June is the month that most homes are sold. That means April and May are the months in which most contracts are written. In this column we answer 10 questions that every buyer and seller should know about. We will also add a bonus question for both buyers and sellers.
If you are a buyer and you haven’t been in the market for a few years be prepared for sticker shock. Home prices have not only outpaced inflation they have led the way in value creation. If you are selling an existing home you will find this to be a pleasant surprise. The first five questions are those that every buyer should ask:
• How much will I be able to qualify for?
The best way to find the answer to this question is to contact a mortgage company. It is a good idea to become pre-qualified before shopping for a new home. That way, you know how much you can afford on the front and you avoid the disappointment that could come with being turned down for a mortgage on the house of your dreams.
• How much should my first offer be?
If you really like the house — I mean really, really like it — you first offer should be your best offer. Otherwise, another buyer may make a higher offer and that one might be accepted by the seller. No purchaser wants to pay more than he or she has to, but many purchasers have tried to lowball the seller only to find that their offer was outbid.
• What is earnest money?
A sum of money that is deposited — usually with the real estate broker — when making an offer to purchase. It is evidence to the seller that the buyer is serious about going through with the transaction. It is not required that earnest money be deposited, however, not depositing earnest money is a strong negative signal to the seller.
• How do I get the best value for my money?
If you want to buy a house that will usually appreciate in value most, buy the worst house in the best neighborhood. That is because prices tend to be “spurred” toward the mid-range of values in a neighborhood.
• What contingency clauses should I have in the contract?
If you are the buyer who is obtaining financing, it would be a good idea to have a contingency clause that specifies that the purchase is subject to, or contingent, on being approved for a mortgage. One clause that should also be included is that the contract is subject on the property appraising for at least the sales price. As you can see, having an attorney review your offer might be a good idea if you are not extremely familiar with real estate.
These next five questions are ones that the sellers should be asking:
• Should I sell it myself or list it with a broker?
If you have time to show the property on a moment’s notice, are an expert in real estate, know how to walk the buyer through the financing process and can negotiate objectively then you may want to consider selling your home yourself. As for me, I have a real estate broker’s license and have taught real estate for many years. I have sold my personal residence on two occasions. Each time I listed it with a real estate broker who was also a member of the local Board of Realtors.
• What should the listing price be?
It should be competitive relative to the local market. It should also be higher than the appraised value. After all, the appraiser estimated what it would sell for, not what it should be listed for.
• What is the difference between a fixture and personal property?
A fixture is an item that has been permanently attached. It stays with the property without even being mentioned in the contract. Personal property is not real estate. It can be taken by the seller. There are lots of legal cases on this issue. To avoid confusion, specify in the contract whether an item in doubt is personal property or a fixture.
• What if a buyer wants to move in before closing?
Make certain that there is a clearly written lease agreement in place. Assume that the transaction will not go through. It can sometimes be difficult to remove someone who thought he or she was going to be the owner of the property.
• How much should I counteroffer?
Enough to keep you satisfied, but high enough to get the purchaser to accept. Seriously, offering and counteroffering is an art, not a science.
The most important questions
Finally, every buyer and seller should know the answer to this question: What is the most important clause in the real estate contract?
The answer: It is the clause that provides for the remedies to each party in the event of a breach of the contract by the other party. For example, if the seller is unable to furnish good title, what can the buyer do and how should he or she be compensated for any damages?
The next few months will be busy times for residential real estate in Mississippi. Knowing the answers to these questions can make it less stressful.
Phil Hardwick’s column on Mississippi Business appears regularly in the Mississippi Business Journal. His e-mail address is email@example.com.