Ask the Brokers

I’m tryin’ to buy a house here!

A reader recently shared this in a comment on another post. I found his predicament worthy of a little more front-and-center discussion.

I just received a “notice to perform” Escrow closes on Jan 7th. My loan has been in underwriting for over 2 weeks and I am being told it is because of holiday schedule, under staffing and we have now had 2 extensions and here we are at the end of another week with no word on approval. I personally hand delivered each document throughout the process, never once putting anything in the mail. My application is clean, credit score, income, everything is high and tight. So here we are just a few days from the close date, frustrated, in the dark, the seller has to be totally impatient. So I ask, why should I jeopardize my down payment because of the inadequate performance of a bank…?

Oh btw, the bank was told by my broker two weeks in a row, “if we don’t get approval by Fri this deal is going to fall apart” and here comes another Fri. I am imagining a guy in a suit at his desk under swaying towers of loan ap’s. or maybe the towers above an empty desk as the camera cuts to a guy out on the golf course somewhere…

Your visual at the end made me laugh, but I doubt any of the parties involved are finding the situation very funny. As is so often the case, I have more questions than answers. Do you have preliminary underwriting approval and are you just waiting on final loan approval? Or, has the lender not even looked at your file yet? Is your lender making representations that the closing date can be met? Do they table funds (make funds to close available at signing), or does the closing package have to go back to the lender’s desk for final review and funding?

The closest I have come to a situation like this lately was when the buyer of one of our client’s homes didn’t get his loan documents for signing until the day of scheduled closing. His lender tabled funds, so we only incurred a one-day delay. While it was an irritant to all involved, there was never any real fear that the transaction would not close, just anxiety as to “when.”

In your case and at this late date, it would appear that a delayed closing is going to occur. If you credit and income are “clean and tight” as you say, it is never too late to submit a package to a second lender, one who can expedite your loan application and perform. We have seen mortgage brokers arrange hail-Mary, back-up financing in less than a week under similar circumstances.

Which brings us to the subject of dual applications at the time financing is initially sought. This process of “double-apping,” while certainly not rampant, is become more commonplace, particularly in situations where a party has some trepidation about a buyer’s ability to qualify or a lender’s ability to perform.

I suspect the reality in your case is that no one really wants to cancel this escrow the Friday before a scheduled Monday close. You and the seller have come too far down this road together. A Notice to Perform is the seller’s only hammer at this point, but if your agent can have a frank discussion with the other side and assure the seller that you are acting in good faith, convey that you working your darnedest to get the lender to rally, and that the delay is not due to your inability or unwillingness to close but on the lender’s different sense of urgency, this might go a long way in persuading the seller to hang in there with you.

Regarding your earnest money deposit, if I were the seller’s agent, I would most definitely be issuing the Notice to Perform. And, I assume we are talking about a Notice to Perform on loan contingency removal, since you mentioned “jeopardizing your down payment.” I would also be making the argument that releasing a loan contingency does not need to be predicated on full loan approval. Having gone this far, you as the buyer should have at least a preliminary or conditional loan commitment from the lender. If the issue is truly a procedural one, and not related to your qualifications for financing, then you should have little fear that you can ultimately perform. Of course, as a buyer’s agent, I would argue otherwise.

Your only choices are to call the seller’s bluff, if it is indeed a bluff, and not release your loan contingency or to roll the dice and sign the contingency removal. If you are indeed qualified and committed to consummating the transaction, the latter should present little risk. In either case, I can’t imagine a seller wanting to start over if it is simply a case of a delayed closing, particularly in this market. But I could be wrong.

Warning! Boring primer on the Real Estate Settlement and Procedures Act (RESPA) ensues. Refill all coffee cups before proceeding.

I received this very personal and heartfelt email this week from an appraisal company.

I received this question in our Ask the Brokers inbox this week:

We are the buyers and signed contract cancellation on 10/27/07 well within 17 days of contingency. The seller relisted the house on the market as active on the same day. But our agent has not heard form the seller’s agent after he has tried to contact the agent via phone calls and email regarding the status. My agent tells me to wait for a few more days, and I am getting anxious and want to know what is the legal time frame I have to wait. What should we do nest? The reason for cancellation are that the seller inflated the square footage of the house. We have the appraisal to prove it. Also the termite inspection (infestation and wood damage) was done four months ago but the fumigation will be done next week which will be past our 17 days of contingency. Without the clearance, we don’t feel comfortable proceeding with the contract.

I will assume that we are talking about a transaction in California involving the standard California Association of Realtors Residential Purchase Agreement. If that is not the case, all bets are off.

There are several issues here, so I will try to break it down. And, of course, the standard disclaimer applies: I am not an attorney, and you are always encouraged to seek the advice of a real estate attorney in situations involving contract dispute.

Return of the Buyer’s Deposit

I sense this is the primary issue, and if I am understanding correctly, you have signed cancellation and are wondering when your earnest money deposit will be returned. As we have discussed here before, the contract is a bilateral one, meaning that it takes two sets of signatures to get you into contract and two to get you out.

Whether or not your seventeen day period for contingency removal has come and gone is mostly immaterial, as the contract requires active removal of contingencies (removal in writing). Absent having done this, you would be within your rights to cancel contract at any point. So, why is the seller playing cat and mouse? We see this occasionally. The seller is presumably not thrilled with you right now, at least in the context that he is not happy he has to start over marketing his home. While you may be entitled to the timely return of your deposit, escrow can not release the money to you without the seller’s signature, and it is probably either not his biggest concern right now or he is being ornery and wanting you to suffer just a little.

I have heard of situations where the money has been held up in escrow for months. This is the exception, of course. With an open escrow, the seller will be unable to sell his home to another buyer, since any future sale will be “subject to cancellation of previous escrow.” This is really the only leverage you have in assuring a quick return of your money. There is a clause in your contract which addresses this:

Release of funds will require mutual Signed release instructions from Buyer and Seller, judicial decision or arbitration award. A party may be subject to civil penalty of up to $1,000 for refusal to sign such instructions if no good faith dispute exists as to who is entitled to the deposited funds.

If the seller continues to be non-responsive, you may want to consider seeking the advice of a real estate attorney. The seller may be subject to damages.

The Square Footage Estimate

There can be many sources of square footage. In the Multiple Listing property flyer, the seller’s agent should have provided the source of square footage. You can assume that the source used will be the one that provided the highest estimate. These sources can include the builder brochure, Assessor’s records, an appraisal, or even the seller. Large discrepancies are most often found where there have been additions to the home, either non-permitted (which would not be reflected in original plans or in the Tax Assessor’s records) or permitted (which are sometimes missed by the Assessor). Regardless of the source, the business of estimating square footage is never absolute, but it should be within a reasonably accurate range. In the end, it really doesn’t matter if you are surprised by the your appraiser’s findings. You have the right to cancel within timeframes if you are displeased with information.

The Termite Clearance

The only contractual requirement regarding termite clearance is that it be obtained prior to close of escrow. The required work need not be accomplished within your contingency period, but the initial report must be made available to you for your review and approval. Escrow is charged with ensuring that all contractual obligations are met prior to allowing the transfer to record. Therefore, you can rest assured (unless the contract specifies otherwise) that work will be completed when you take title.

Ah, the contracts. They are long and full of words, words which too many agents and principals to the transaction gloss over but which are oh-so important. It is incumbent on both agents and their clients to discuss the terms and to have a clear understanding of the implications of the provisions. No one opens escrow expecting the dispute clauses to apply to them, but some day they might. Better to understand your rights up front so that you are prepared for the worst case. 

I received an email earlier in the week in which someone planning a move to San Diego apologetically asked the following:

I hope that this doesn’t seem callous in light of the recent events in the San Diego area, but my family may be moving there in March and are wondering what effect the fires might have on real estate values in San Diego County. Will the coming year be a bad time to move to the area, or might it be prime?

This is, not surprisingly, a question I have been asked at least a half-dozen times since the smoke began dissipating. A few asked simply out of curiosity, while others asked in the context of “might I benefit?” At first blush, one might instinctively find the latter lacking compassion. If we are honest, however, most of us who care about the real estate market, either because it is how we make a living or because we are currently seeking to buy or sell a home, will have to admit that the question has crossed our minds.

I do not for a moment believe that the seller who asked if the destruction of so many homes might positively affect his market value was taking joy in his perceived potential to profit from the misfortune of others. On the contrary, a real estate market is influenced by a myriad of complex factors, both internal and external. It is a valid question.

 My short answer is no, the fires will not have a measurable effect on demand or pricing. The longer answer requires a caveat. Based on our experiences with the 2003 fires in Scripps Ranch, there is the potential for short-term localized blips in the demand radar. Of course, property loss then was not so widespread. With nearly 400 homes lost in Scripps Ranch, we saw an immediate and significant demand for rental properties. In addition, with many of the affected families being what most would consider more affluent, we also saw an increase in buyer demand. Many families chose to purchase a home rather than rent while undergoing the long process of rebuilding.

Markets in surrounding communities saw little impact. People will tend to want to stay close to “home” in the aftermath, in the areas where their children attend schools, where they are familiar with the services, and so forth. There is a comfort zone beyond which few will wish to venture.

It is important to remember too that what we experienced in the aftermath of the 2003 Cedar Fire occurred in a different real estate climate. On October 29, 2003, we had 25 active listings in Scripps Ranch with an average market time of fewer than 30 days (according to the Sandicor Multiple Listing Service).  This morning, we have 126 homes listed for sale with an average market time of nearly 70 days. Four years ago, we were in the crazy days of real estate. You couldn’t list them fast enough, and prices were increasing dramatically. Purchasing for the short-term and as an interim measure was perceived as a good investment. Today, that is not the case.

I am aware of reports that there is huge immediate demand for rentals in the areas hardest hit, such as Rancho Bernardo. This is as expected. I have not seen this same clamor in nearby Scripps Ranch. While enormously tragic for each family affected, the loss of housing on the larger, impersonal scale does not constitute a significant subset of the county-wide housing inventory. So, the question of whether it is a good or bad time to move becomes one of general market environment. For a buyer, and from strictly a pricing standpoint, there hasn’t been a better time to purchase a home in San Diego in the past four years. Will prices go lower yet? Perhaps, and probably. But, if you are purchasing for the long-haul and not as an interim strategy or purely for short-term investment and gain, you should have nothing to fear from buying now.

Before it is over, I may need to retitle this post, but it’s too early. So, on to the latest email I received (from Illinois, no less) in what is shaping up to be Ask the Brokers Week at the San Diego Home Blog.

I have a question and hope that you can be honest with me about it. With the market the way it is today, would it truly make a difference if I go with a big real estate company verses a real estate marketing consultant, who reassures me that we will get (my property) sold before I get into any further trouble and lose it all? I just need some truth because I just wasted 3 months with a friend of mine who honestly didn’t show me anything that she claimed was being done except working from her computer.

Steve and I have worked for Little, Big and Biggest when it comes to brokerages. I will give you the most honest answer I can given that we are currently affiliated with the Biggest category.

All things being equal, the brokerage your agent aligns himself with is terribly important. Larger companies can provide resources that smaller firms simply can not. These include legal and administrative support, technology-related opportunities and tools, and credibility and presence in the agent community. I will brace myself for the onslaught of agent rebuttals to this statement, but the average agent (and, therefore, the consumer), in my opinion will be far better served by the large, established brokerage. And, the sad fact is that most agents are average at best.

All things are not equal, however. Big and small companies alike will have mediocre agents under their banner and they will have stellar agents associated with their brand. Ultimately, the individual agent will dictate the level of service and success that the client receives. A brand name alone does not qualify an agent to represent you. As the consumer, it is incumbent to evaluate the differences. Look at the individual agent’s marketing and services program, look at their track record, evaluate their successes and speak to their past clients.

As for your particular situation, I obviously don’t have all of the facts. Properties fail to sell for a variety of reasons: Market factors; location; property condition; and, most importantly, price, to name a few. Beyond this, the agent can indeed be an influencing factor. Proper pricing advice and aggressive, professional exposure are critical in a successful sale. The best agents today will find themselves “working from their computer” a lot, that much is for sure, but as one who leans a little further toward the side of technology than most, I still spend as many hours a day communicating with my clients on the phone and face-to-face than I do from behind a computer screen.

It is all too easy (and common, I’m afraid) for the agent to bear the brunt of blame when things are not going well. Too often, this is not justified, yet often some of the blame is warranted. A successful partnership, and don’t forget that your relationship with your agent is just that, is dependent on effective communication and on trust. The most important advice I can offer is this - If you are unhappy with your representation for any reason, you should find an agent that you can respect and trust. You have so many choices. Settling for a “friend” because you feel obligated may not be in your best interest, unless of course that friend is the best agent for the job.

Big company or small, your agent is an independent contractor who brings with them a particular level of experience, knowledge, professionalism, and success, not to mention a particular tool box of marketing and service tools to help you sell your home. Big companies may tend to offer their agents a wider array of spoon-fed opportunities to serve their clients and a more impressive brand recognition, but these are not ultimately proprietary things. Your agent, large company or small, can and should demonstrate a commitment to their business by being always knowledgeable in the market, in contracts and disclosure law, and in the changing technological opportunities for marketing your home. They can and should show a commitment to you and the business of representing you using the best resources available. Ultimately, it will be the qualities of the individual agent which are most important to you personally and to your transaction.

I received this question today:

I was told I had loan approval. The broker then opened escrow. Escrow should have closed 8/27/07. As of this date, I have no funding and escrow has not close. Am I entitled to receive my deposit and appraisal back?

I am afraid I have more questions than answers, and I hope you will help me out through your comments (under an alias, if you wish).

1. “I was told I have loan approval. The broker then opened escrow…”

Loan approval is always subject to conditions, so my first question is, were there conditions that you were unable to meet? Was your “approval” a prequalification or a preapproval, or did you indeed get subsequent underwriting approval subject to final funding conditions? Regarding prequalification and preapproval, there is a difference. A prequalification typically consists of a short conversation with the lender or mortgage broker. “What do you make? What do you owe?” Based on unconfirmed representations, the lender or mortgage broker will make a determination that you are, in theory, qualified to make the purchase. On the other hand, a preapproval typically involves actual completion of a loan application, verification of assets, and a credit check. While not a final commitment to make the loan, it is clearly more thorough.

2. “Escrow should have closed 8/27/07. As of this date, I have no funding and escrow still has not closed.”

I can’t imagine why escrow is two months late in closing, but I clearly lack the information that you have. You say you have no funding. Funding occurs after full loan approval and after loan documents have been executed. Have you signed loan documents? What reasons are you being given for the extraordinary delay?

3. “Am I entitle to receive my deposit and appraisal back?”

Most lenders require the appraisal to be paid out of pocket by the buyer. You would have to take this issue up with the lender, but I highly doubt they would refund the appraisal cost. This is a cost of doing business paid to a third party for services rendered.

Regarding your deposit, this goes back to whether or not any of your contingencies of purchase are active. If you have waived all contingencies, particularly your loan contingency, then your deposit is at risk, since failure to close at this point would be a breach of contract. If, on the other hand, you have not removed these contingencies, you might be entitled to have your deposit returned upon cancellation.

Again, if you are willing to shed a little more light on your situation, that would be helpful. If there are any lender-types out there (Brian Brady?), I would appreciate your input.

It sounds like a mess all around, and the real travesty (I sense) is that no one is properly explaining the process or the reasons for the delay to you. I wish you the best of luck!