Real Estate Closing Problems

Real estate closings have changed outwardly in many ways, especially since the beginning of the pandemic.  Most parties sign ahead of time, and--usually--not much happens at the closing.  The monies are often wired from buyer to seller, and sometimes the commission is paid that way as well.  

Although that all sounds smooth, there are always glitches that pop up at the last minute.  The most problematic, and maybe most common, is a delay in the closing date. It could happen that the mortgage funds are not available.  That could be due to processing issues, or for any number of other reasons.  That commonly delays the closing.  It's interesting to know that our contracts in Connecticut allow for closings to take place after the date specified, and that a couple of weeks, which can feel like forever to the seller, is not unusual.  In fact, not all contracts in real estate use the phrase "time is of the essence", which signals that the transfer must take place on time, or there will be consequences.  It is not uncommon for the party who wanted that phrase used to be the one who cannot close on the date identified.  We had one buyer who insisted on using it, and then had a child with chickenpox, and was unable to move when required.  Attorneys on vacation are another likely cause of a delayed closing, and they would most often work that out amongst themselves, without the buyers and sellers having much say in the matter.

Sometimes buyers want to move in before the closing, or at least store furniture in the new home.  That raises issues of insurance--the buyer, before closing, has no "insurable interest" in the property, and the seller has no reason to take the risk.  Attorneys would normally be used to write up an agreement of indemnification.  Sellers frequently worry that the buyers will move in, find something wrong, and refuse to close.  That's not crazy.  Usually, something gets worked out, especially if it is the seller who isn't ready to close for some reason.

The walk-through can be sticky, if something is discovered to be broken or missing.  The contract is usually clear that the purpose of the walk-through is just to be sure that the house is in the same condition as it was at the time the contract was signed, so it isn't clear that a buyer could get satisfaction for something found that wasn't working--it should really be that he or she would have to prove that it was not broken when the contract was signed.  At other times, the argument is over what was taken.  It could be the washing machine or the dishwasher, although the usual culprits are chandeliers and pool equipment.  . There has even been one closing held up because the sellers took the light bulbs, and the buyers wouldn't close without them! All in all, everyone breathes easier when that inspection is done

Many other situations occur every once in a while, enough so that we caution sellers not to "count their chickens before they hatch".  That way, a little bump in the road will be expected, which can be all that is needed to defuse the tension and find a way to move forward, if all parties are reasonable. And, if there are no last-minute items that arise, everyone can be pleasantly surprised!

Letter to Our Clients

Colleagues and Friends:

As many have said, these are extraordinary times. As you know, Connecticut Governor Ned Lamont has issued an Executive Order asking many businesses and organizations to suspend operations, while we battle the Coronavirus outbreak that has disrupted our health and our lives.

As of now, real estate services are exempt from the order to close due to the fact that for some people, moving may be a necessity even in this stressful environment. Some businesses critically need more space to provide for increased demand in certain industries. There are many in our community right now who are in the middle of a real estate transaction, or who find themselves needing to purchase or sell a property due to changes in their jobs or their families.

While we remain available to those who need us during this time, the Governor's order was put in place for a reason, and we are doing everything we can to respect and honor it. That means that at Pearce Real Estate, our primary concern is for the health, safety, and welfare of everyone in our community that is affected, in whatever way, by the current crisis. So, while we are still able to serve you, we will be strongly recommending doing so virtually. When in-person contact is required, we will be sure to do so safely and appropriately to respect the circumstances.

During this time, we feel one of our primary responsibilities is to listen; whether it's about a specific housing need you may have, or just about how this situation is affecting you and your family. Even if you’re not someone who needs to move right now, you may have questions. Please know that we are here to help you make the best possible decisions for your specific situation and help you safely through the process.

We will continue to communicate information we believe to be important to you as circumstances evolve. In the meantime, don't hesitate to contact us.

Thank you for the trust you have placed in us, and we intend to do everything we can to live up to it.

Together we'll get through this.

Barbara L. Pearce

CEO & Chair
Pearce Real Estate

Move Up and On

Recently, we sent out a chart to our agents of interest rates by the decade.  Rounding off, they are now about half of what they were in the 70s and 90s, and a third of what was common in the 80s.  Given another chart, showing how long people have stayed in their homes before moving, it's worth pointing out again how much of a difference in the true cost of a home the mortgage rate can make.

Many boomers I know are chagrined to find that, even if their downsized home is actually smaller than the home they left (and you would be surprised to find how often it is not!), they almost always spend just as much buying the new home.  However, rates are still so low that we should think of it as buying "up" at a great cost, in much the same way that we might spring for Premium Economy or Business Class on a plane, if the differential is very reasonable.

While spending more on finishes and extras is a luxury, it will eventually increase the resale value if you make a home modern in the way that buyers down the road will expect.  That won't work if it's too personalized, but many currently trending add ons are well worth the price, and, at these interest rates, may not cost as much as they would have cost in a different decade.

So, the message?  Move up and move on.  Buy what you can afford, and don't forget what you are saving in interest costs, as well as common savings on landscaping, gas (being closer in toward a town center saves money and time), and utilities (modern appliances save energy).  Think of it as Business Class at a Premium Economy fare rate, and go for it!

Current Absorption Rates

Explanation of absorption rate: The rate at which available homes are sold in a specific real estate market during a given time period. If you look at the number for North Branford you can say “If market conditions do not change and if no new listings come on the market it will take 6.5 months for the current inventory to sell at the current pace of the market. A balanced market’s absorption rate is typically between 5 - 7 months.”



Keep Your Expectations Low

Remember the old phrase that "it's not over til the fat lady sings"?  Real estate transactions are like that often.  Things happen, and they happen right up until the papers are signed.  We have heard -almost- everything, but new stories keep popping up.  There are issues of sellers getting cold feet, buyers getting sick, or having children who get sick, sudden job losses, sudden divorces or separations or reconciliations, financial issues arising, and nearly anything else that you could imagine.

That's why a calm attitude and a good sense of humor both go a long way toward making the experience better for everyone.  Often it's the person who insists upon locking down the dates, who in the end can't meet them.  Or the seller who won't let the buyers postpone the closing, and then is the one who can't get out in time.  Given all of this, and more, I recommend that all parties expect at least one thing to go wrong (or maybe two or three things), so that they aren't thrown by a sudden change.  I would say that it's less the exception than the rule that something in your new home will stop working, or start leaking, right after the closing.  If you take that in stride, you'll be a lot happier.  Try to make it into a good story, that will get everyone laughing at a future dinner party or family reunion, and see whether anyone else can top your entry into a contest.  In our family, although it's not a real estate tale of woe, we can recount the day that one car caught on fire, one child got hit in a different car, by someone turning illegally, while the other child broke her arm, and the dog ran away.  You can't help but laugh when you tell it!

So, if you are ever annoyed because your real estate agent is not outraged by a request, a change, or a problem, now you know why.  We have memories of worse!

A Pause in Rates

Many of us thought that rates would continue to rise, and have been pleasantly surprised.  New buyers, and even those who haven't bought in a while, should be reminded that the price you pay for a property is often less important than the monthly payment you have.  When you get prequalified, you should ask for those numbers, at least the ones around your target range.  You can tell by the monthly amount what you can afford, and that's the number to focus on, when you sign a contract.

Usually rates go up in the spring, and down in the fall.  They are usually at their lowest around Election Day.  However, that's not when most people want to buy--that would be now.  Seize the moment, and capture the current rate.  Don't miss out, and later wonder why you waited!

How Do Real Estate Agents Get Paid?

I've started writing about common questions that buyers and sellers have, and, believe it or not, how we get paid is still one of them.  To understand the payment process, we first have to go over the legalities of licensing.  Each real estate company has one broker for legal purposes.  At Pearce, for example, I'm that person.  All agents at Pearce "hang" their licenses with us, although some of them are salespeople (who must work for a broker), and some are brokers themselves (who could work independently or can work for another broker).  Over 90% of real estate companies across the country have fewer than ten agents, and the broker sells him- or herself.  That makes Pearce Real Estate one of the largest firms in the State, and across the country.  The principles of agency, however, are the same regardless of size.  It's also useful to note what Realtor designates (and it needs a trademark sign, which is above my pay grade on a computer!):  It means that the company, and therefore all of its agents, belong to the National Association of Realtors, agree to abide by its Code of Ethics, and can participate in the Multiple Listing Service (MLS).  Most local firms are Realtor firms if they sell residential real estate, and, increasingly, commercial firms are not. We are, and we handle both types of property.

When a seller signs a listing agreement, or a buyer signs a buyer broker agreement (and those two contracts are basically equivalent), they sign with the broker in charge.  Only the broker in charge sets the rules--commission rates and terms--or can legally change or cancel the agreement.  Most compensation is offered through the MLS:  When a listing is posted there, it has a BBC (Buyer Broker Commission) offered, and the listing firm is required to pay that amount to the broker who represents the buyer, unless a change is agreed to by both firms, or firm if it is a sale with both brokers at the same company (which we call an "in-house" sale).   In order to have an in-house sale, both buyer and seller must sign a Dual Agency agreement.

When the property closes,in most cases, the closing attorney makes out a check or checks to the brokerage firm--checks cannot be made out to individual agents.  Firms differ widely in the way they compensate agents within their firms, both in the percentage of the check that goes to the agent, and in what expenses they pay toward the transactions.  In addition, some (usually national) firms also charge buyers and sellers "transaction fees", which are paid on top of the commission, and go only to the real estate company. In some cases, the commission is divided evenly between the listing side of the transaction and the selling side.  Increasingly, the listing firm keeps a higher amount, and offers a BBC that is less than half of the total.

Agents are legally independent contractors, so they don't get a salary, or a regular paycheck.  They earn money only when property closes or rents, and they share that with their firm.  It used to be that the firm got half and the agent got half, but now it can vary.  Some companies pay higher amounts (sometimes much higher percentages) to the agent, but often charge them for their desk, their postage, their copies, and their marketing.  Many transaction-related expenses are borne by the agent personally.  If he or she takes you to lunch, that comes out of his or her pocket.  If a problem arises during the selling process, and is paid for by the broker, that is also often coming out of the agent's share.  If you were referred to your agent or agency by another real estate agent or company, either here or somewhere else, that agent's firm can be receiving up to half of the total amount paid.

If all of this is making you feel as though the poor agent is at the bottom of the heap, you could be right, especially if you don't end up selling or buying, and they get nothing for all of their work.  What my goal is, however, is to make you understand what they make, and when, and to help you appreciate their excellent efforts on your behalf!

Absorption Rates

Explanation of absorption rate: The rate at which available homes are sold in a specific real estate market during a given time period. If you look at the number for Branford you can say “If market conditions do not change and if no new listings come on the market it will take 8.8 months for the current inventory to sell at the current pace of the market. A balanced market’s absorption rate is typically between 5 - 7 months.”

 



Absorption Rates

Explanation of absorption rate: The rate at which available homes are sold in a specific real estate market during a given time period. If you look at the number for Branford you can say “If market conditions do not change and if no new listings come on the market it will take 8.8 months for the current inventory to sell at the current pace of the market. A balanced market’s absorption rate is typically between 5 - 7 months.”

 



Renegotiation is the New Normal

Sellers may be surprised, and not particularly happy, to learn that today, more often than not, the sales price listed on the first contract signed is not the same as the sales price at the closing.  It's just a fact of life for us now, because so many issues can arise between the accepted offer and the final transaction that occurs.

Inspections come right after the offer is signed, and today's buyers are likely to expect that everything that gets pointed out as an issue in any inspections will be paid for by the sellers.  That wasn't the case years ago, when buyers viewed work to be done as something that they were taking on in the purchase, unless the problems were structural.  Although the sellers don't always agree to every item, especially when it involves questions of taste and preference, but they often are asked to give money back.

Mortgages now can also provide for funds from the seller.  Various programs differ greatly, but there is a range of items, from inspections to closing costs, that banks and mortgage companies may allow the buyers to have paid by the sellers, and that range goes up to 6% of the mortgage amount on the high end.  While everything must be disclosed in the closing documents, it can prove to be an additional hit to the sellers.

Appraisals, usually ordered for the lender, can cause changes, if the home does not appraise for the amount being requested in a mortgage.  If the sellers can't pay the difference, the sellers might decide to lower the price.  This, as with money toward inspection items, is less likely to occur if there are backup offers that could be accepted, if the buyers do not want to leave the contract price alone.

Finally, things that break or go wrong between the time of the accepted offer and the closing are the responsibility of the sellers, and, while it doesn't happen that commonly, the reason for the preclosing walkthrough is to make sure that the home is in the same condition as when it went under contract.

Although this list may strike fear in the hearts of sellers, the real lesson is that you shouldn't be angry or unprepared with an answer if any of these items are raised.  Once you know that there can be bumps along the way, it's easier to accept changes, or at least consider them rationally.

Here We Are Again at the Sweet Spot for Buying

Every year, I write the same thing at Halloween:  The period between now and Thanksgiving is the best time to buy a house!  People who want to sell before the end of the year for tax reasons, people who have already moved (or are about to move), people who are trying to avoid the increased maintenance and expense that winter brings, and others who may just want to check a sale off their to do list, are all itching to sell before the true cold weather sets in and the calendar turns to another year.

Buyers who have been waiting should gear up when they read this, because it can often be easier to reach agreement when the clock is ticking, even if it's only a psychological clock.  In addition, rates tend to drop around this time (though we may not see that this year, even a pause would help) and go up in the spring season, so there's another reason to buy now.

Even something as mundane as the inspection can be simpler in the time of  year when the heat is on and the hot water is flowing often.  And, since many workers look to earn extra money during the holidays, it may even result in a faster repair or maintenance appointment.  Mortgage brokers as well want to close before the end of December, as results are usually compared by quarter, and bonuses accrued for that period as well.

So what are you waiting for?  Ready, set, BUY.

Handling Multiple Offers

The first thing buyers probably want to know is why we have so many multiple offers, when the real estate market doesn't seem overheated?  The answer is that consumers today know the market very well, often as well as their agents do.  They have been to many open houses and/or showings, and they have a sense of how quickly a home will sell.  We advise sellers, in the pursuit of a high selling price, to price their homes in the sweet spot--i.e., where the buyers will perceive that they need to make a good offer right away, if they want to get that house.  Since many properties on the market are overpriced, those homes priced aggressively stand out, and buyers know that.

So, here we are.  We have a new listing, priced to sell, and three different sets of buyers have made offers.  What do we do now?  The most important realization for most people is that the seller is in control.  The agent advises, but there is no law on how to handle multiple offers, so s/he can accept any of them, ask for each of them to present a new offer, or simply state what they would take, and sign with the first party who agrees.  If I am allowed to give advice, I tell people to negotiate with one party at a time (especially since the only real danger in multiple offers is that the seller might inadvertently accept more than one, or the buyer might have offers accepted on more than one home, if they are not paying attention to the details).  It might be the highest price, but it's also possible that it's the cleanest offer with the fewest contingencies, an offer without a mortgage requirement, or an early closing date.  If you are the buyer, then, you should make the cleanest offer that you possibly can.

Many times the agent asks each of the bidders to come in with their "highest and best" offer.  In that case, I tell people to offer the highest price that they would be sorry not to have bid, if someone else got it for that amount.  That means, of course, that buyers shouldn't be sorry if they went as high as they could afford to go.  In a multiple offer situation, buyers should not expect, however, to be able to renegotiate much, if at all, after inspections.  When there's another buyer, or buyers, in the picture, the advantage here goes to the seller.  Also, in a multiple bidding environment, you should not count on a Hubbard clause to win the bid, since a clean offer will almost always beat it. 

The last important note to strike is that it's very common for buyers to doubt that other offers exist, or that they are being treated fairly.  Agents, in my experience, don't lie about other bidders, nor do they do anything that would interfere with the seller getting the best offer (which may, of course, not be the highest in dollar terms).  Most Realtors are very careful to give the same information and opportunity to all parties, since we are bound by the Code of Ethics to treat all parties fairly, and to act in the best interest of our client.  No one is happy to lose a bid, but it can happen under the best of circumstances, and buyers should learn from any mistakes (like delaying), and move on. 

For Sellers:  Price to sell, and be fair to everyone.  Don't be greedy.
For Buyers:  Do your homework ahead of time--know your limits and your preferences.  Act quickly!

What's an Escalator Clause?

When a property receives multiple offers, some motivated buyers may try to make sure that they are the successful bidders, by putting in an "escalator" clause.  This is a new development, that sometimes replaces the old standard system of going back to all bidders, and urging them to put in their highest and best offers.  That can go on for more than one round, when more than one buyer is still interested, or can be stopped at any time by the sellers selecting one buyer with whom to negotiate further.

The escalator clause circumvents the old system, by including future bids in an addendum to the sales contract.  For example, let's say that the home is on the market for $400,000.  A buyer who expects, or is told, that there will be multiple offers may choose to offer full price, but add an escalator clause, offering to pay, say, $2000 more than the highest bidder.  So, if s/he offered $400,000, and someone else offered $410,000, his/her bid will automatically adjust to $412,000.  There should be, and usually is, a cap above which the buyer will not go; in this case, let's say that it's $415,000.  If the cap had been $410,000, then it wouldn't be triggered, because the buyer didn't consent to go above that, and there is already a bid at that amount.  If the other offer had been lower, then $410,000 might have gotten this buyer the property.  Most clauses require the seller to prove the other offer, which can be done with a copy, from which the names have been redacted (crossed out).

The above paragraph may be a little hard to follow,  without a specific example to plug in.  The basic premise, though, is simple:  you as the buyer offer to go above other offers, up to an amount named.  If that offer is not triggered, you can buy for the amount on the original sales contract.  If it is triggered, the amount offered under the formula stated will be inserted into the addendum, along with a copy of the other offer.  In either case, the seller should get more money, and without the back and forth of multiple offers.  The downside is that, when there are no other offers, the buyer who offered the escalator may feel that s/he overpaid, causing buyer's remorse.  There's no perfect system, but buyers and sellers should be aware of the possibilities that are out there, and know to talk to their agents about the options they have.

Absorption Rates

Explanation of absorption rate: The rate at which available homes are sold in a specific real estate market during a given time period. If you look at the number for Madison you can say “If market conditions do not change and if no new listings come on the market it will take 5.5 months for the current inventory to sell at the current pace of the market. A balanced market’s absorption rate is typically between 5 - 7 months.”

 

 

What's a Hubbard Clause?

I'm learning to play bridge, and I am often stymied by certain conventions that are named after people I don't know and that mean nothing to me.  Real estate has some similar phenomena, and one is called the Hubbard clause.  Even we don't know after whom it's named, and, for all we know, it could be Mother Hubbard!

So what is a Hubbard clause?  Basically, from the buyer's point of view, it's a kind of right of first refusal.  It means that the seller has agreed to the terms of the buyer's offer, but that the buyer doesn't have to buy unless either s/he sells his/her current home, or until another bona fide acceptable offer comes along.  At that point, the buyer can agree to lift the condition about sale of a prior property and perform, or cancel the contract.  The seller cannot take another offer, even if it's better, until the time period for the buyer's choice has passed.

Why do people use Hubbard clauses?  To be clear, I am not a big fan of them.  I think they are better for buyers than for sellers.  However, sometimes sellers like them because there is a feeling that the buyer is psychologically committed to the property, and will work diligently to perform, or even take the risk that s/he can sell the current property before the closing date, letting the Hubbard expire and taking the chance.

Buyers use them because it gives them a clear last chance to purchase, and limits the price to what has been agreed to in the sales contract.  In some cases, they may actually be able to perform without selling the first house, but the Hubbard clause gives them comfort that they won't have to have two mortgages. 

One downside for the seller is that some buyers will not look properties with Hubbard clauses, if they know about them, because they may well be wasting their time.  The agent representing them may feel even more strongly about that possibility.  Of course, the seller's inability to take a later, higher offer is an even bigger negative, which could be countered by arguing that the first offer is almost always the best offer, and s/he has that in hand, with the Hubbard clause contract.

Reasonable people can disagree about Hubbards, but everyone should know what they are.  This to me is unlike the Stayman convention, which I can say exists, but cannot explain!

The First Two Weeks

There seems to be a persistent practice in real estate of "testing the market" with a price higher than what the agent believes that the property will bring at closing.  Sometimes there is an agreement that the price will be lowered after some stated period, often thirty days.  Agents often feel that sellers become wedded, however, to the original listing price, and forget completely that they were told that a lower price would be more in line with market expectations.

While testing the market might seem like a reasonable course of action, especially if there is a clear understanding up front that the price will be lowered in x days if not enough action, or an offer, is generated, those of us in the industry should know better. We now have access to all kinds of information that tells us who looks at a listing, when they search, and how (with what device).  We know popular hours, phrasing that captures attention, and click-through rates by property.  We can see whether they looked at it, saved it, forwarded it, or contacted us about it.  Administrators like me get a copy of every email inquiry sent to an agent on certain search engines and platforms.

And what do we know from all of that?  We know the power of the new.  Overwhelmingly, the greatest interest in a property comes in the first two weeks after it gets listed, whether it is commercial or residential, and no matter the price or location.  Some properties clearly generate more activity than others, but always get the most attention early.  Sometimes that is because prospective buyers have signed up for notification alerts, so that a new listing will show up in their emails.  Many times it is because the buyers themselves look on a regular basis, and click on anything that they haven't seen before.  The end result is the same:  They gravitate toward the newest entries.

So it's easy to see the problem with testing the market.  Your property gets the most exposure and the greatest number of views at the original price, which is higher than the agent, and perhaps even the seller, thinks is the true selling price.  Agents often talk about how much higher the likelihood is of securing a buyer in the first two weeks after the listing comes onto the market, but, in order to secure the listing, they also often sabotage that chance, by using the most useful marketing time to expose the property at the wrong price.

We know that buyers today know a lot, and often as much as agents or sellers, about the value of properties, through comparisons of available inventory, and market knowledge gained online and elsewhere.  They aren't going to overpay, and many aren't going to potentially waste their time making offers that will be refused.  They concentrate instead on properties that are listed at compelling prices, which suggest that they will sell quickly.  That motivates buyers to make speedy offers, at prices near, at, or above the listing price, especially if they see that there is a lot of activity at open houses, or with showings.  It's better to accept the reality that buyers know value, than to think that serving up higher-priced listings will change their minds about the correct price.

If there is one takeaway from this, it should be that sellers need to ask agents this question:  What price do you believe that my property will close for in the end?  Then list as close to that number as possible.  And enjoy the attention your property will receive.

Current Absorption Rates

Explanation of absorption rate: The rate at which available homes are sold in a specific real estate market during a given time period. If you look at the number for North Branford you can say “If market conditions do not change and if no new listings come on the market it will take 4.5 months for the current inventory to sell at the current pace of the market. A balanced market’s absorption rate is typically between 5 - 7 months.”

 



Should I Wait Until Next Year To Buy? Or Buy Now?

Article is from the KCM Blog, click here to view on their website

 



 

 

Some Highlights:

• The Cost of Waiting to Buy is defined as the additional funds it would take to buy a home if prices & interest rates were to increase over a period of time.
• Freddie Mac predicts interest rates to rise to 5.1% by 2019.
• CoreLogic predicts home prices to appreciate by 4.3% over the next 12 months.
• If you are ready and willing to buy your dream home, find out if you are able to!