Inspections, Financing, and Title

Once we have a signed contract on your new home, we have a lot of work to do to ensure that this is a good experience for you and that we get to closing without significant headache or heartache.  With few exceptions, the first week or two after you contract on a property are among the busiest and most important in the home buying process. We have to arrange for inspections and negotiate repairs, get important information to your lender and make sure they are doing their job, review important documents coming from the title company, and make sure the appraisal gets done on time. The "things to do" list will fall under three general categories:  property inspection; financing issues; and title issues.  Let's examine each separately:

Inspecting the Property

The most obvious part of the property evaluation is the physical inspection. You need to know whether the big things like the home's structural, roofing, siding, plumbing, heating and electrical systems are all in good working order.  But you also need to know about the little things like doors, windows, and appliances. When specified in the offer, you have the right to have the property inspected and to either terminate the contract or ask for repairs if anything is unsatisfactory. This clause usually specifies a deadline by which the buyer must complete inspections and deliver a written objection or termination notice to the seller or the seller's agent. It usually also specifies a deadline by which the buyer and seller need to agree on what will be done to resolve the buyer's objections.  We recommend to every one of our buyers that a professional home inspection be performed.

There are a host of other issues as well that need to be considered when you evaluate whether to go through with the purchase of the property you now have under contract. These issues may be more important than the physical condition of the property itself. If you overlook the fact that the roof needs to be replaced, you may be out $2,000 to $10,000 - but you'll also have a brand new roof. If, on the other hand, you overlook the fact that your new home is 500 yards from the end of the airport runway, or that the "open space" behind your home is actually the loading dock for the new neighborhood grocery, the value of your new home may have just dropped $50,000 to $100,000 and there is nothing you can do to fix it.

Worse yet, consider what might happen if there are massive amounts of toxic metals in your water supply and you don't get around to looking into that until after you and your children have lived in the home for a decade. In that context, a faulty water heater can start to look pretty trivial.

Because your rights to object and terminate are so broad, the seller will want to limit the time frame for the inspection. If you write an offer that gives you a month to do the inspection, the seller will almost certainly counter or reject the offer. Typically, 5-10 days is adequate for inspections, but you need to check with inspectors to be sure they can complete analysis and reports within the time provided. If you don't complete your inspections by the deadline, you have effectively waived your right to object or terminate.

Though you have wide latitude in determining what you want to object to, the seller is under no obligation to do anything to remedy your concerns. If your requests are unreasonable or unusual, the seller may well decide to let you terminate the contract. No matter how reasonable your requests, however, the seller is not obligated to fix anything unless they agree to in writing in the inspection resolution agreement.

As a practical matter, it is unusual for the buyer to terminate the contract over an inspection issue relating to the physical condition of the property. Since most physical defects can be fixed for a few hundred -- or a few thousand -- dollars, the buyer will usually ask the seller to repair these defects rather than terminate the contract. Typically, there will be 3-10 days after the objection deadline for the buyer and seller to try to reach agreement on what the seller will do about the issues the buyer has raised. If the problems are routine, the decisions are fairly easy. If they are unusual or expensive, the buyer and seller may have get bids from contractors in order to realistically evaluate the situation. Some sellers are quite reasonable in responding to inspection issues. Others, especially in a hot market, may refuse to do anything.

In our experience, there are specific factors that determine whether you'll get a positive response to inspection objections:

• The seller will typically be most responsive to serious issues such as a faulty electrical system or leaking roof. These objections seem reasonable to the seller, and, if they let you terminate the contract over the issue, they know the next buyer is likely to object too. In contrast, when you object to minor scratches on the stair rail or to spots on the carpet, the seller may be tempted to let the contract terminate and hope the next buyer will be less picky.
•  The seller is more likely to agree to pay to have things fixed if he fears losing you as a buyer if he doesn't complete the requested repairs. The seller is more likely to fear losing you as a buyer: (1) in a slow market than in a hot market, (2) if the scheduled closing is a week rather than 3 months away or (3) if he feels he's getting a good price for his property in his contract with you. Even if the seller wants desperately to keep the contract alive, he may refuse to address your inspection concerns if he is convinced that you'll buy the property whether he does the work or not. If you offered him $20,000 over his asking price, he may guess that you're unlikely to back out if he refuses a $500 repair. Similarly, if you have the bank send the appraiser out (at a cost of $350) before you've resolved the inspection issues, the seller may guess that you're planning on going forward with the purchase no matter what he does.

Financing Issues

We've already stressed the importance of selecting a lender and starting the loan application very early in the process. If you haven't applied for the loan, the contract will typically specify a brief time frame within which you must do so. Assuming that you've completed the application process, you still need to coordinate several things with your lender during the period immediately after you contract on a home.

First, you need to get a copy of the contract to the lender so that they know critical contract terms such as the purchase price, the loan type and amount, the location of the property, and the contract dates and deadlines. If you don't have a loan commitment from the lender yet, the lender needs to know the date by which they need to complete the loan approval process. That date is established in the contract, as are others that are critical to the lender, such as the appraisal deadline and the closing date.

The lender also needs to begin the process of reviewing and approving the property for the loan. Full loan approval requires not only that the lender approves you as a credit risk, but also that it approves the property as collateral for the loan. You also need to get copies of all subsequent contract amendments to the lender as soon as they are completed. Many minor disasters occur in real estate transactions because someone failed to notify the lender of changes in the closing date or changes in the terms of the contract.

Second, you need to start talking with the lender about "locking" your loan as soon as you go under contract. When you "lock" your loan, the lender is committing to provide the loan at a specific interest rate and terms. You are committing to take the loan at that rate - assuming the lender approves the loan and you close on the home. Generally, lenders will not lock the loan until you have contracted to purchase a particular property. When you lock the loan, they are committing to accept the loan funds at a specific rate from their funding sources. If they fail to close on the loan, they may lose money. For the same reason, once you've locked a loan with a lender, they are generally not going to give you better terms if interest rates drop before you're ready to close. And keep in mind that your loan lock must be carefully coordinated with the closing on your home. Rates are locked for limited periods of time, typically 30, 45 or 60 days. If you fail to close within the allotted time, your lock will generally expire. This can complicate matters when the contract does not specify a specific closing date, a common situation with new home construction.

Third, you need to work with the lender on the timing of the appraisal. In the typical transaction, where we have at least 3-4 weeks between contracting and closing, we try to put off the appraisal until after the buyer and seller have resolved inspection issues. You don't want to pay $300-$350 for an appraisal if you've just terminated the contract because of the inspection. You need to let the lender know that you want to wait on the appraisal, but you also have to make sure that you allow the lender time to get the appraisal done within the time frame provided for in the contract. If the appraisal isn't completed by the deadline set in the contract, you may lose your rights to terminate the contract or to try to renegotiate the contract price if the appraisal comes in below the contract price.

In general, communication with the lender is critical at this juncture. Any change in your contract with the seller, and any related agreements such as those involved in the inspection resolution, need to be communicated to the lender as soon as possible. In fact, the best practice is to review with the lender any changes to the contract or any other agreements you're discussing before they are finalized. Depending on the issue and the type of loan, the lender may not allow certain resolutions of inspection issues. If the you and the seller want to extend the closing date by a few days, or if the seller wants to stay in the property for a period after closing, you need to know whether the lender will fund the loan under these circumstances before you sign the agreement.

Title Issues

When you are purchasing a home, it is important that you have clear title once the purchase is complete.  Typically, a title company will search the history of the title and issue a title policy insuring that the new owner has good title to - or ownership of - the property. Most purchase agreements specify that the seller will provide the buyer with a commitment for title insurance by a specific date. It also provides a period for the buyer to review the commitment and object to unacceptable title conditions.

While title insurance policies are designed to cover you if there is outright fraud in the sale of the property - (the husband's girlfriend rather than his wife signed the closing documents, for example) - these kinds of problems are not common. Typically, our review of the title commitment focuses on three issues:

• Limitations on Use: As I've noted elsewhere, your right to use your property can be limited by local regulations and state laws. But there can also be use restrictions that are connected with a specific property or set of properties. Subdivision covenants can limit the way you use the property, as can limitations placed in earlier deeds by a previous seller or agreements between the city and a developer.  Other provisions may obligate you to contribute to the cost of maintaining roads or community areas.
• Rights of Others to Use the Property: Almost without exception, others will have "easements" which give them the right to use portions of your property for specific purposes. In nearly all residential subdivisions, there are easements that allow utility companies to install and maintain utility lines, but easements can also give someone the right to drive across your property, fly over your property, mine your property, or bury their wife on your property.
• Liens against the Property: A lien is the record of a right to collect money when a property is sold. Lenders file liens to record loans on a property. Governmental entities file liens to record taxes owed by the owner of the property. Contractors and vendors file liens to record money owed for work they have completed or products they have installed on a property.

In the title commitment, the title company will reference recorded documents that can create these kinds of rights and obligations. In some cases, references to problematic issues will be obvious - a reference to a $30,000 tax lien for example. In others, the commitment may simply refer to the subdivision covenants. If you don't read the associated document carefully, you may not learn about your responsibility to provide easements, to pay for road construction or maintenance, or to get permission from your neighbors to change the color of your house. You need expert assistance - either a good real estate agent or a good attorney - to assist in the review of the title commitment.

There are four parts to the title commitment:

• The preprinted language that outlines the general parameters of the coverage and the title company's commitment to deliver the insurance policy.
• A page listing the property in question, the type of policy to be provided, the names of the buyer and seller, and the cost of the coverage. Check to be sure they have your name right!
• A "Requirements" section in which the company lists what they require to happen before they will close and insure the property. Typically, this refers to routine things such as the signing of the deed and the recording of your loan, but they may also list liens that need to be paid off before the sale closes.
• An "Exceptions" section which lists the items that the company is "excepting" (excluding) from coverage. This is where they will list documents that limit your use of the property (such as covenants) or give others rights to use your property (easements). Careful review of this section and the documents referenced in it is obviously critical.