Ch 31 Pre and Closing Cost Issues

Roof Inspections

A home inspector needs to determine the condition of a home's roof when inspecting a property. They need to inspect the surfacing material, any chimneys, gutters, and flashing points. The home inspector may recommend repairs to the buyer in their report.

an agent's duty to disclose information on a real estate contract to potential buyers of a listed home for sale can be broken down into two main categories:

1. Information that is a material fact to the physical condition of the property for sale; and 2. Information about the sellers themselves. If the property has severe termite or mold damage, it must be fully disclosed by the listing agent even if instructed by the seller to not disclose it. This is true whether or not the seller doesn't list it on their own disclosure forms at the start of the listing agreement.

Follow Up

follow up a week or so after closing, stay in touch, get them a gift and write a letter

Steps taken between buyer and seller prior to closing:

Broker puts a "sale pending" sign on the listed property; notifies MLS. Broker collects any additional monies if called for by the contract. Buyer applies for the loan in time according to contract. Buyer and seller work to clear any "contingencies" (conditions) written into the contract. An appraisal is done by a certified appraiser. A conditional loan approval is obtained.* Title insurance on the property is obtained by the mortgagor for the mortgagee and the mortgagor. Termite, building, and radon inspections are done according to the contract. Any repairs required by the contract are made. A survey of the property is ordered. The buyer obtains hazard insurance and sends a copy of the policy to the closing agent. Flood insurance must be obtained if necessary. Buyer, seller, closing agent and real estate professionals set closing appointment. Buyer's agent gets final amount due from the closer so that buyer can obtain a certified check for closing. Broker alerts closing agent of the earnest money deposit. Closing occurs.

What is important to know (and tell your buyer clients) regarding the CLUE Report?

CLUE is a database of insurance claims against a property from the past five to seven years. It is not available to insurance companies until after closing (at which time the language in the insurance policy may allow them to reject coverage). Buyers should make their offer subject to receiving and approving a copy of the seller's CLUE report.

Changes to Agreed-Upon Dates

Closings are frequently delayed due to circumstances beyond either party's control. Sometimes a party simply cannot get done the things that need to be done prior to closing. This situation will also result in an amendment to the original real estate sales contract.

Factors that will determine whether the company will issue a policy and what premium they will charge include:

Current condition of the property. Claim history on that property. Owner's claim history. Owner's credit history.

"insurance record"

Each home has an "insurance record" of its own and if the buyers are unaware of the claims history of the home they wish to purchase, they could find themselves in a very bad situation - unable to get insurance coverage on their new home or having to pay very high premiums for that coverage.

Most basic homeowner policies, known as HO-2 policies, provide coverage for:

Fire or lightning. Hail or windstorm Explosion. Riot or civil commotion. Damage from aircraft. Vehicle damage. Smoke damage. Vandalism. Theft. Glass breakage. Falling objects. Weight of ice, snow and sleet. Accidental discharge or overflow of water or steam. Sudden accidental tearing apart of heating, air conditioning or hot water systems. Freezing of plumbing, heating, air conditioning systems or household appliances. Sudden accidental damage from artificially-generated electrical current. Property lost that was removed from the premises when in danger from fire or other hazards. Some liability coverage for personal injury and property damage caused by the policy holder.

Failure of Financing Contingency

If the buyer applies for and cannot receive financing for the purchase, there is not much that can be done to salvage the transaction. Even if the seller reduces the purchase price some, it probably will not be sufficient to change the lender's mind about the buyer's ability to repay the loan. The one thing that might be done is to extend the contract to allow the buyer to find an additional financing source. If so, the contract could be amended to change the closing date. The other deadlines will have to be amended as well.

Recommending Legal Counsel

If the title is clean, without exceptions or unusual requirements, the buyer may not need an attorney to review it. However, it is always good for the buyer to have an attorney to guide the buyer through the process. An attorney can review the contract to be sure that the buyer is protected and complies with the contract's provisions. An attorney can review the settlement statement and prorations to ensure they are done correctly. An attorney can review the title commitment and make sure that there are no exceptions that can potentially harm the buyer if the buyer closes. The attorney can review the commitment to be sure it contains the proper coverages, the legal description is correct, the endorsements are correct, and generally verify that the commitment is in good order. One of the things an attorney will do is ensure that the standard exceptions are deleted so they will not appear on the policy when it is issued. Often this is overlooked by non-attorneys because they do not understand the importance of getting the standard exceptions removed.

Wind Mitigation

In Kentucky, severe storms are an ever-looming threat to badly damage or even destroy a person's home. In some states, up to 70% of a homeowner's insurance premium goes towards covering wind damage.

Four Point Inspections

In a "four point inspection" the home inspector investigates the four most important components of a home: the HVAC system, the roof, plumbing (pipes and fixtures), and electrical wiring. In older homes, it is crucial to discover the condition of each one of these components so the buyer can be aware of potential future problems. For example, if the roof is 12 years old and is wearing out, the buyer can figure on having to replace the roof in the next couple years. Replacing a roof usually costs over $5,000, so with this information the buyer may offer a lower price for the property.

The Title Search

In most counties, searching title can be done by computer. Title companies used to have a searcher go to the county records and manually search for liens and encumbrances. Now, by putting the legal description of the property in the computer software program, they can receive a report electronically. They will still have to obtain copies of the back-up documents that support the report. In some counties, the searches are still done by hand, since the data in the records is not computerized.

Several events have made insurance companies look at their insurability criteria:

Increase in hurricane and tornado damage. Problems with rotting walls as a result of improper installation of exterior synthetic stucco finish, known as EIFS. Mold growth caused by interior water damage.

Tracking Contingencies and Suspense Dates

It is the broker's responsibility to keep track of all the dates listed in the contract. There is no set way to do this, but the broker needs to have a system in place that is unfailing. Many brokers use electronic calendaring systems to input the dates. When the broker checks his or her calendar each day, the deadline pops up. Be sure to calendar a reminder to the client BEFORE the deadline actually occurs so that the client can take the necessary action before the deadline passes.

Why is the property inspection report often controversial?

Items found during the inspection Personal circumstances that necessitate changing the closing date Title or survey issues that cannot be resolved prior to the scheduled closing date

Among those items that can trigger renegotiation are:

Items found during the inspection Personal circumstances that necessitate changing the closing date Title or survey issues that cannot be resolved prior to the scheduled closing date Failure of financing contingency Appraisals that come in lower than the contract price Whenever a buyer wants to renegotiate the contract, you will have to prepare an amendment to the contract in order for any changes to be effective. The amendment will have to be in writing and executed by both parties.

Cash at Closing

Items found during the walk-through are most easily handled by an exchange of cash.Get the seller to write a check to the buyer for the amount of the estimate. You do not want to credit the buyer; it's too late for that. It must be done in cash so that the closing statement does not have to be revised.

Obtaining Property Insurance

Most lenders require the buyers to purchase property insurance so that their interest in the property is also protected. The most common type of insurance is homeowners insurance.

Renegotiation of Inspection Items

Perhaps more than any other cause, the inspection will frequently result in a renegotiation of the contract. Something is always found that will cause the buyer to want the seller to do something beyond what is set forth in the contract. Frequently, the buyer wants the seller to make a repair that the seller does not wish to make. The seller may offer to lower the price of the house as a concession. If this is agreed upon, the broker will prepare an amendment to the real estate sales contract.

Flood Insurance

Private companies offer flood insurance that is subsidized by the federal government. This insurance protects the owner from damage caused by floods or tidal waves. Lenders that are regulated by the government require insurance on any property located within areas identified by the Federal Emergency Management Agency (FEMA) as being flood prone. Flood insurance is not included in a basic homeowners policy.

After Closing

The last thing you want is for a client to select another broker the next time he or she buys or sells a house. For this reason, you must take care of your clients even after the transaction is completed.

What is important for the licensee to do during the escrow period?

The licensee should check frequently to see that things are happening on schedule and keep the clients informed about how things are progressing.

Reviewing the Inspection Report

The property inspection report always raises controversy between the buyer and the seller because the inspectors always find something the buyer wants repaired and the seller does not want to repair. Experience will teach you how to handle these issues. For the most part, you want to separate the major items from the minor ones. Usually the inspector will provide a summary list of items and will tell you which ones are important to have fixed immediately and which are not.

When the Appraisal Comes in Too Low

The seller never wants this to happen. It almost always means the deal is in major jeopardy unless the seller is willing to reduce the purchase price to the value established in the appraisal. In recent years, this happens more and more as housing values in certain parts of the country have dropped by more than 30%.

Coinsurance Clause

This clause requires that the homeowner have insurance that is equal to 80% of the home's replacement value. This does not include the price of the land. If an owner has this type of policy, he or she could make a claim for the full cost of the repair or replacement without deduction for depreciation. If the owner does not carry this type of insurance - he or she carries less than the 80% figure - any claim will be handled in either of these two ways: The loss will be settled for actual cash value. The loss will be prorated. For example, if a person's home is insured for only 70% of its replacement value and the owner suffers a loss of $15,000, the insurance will pay $13,125. (70% ÷ 80% = .875 x $15,000 = $13,125)

Confidentiality

between a licensed real estate agent and his or her client is part of the ethical bond in this fiduciary relationship. There can be a fine line between feeling the need to disclose something that was told by the client to others that is not a violation of licensing laws or may be a violation of KREC requirements, civil laws, and even criminal laws.

Delays Caused by Title and Survey Matters

From time to time, a title report or survey will reveal a problem that cannot be rectified within the time frames of the contract. An example of this would be if the seller died and the property would have to be probated before it could be sold. Probate usually takes several months, and the title cannot be cleared without probate. An example of a survey problem that could cause a delay would be if a survey showed a dirt road through the property for which there were no easements recorded. It will take some time to figure out whether or not a neighbor has acquired an easement by prescription through the property. One way of solving the problem is for the buyer to give the seller a certain amount of time to rectify the problem. If the seller cannot rectify the problem by that date, the buyer will have the option of terminating the contract. You cannot leave the closing date open-ended, however.

The Comprehensive Loss Underwriting Exchange (CLUE) Report

is a database used by insurance companies that provides five to seven years of prior claim information on properties. The CLUE Report does two things: Insurance companies use the information to determine whether to insure a property and at what cost. The report reveals major damage or repairs covered by insurance. In some cases, it reveals damages about which the owner contacted the insurance company but did not file a claim. Even though this sounds good, be aware that the CLUE Report is not available to the insurer until AFTER closing. To deal with this, it's important to advise your buyers to make their offer subject to receiving and approving a copy of the seller's CLUE report.

Final Walkthrough

is a ritual that signals the deal is really going to close. The sellers have moved out, the cleaning people have come, and the buyer gets to walk through the house and inspect it to verify the seller has completed all the items required by the contract and the inspection report. It is an exciting time for the buyer, and the broker walking through the house with the buyer should allow the buyer to enjoy the moment. Schedule the walk-through the day prior to or the morning of closing. You really do not want to give the buyer too much time to nit-pick the property. You want the buyer to get in, do the inspection, and get out. If the buyer finds anything that is unsatisfactory, be prepared to contact the listing broker with the buyer's concerns. The walk-through occasionally produces something that ends up being settled at the closing table. You do not want it to derail the transaction or delay the closing. Once the parties get this close to closing, everyone wants it to just be over.

* Conditional Loan approval

is given, meaning the lender has agreed to lend the money but certain conditions remain to be completed, such as the sale of the previous house or the taxes being brought up to date. This condition is not actually changed until closing.

inspection period

the buyer will most certainly want to order a property inspection and perhaps retain specialized engineers to inspect the foundation and/or structure of the house. A property inspector will conduct a general overall inspection of the house. Never give the buyers the name of just one specific company. Have the inspector provide you with the copy of the report to give to the buyer. You will want to inspect the report thoroughly so that you and the buyer can decide which items the buyer will request the seller to repair.

Some of the most important licensee actions that usually need written authority and delegation include:

the maintenance of trust accounts, transactions, and records as well as the supervision of other agents and brokers in a real estate firm.