate with listing broker and seller to make repairs before settlement, if possible, Upon receipt of bills and notification that repairs are complete, attorney will release balance of funds to seller, if money is escrowed for needed repairs.
Settlement
Signing Papers And Transferring Keys
The big day is here! Tonight you can pop open the champagne, but today there will be a lot of paper signing and a poignant passing of the keys (don’t forget the garage keys, and electric garage opener, too).
At the settlement will be an attorney or title company representative, the buyer, listing and selling brokers and all owners. The home seller should bring all warranties on equipment (or leave them in the house) and any instructions on equipment maintenance or operation.
The attorney will have searched the title, and obtained old and new lender instructions. First, all unresolved walk-through deficiencies are resolved.
With the buyer the attorney explains the deed of trust, deed of trust note, and settlement sheets. Buyer signs all three, and pays the balance of the down payment and buyer’s closing costs.
With the seller the attorney explains the deed and settlement sheets and gets the home seller’s signature on them. Seller pays appropriate closing costs.
Seller’s Settlement Costs
Closing costs for the seller may include (Again, ask your listing broker):
- Attorneys fees (preparation of deed, settlement fee, and any release fees)
- Lender’s inspection fee
- Appraisal
- Broker’s commission
- State deed transfer tax or recordation fee
- Condominium or Homeowner’s Association packet fees
- Water escrow (to reduce, bring canceled check and last bill; amount prorated at settlement)
- Termite inspection
- Loan discount fee (points based on loan amount)
- Mortgage pay-off penalty (see deed of trust note)
- Interest up to the date trusts are paid off
If the seller’s taxes or insurance have been escrowed, the seller will receive any money accumulated in the account for bills not yet due. Additionally, the seller will be reimbursed for any money paid in advance and not used, such as property taxes. The seller will receive these refunds at or after settlement, depending on the locality. Taxes and homeowner’s dues or condominium fees will be prorated on a daily basis. Seller, buyer and brokers are supplied a copy of settlement sheets for their records. The house keys are transferred to the new owners.
Disbursement
The attorney or title company will disburse funds after all funds are in hand, checks have cleared, new lender has reviewed papers, and the title has been re-checked and deed recorded. Seller should not plan to receive funds for up to four days, although they may be disbursed the same day in some localities. Check with your listing broker.
The house has now been sold, settled, and funds disbursed.
Financing
Different Mortgage Strategies
When it comes to paying for a home, buyers today have an almost unlimited number of financing options from which to choose. They have before them a real “mortgage smorgasbord”-a table full with exotic names like “ARMs,” “balloons,” and “buy downs.”
Many involve financing assistance from the home seller. Others are from regular financial institutions like mortgage companies, banks and savings and loans. Here’s a run-down on the main types of financing every home buyer should know today. Interest rates are intended for illustration only; ask your Long & Foster Sales Associate or loan officer from Prosperity Mortgage Company, a Long & Foster affiliated company, for current market rates.
Conventional/VA/FHA
Conventional Mortgage. A conventional loan is an indebtedness or mortgage made between a lending institution and a borrower without a third party participant, such as VA or FHA. Most types of conventional loans are paid off in equal monthly payments spread over 15, 25 or 30 years. The interest rate stays the same for the life of the loan, therefore the monthly principal and interest payment also remains constant.
Terms of a conventional loan vary among lenders, but basically a loan can be obtained with as little as 3% down payment. When the down payment is less than 20% it is, in most cases, necessary for the loan to have private mortgage insurance to protect the lender.
Example: The buyer purchases a $150,000 home. Typically, the lender will require a down payment of $30,000 or 20% of the purchase price. Assuming 8% market rate; $120,000 loan amount; 30 years, $880.52 monthly payment. With private mortgage insurance, however, the lender would lower the down payment requirement to 5%, or $7,500, which increases the monthly payment. (Lenders refer to private mortgage insurance as “PMI.”)
Advantage: Fixed rate financing is straight forward and easy to understand. Using private mortgage insurance normally adds up-front costs but new PMI plans allow premiums to be financed or paid monthly.
VA Loan. The VA does not lend money, it guarantees a portion of the loan so that lenders who originate the loan feel comfortable with their risk. Qualified veterans can take out loans up to $203,000 with no down payment. VA-guaranteed loans can be combined with second mortgages and are assumable upon qualifying by any future buyer. Payments may be fixed for full term.
Example: The veteran agrees to buy a home for $100,000. With no down payment, the loan amount is $102,000 (includes a minimum 2% VA Funding Fee) for 30 years, and say the VA interest rate is 8%, plus “points” paid by either buyer or seller. The monthly payment for the $100,000 loan will be $748.40.
Advantage: No down payment necessary.
FHA Loan. Strictly speaking, FHA does not make a loan; rather, it insures loans, which makes lenders willing to finance home purchases on favorable terms.
With an FHA loan the down payment can be as little as 2.25% of the purchase price or 3% of the first $25,000 of the purchase price, 5% of the next $100,000, and 10% on the remainder.
Points (prepaid interest) can be charged by the lender, but since the FHA rate is no longer regulated by HUD, the purchaser may negotiate the rate and points.
FHA is now charging an up-front Mortgage Insurance Premium (MIP) fee. This fee can be financed in with the loan or paid in cash at settlement. It is 2.25% of the loan amount, if financed. In addition to the upfront 2.25% fee (which can be financed into the loan), FHA now charges a monthly MIP of .5%.
Example: The buyer of a $100,000 home in Maryland, would make a down payment of approximately $2,250, resulting in a base loan amount of $97,750 and a total loan amount of $99,949, including the financed M.I.P. At a rate of 8%, the monthly principal and interest would be $773.39, plus $40.73 for the monthly M.I.P., for an adjusted payment of $814.12.
Advantage: Low down payment and low interest rates. Fixed or adjustable rates available. Especially designed for first-time home buyers.
Owner Assisted
Second Mortgage. The seller of the house lends the buyer enough to make up the difference between the purchase price and the down payment + first-mortgage balance. (A commercial lender may also make this kind of loan). The terms, including the interest rate, are based on buyer/seller agreement. It is often a short-term (5-to-15 year) loan; sometimes “interest only” payments being made until the term date, when the balance is due. A buyer can then pay off the loan or refinance.
Example: A $100,000 home offers a $40,000 assumable first mortgage balance; to pay $60,000. the buyer puts $14,000 down and takes a 15-year second mortgage for $46,000 at 10%. Monthly payments on the first mortgage are $283; second mortgage, $494. The total, $777, is less than if the purchaser had taken out a new first mortgage for $86,000 at 8% ($821.86) and the second pays off after 15 years.
Advantage: Well suited for the buyer with a small amount of cash for a down payment, but with a monthly income high enough to handle both mortgages.
Buy Down Mortgage Plan. The seller (who in this case might be the home owner, the builder, or a third party) puts additional cash “up front” with the lender when the loan is closed, in exchange for a lower interest rate in the initial year(s) of the mortgage.
Example: Assume that the current “Market” rate is 8%. With the purchase price at $100,000, the buyer makes a down payment of $14,000. Monthly payments on the balance of $86,000 would amount to $631.04. However, the seller/builder/third party can “buy down” the interest rate by paying the cost differential between the higher and lower rate monthly payments at 6%, the monthly payments are $515.61 for the first year.
Advantage: Lower interest rates and lower monthly payments. Buy downs allow more potential buyers to qualify for a loan.
Long & Foster’s mortgage company, Prosperity Mortgage, can help you structure below market financing using “Flex-Fixed Financing”. In this plan, at the rates in effect at the time of printing, a 7-year extendable ballon mortgage is chosen with a 7.5% note rate. By agreeing in advance to pay 3 additional points, you could offer a mortgage starting at 5.5%.
Owner Financing. Owners may finance first, second, third or fourth loans. They may lend their equity back as a first mortgage (often called a “take back”) or help the buyer in other ways. One form of owner financing (sometimes called a “balloon” mortgage) bases monthly payments on a 30-year-loan scale, but requires the balance of the mortgage to be paid at the end of a short period, say 5 to 7 years.
Example: The house price is $100,000. The seller will take a down payment of $14,000. The balance ($86,000 less monthly payments made on the principal) will be due in five years. Interest rate, 10%. Monthly payments, $755-nearly all of it interest. At the end of five years, the buyer must pay the seller $83,054, the balance of the mortgage. At that time, the new owner will seek other financing.
Advantage: Lower initial interest rate. If interest rates have declined by the time the balloon payment is due, the buyer can secure less expensive financing.
Institution Assisted
Assumable Mortgage. Buyer “takes over” or assumes the mortgage obligations of the seller (with concurrence of the lender). Down payment is the difference between new purchase price and the existing mortgage balance. Interest doesn’t change, which is usually lower than today’s rates.
Example: With a house price of $100,000, the seller holds an assumable mortgage at 7%. The balance of the mortgage is $40,000. (The seller originally paid $50,000 for the house in 1969). Down payment, $60,000. Monthly payments on balance of seller’s mortgage, $283. A substantial portion of the $60,000 might be financed by a second mortgage.
Advantage: An opportunity for the buyer to get financing at bargain rates and seller has substantial marketing advantage if home is competitively priced.
Adjustable Rate Mortgage (ARM). The interest rate may go up or down over the years, and it is keyed to a financial market index. Monthly payments may also be adjusted on a periodic schedule. Many ARMs set a maximum adjustment on possible increases to interest rates and monthly payments, and/or overall floor or ceiling for life of the loan. The initial rate is often lower than conventional fixed rate financing.
Example: Buyer purchases a $100,000 home. Down payment $14,000; loan amount, $86,000; interest rate at start, 6%; monthly payments (interest and amortization) at start, $516.00. Interest rate adjusted annually to reflect Treasury bills; maximum annual rate adjustment is 2%; life-of-the-loan rate cap is 12%; monthly payments adjusted every year.
Advantage: Initially, monthly payments are lower and less income is required to qualify. If interest rates decline, the rate is adjusted downward.
Balloon Mortgages. A balloon mortgage is typically a loan which must be paid off after a certain period. The advantage they offer is an interest rate that is lower than a 30-year mortgage. Balloons may range in duration from 5 to 7 or 10 years. If the 30-year fixed rate quote was 8%, the 7-year balloon may be as low as 7.5%, providing lower payments for the 7-year period. One point to consider, however, is that the investor may but does not have to guarantee to extend the loan past the balloon date even though most balloon plans contain provisions for optional refinancing.
Example: See example under the heading of “Owner Financing.”
Long & Foster®, Realtors®, is not a mortgage lender. These examples are for illustration only and were provided by Prosperity Mortgage Company, a Long & Foster affiliated company. The exact terms of any financing are subject to the requirements of the investors in each specific case. Choosing the “best” method depends on the circumstances of the individual. A real estate agent will be most happy to fully explain the home buyer’s options for financing.
