When buying a home, the rules of the transaction are defined by the purchase contract. It’s a long document with a lot of small print, but as a consumer, it’s important to understand what you’re agreeing to when signing it. I’ll put you to sleep if I try to cover it all here, so I’ll just cover some items that are of concern to a lender and thus may affect your purchase. As a realtor, it’s important to understand the lender's sensitivities.
Most home purchases here in Hawaii use the Hawaii Association of Realtors standard purchase contract. I’ll address items of note in that contract, but other forms of a purchase contract can be used instead. Developers, owner builders, FSBO (For Sale By Owner) and REO (bank owned) transactions may all use a different form of contract. Regardless of the form of contract used, the items of concern remain the same.
1) Inclusion of Non-Real Property
The pitfall I see most often is the inclusion of “non-real” property in the sale price. Real property from a mortgage lending perspective is the land, permitted structures and anything permanently affixed to either. So, an oven would be considered part of the ‘real’ property, but a free standing microwave would not. A ceiling fan would, but a nice big portable fan would not. When these items are included in a sale, the purchase contracts typically include them items in section C-3.
Example & Problem
In a recent transaction, a buyer liked the piano, a couch and a couple of beds that were currently in the house. The seller no longer wanted it, so the two parties included those items in the purchase contract. Here’s why it is a problem for us, the lender. Those items surely have some value. Let’s say it is $3000 for the sake of argument. If the purchase price in the contract is $500,000, logic would dictate that the value of the real property is actually only $497,000 because the couch, piano and beds are worth the other $3000. That would mean that we have to do our loan amount calculations off of the lower, $497,000 value and the borrower would need to come in with a higher down payment.
Resolution
The normal suggestion from the real estate agents is to say that the two items have no value, but that is no longer an acceptable practice in this lending environment. The best solution is to do a contract addendum deleting those items.
2) Condominium Documents
Another issue that we see occasionally is that condominium documents have not been accounted for in the contract section C-64. We will always need the Condo Disclosure (RR105c) when the subject property is a condo & there are other situations where we will need a more complete set of condo documentation. If the condo docs are not requested right away or there is a delay because of a dispute over who pays for them, it can delay the whole transaction. I have a recent transaction for the purchase of an investment property. The condo docs were not identified as needed in the contract and several weeks later, when they arrived, the occupancy percentage was below what everyone had imagined and communicated previously. As a result, we were several weeks into the loan & awaiting approval, but then needed to start over, change the loan program and broker the loan to a new lender.
3) Short Sale and REO Properties
For short sales & REO’s there is often an addendum to the contract or a short sale agreement. This may address or modify any credits or fee splits agreed upon in the contract. Make sure that these are accounted for when calculating the anticipated cash to close. Take a look at our post addressing the
hidden costs of buying a bank owned (REO) property.
Other Items of Note
Here’s a list of some other things to look out for when preparing or reviewing a purchase contract:
- Is the closing date realistic? Make sure your lender and any other parties involved can close by the specified date.
- All borrowers & accommodation mortgagors must be on the contract (anyone who is on the deed and new title must be on the purchase contract, regardless of whether they are on the loan or not).
- C-61 Rental Property Matters - make sure this information makes sense with regard to the the occupancy status of the loan and requirements of the loan program.
- C-67 Special Terms - make sure anything listed there is reasonable and acceptable.
- Make sure all counteroffers and addenda are accounted for and have been reviewed.
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