Contingency - "A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector."
In California, you have 17 days from the date of your offer to complete all your inspections, complete loan documents, etc. I recently just completed a transaction when the sellers purchased another home on contingency the day after they were "planning" to close on their current home. It was one of the most stressful sales I had in a while. Why, because everything had to go exactly to plan.
The buyer was interested in the home, yet we had no bargaining power because the sellers weren't able to back down because they needed to sell the house in order buy their new house. They calcuated to the date of closing and monies they were receiving one on and closing on the other without any delays in the process. There are always delays somewhere, somehow. Its Murphy's Law!
In addition, I had a lot of trouble getting the buyer's agent to understand that they had to release contingencies. The buyer's agent slipped the clause, "until loan has funded" on the release of contingencies yet not on the original offer. This is a red-flag for any listing agent. For me as the listing agent, this says that the buyers can pull out without any penatly literally under the 11th hour. Doesn't sit well for a seller when they are planning on relocating and realize the buyers still have the chance to back out and they may have to start the whole process again.
When I am a buyer's agent, the 17 day is important. It tells me and the sellers once you sign the removal of contingencies that your buyers' are serious about the purchase and are willing and can loose their security deposit if they fail to complete the purchase. By this point, I will usually explain to my buyers that this their final chance out backing out, if they wish. I tell my buyers that the sale is at the half way point. If they don't continue with the sale, they can and may lose their deposit.
Make sure your clients understand they are signing a legally binding contract. If you or your agent, doesn't understand the contigencies, you may want to seek counsel or have your agent's broker explain the release of contingencies. This could make or break the deal.
Mortgage Rates Drop AGAIN!!!
Thinking of buying, get something now.
More or less for you first time home buyers, you get a get a nice home for a bang. Yet you will have to look and make an offer fast because Sacramento doesn't have a lot of inventory. So,if you see something grab it.
Today my husband Doug, an economist and occasional travel finagle blogger
, wrote the following guest post about the reason so many homes have been purchased with cash, and why cash buyers can successfully undercut financed buyers:
Our friend Dan brought our attention to an article
by Sean Williams, a Motley Fool contributor, trying to understand the reason that so many properties are being purchased for cash by investors.
Nancy has had a number of clients from overseas, including Singapore, and other foreign nationals with green cards living here, probably mostly bringing family money from China, who are loaded with cash and recognizing that America is on clearance right now. Some of it may also be private equity money originating from pension and investment funds such as CalPers and wealthy individuals. As an investment, real estate has been unusually lucrative over the past few years, due to the low prices and relatively stable income - although we can assure you that it comes with no small amount of risk.
But there is more to the story than the blogger has really explained. There is a market failure at play. A market failure is a situation in which the market, left to its own devices, results in an inefficient allocation of resources. In this case, the inefficiency stems from the fact that financed buyers are not able to purchase houses, even when they are willing to pay more than cash buyers.
("Efficiency" is an economic term that by itself may be hard to understand, but you can think of it as the opposite of waste: when allocations are efficient, nothing is wasted from an economic measurement, meaning that everyone has the opportunity to buy the most house that they can afford. Conversely, in countries with high levels of corruption, allocations are highly inefficient, since benefits accrue to those with political connections, etc., not those who are willing to offer the best deal in the marketplace.)
So why is this happening?
First of all, many of the properties in lower-income neighborhoods need cash buyers. They have been completely ransacked by previous tenants and owners who have been foreclosed upon, so they don't meet FHA or conventional loan guidelines, so lenders cannot finance them. To attract cash buyers who can also improve the properties, the banks trying to unload the properties off their books ask very low prices, so that a "flipper" can afford to make improvements and resell it.
Meanwhile, financed buyers typically have very little cash - or they will use all of the cash they have to stretch into the best neighborhood possible - and are borrowing close to 100% of the home's value and won't have much extra cash for improvements. For this reason, financed buyers seldom purchase houses that need a lot of work. Also, as mentioned before, financed buyers cannot buy homes in bad condition because lending guidelines will not permit it.
Also, a buyer that needs financing needs an appraisal. Appraisers have to go by "comparables" in the neighborhood. With all of the low prices in the neighborhood, comps for homes in good shape (worthy of financing) are much harder to assess, and an appraiser will have a difficult time demonstrating that improvements justify a higher price. This means that many financed deals fall out of escrow. For this reason, sellers prefer to sell to a cash buyer, creating a self-fulfilling prophecy.
It also has made "flipping" very difficult and we personally have seen that most flipped houses are of very poor quality - lipstick on a pig. The reality is that a flipper can't do it right even if she wants to, because appraisals can't support the true cost of a good job. The result is the so-called "lemon" effect, first noted (or at least written down) by the economist George Akerlof: when buyers can't tell the difference between "peaches" (high-quality products - homes in this case) and "lemons" (low-quality products), they will only pay enough to buy lemons, so that is the only type of product that sells.
When will this shake out? That is a harder problem. Once the inventory is depleted, the downward pressure on prices will not be so strong. Also, cash buyers may have the wherewithal to pay for improvements which will improve the housing stock. At some point prices will come back up - perhaps slowly - and the appraisals will reflect those improvements. At that point, financed buyers will probably be able to compete effectively.
Here in Sacramento, we think we have already seen the bottom, certainly in the low end of the market (under $200k), although there are other people here who disagree. Sacramento had one of the first peaks in the country, in 2006, and the market had slowed dramatically in 2007 and 2008, as people refused to lower prices to sell their houses. By 2009, prices started dropping and foreclosures were really starting to come into play.
For this reason, we think most of the houses purchased with 3-year ARMs are already cleared out of the market, and many of the 5-year ARMs reset to unaffordable payments in 2011. As Nancy has said in her recent blog posting, the low end of the market has tightened considerably, and only homes priced very high or in need of a lot of repair relative to their price stagnate on the market.
Let us know what you think.