Real Estate Terms

It doesn’t seem to matter whether it’s buyers or sellers, first-time homeowners or seasoned investors. When it comes to the Residential Resale Purchase Contract, we tend to get the same questions over and over.

So I thought I’d share some of the more common questions here. My intent is to have a “Weekly Contract Question” but I have to be admit that it’ll probably wind up just like my “Pic of the Week” idea did. That being instead of appearing weekly, it winds up being every 2 days to 2 months, depending on the direction the wind is blowing…

Here is this “weeks” question:

Question: How long does the Arizona Residential Resale contract allow for an inspection period?

Answer: The “boilerplate” language (see below) in the standard Arizona Residential Resale contract allows for a 10 day inspection period. (FYI, Commercial transactions typically have a 30 day “due diligence period”) However, there is an area in the boilerplate language where a longer or shorter inspection period can be written into the contract.

As with any other contract provision, the terms must be agreed to by all the parties involved. So if a buyer requests a 15 day inspection period, the seller has the right to decline the offer, accept it with the 15 day inspection period, or counter the offer with changed provisions.

Likewise, just because the boilerplate language has a 10 day inspection period, that doesn’t mean that any party is required to accept that boilerplate language.

Actual AZ Residential Resale Purchase Contract verbiage: (click image to enlarge)

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UPDATE: Please see this post for an updated chart (through Dec 2007) plus new charts!

“We’ve got to refinance NOW, rates are going up!”

“If we don’t buy now, we may not be able to get a good rate!”

I hear comments like this all the time.

Chasing mortgage rates will drive you bonkers. Yes, the rates for 30 year fixed rate mortages are inching up. But keep this in mind… they are coming up from historical lows. Today’s rates are some of the lowest ever. If you concern yourself too much about locking into the lowest rate you’ll ever see in your lifetime, then you’ll never get anything done.The chart below shows the rate of a 30 year fixed mortgage since 1971. Note where we are today compared to the other 35 years this chart reflects.

Is now a good time to convert that ARM to a fixed rate mortgage? Maybe. Maybe not. Rate isn’t the only factor to consider in a refi. How long you plan to live in your home, closing costs, your personal and professional situation, all this and more should be considered. Consult a loan officer, CPA and real estate professional in order to consider ALL your options. Rates are important, but they aren’t everything.

I never jumped on the Zillow posting bandwagon. For those not familiar with it, Zillow.com is a site that estimates the value of property using a bunch of publically available data and some proprietary algorithms to come up with approximate valuations. Sometimes it does OK, sometimes not. But it’s getting better.

Zillow scares the crap out of some real estate agents. I don’t understand why. I think they are afraid that Zillow is going to replace them. That’s absurd. Here’s a couple of facts:

Zillow can’t sell anyone a home. Zillow can’t show a home. Zillow can’t look inside a home and evaluate it from the inside out. Zillow can’t talk to people, and people will never be able to talk and interact with Zillow like they can another human being (at least not in our lifetimes, I think.)

Zillow themselves have this to say about their property “zestimates”: Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for, such as entertaining offers, negotiating, closing costs, timing, etc. They say they feel they are within 10% of true market value. So that means price your $500,000 home using a “zestimate” and you may just cheat yourself out of 50 grand. But it’s still a great starting point for home value research.

Zillow provides data. Some of it’s OK, some is questionable, but some of it’s fabulous. And that’s the case with most data sources. Anyone that blindly accepts data from ANY source without analyzing it with a critical eye is asking for trouble. But do that, and you may find some interesting things.

They recently released a report on the Phoenix area market. It’s quite interesting and is worth looking at. Here’s a couple of charts from the report:

The full report is available in PDF format here. Check it out and let me know what you think!

Earnest Money – whenever we’re writing up an offer for a buyer, invariably the one thing that generates the most questions is earnest money. What is it, why do I need it, how much, will I lose it – these questions almost always require a lot of discussion and education.

What is earnest money and why do I need it? The “book definition” of earnest money is: “A deposit paid by a buyer to a seller to demonstrate intention to complete the purchase.”

That pretty much sums it up. In Arizona real estate, earnest money is some amount of money, deposited in escrow, which helps show the seller that a buyer is serious. Normally the earnest money is applied to the buyer’s down payment at close of escrow.

Without earnest money, and the possibility of losing it, there is nothing to stop a buyer from submitting offers on multiple properties. Without earnest money, there is nothing to stop a buyer from just walking away from a contract days or weeks after it’s been accepted and the seller has taken their home off the market. Sellers want and need to know that a buyer is serious about the offer on their property.

How much earnest money do I need? The simple answer is, “the more the better”. The complicated answer (and one that’s virtually impossible to know in advance) is, “whatever it takes to make the seller know you are serious”. **Generally** speaking, 1% of the offer price is considered a reasonable amount. But like anything in real estate, there are no hard and fast rules. I’ve seen offers written with as little as $1 earnest money and as much as 100% of the sales price.

An example may be helpful here. Let’s say a seller gets two offers. They are identical in price, down payment amount, close of escrow date, etc. But offer #1 has a higher earnest money deposit than offer #2. Regardless of the true motivation of the buyers, the seller will most likely accept the offer with the higher earnest money amount. A significantly higher earnest money amount may even make a seller consider one offer over another even is there is difference is terms such as price, close of escrow, etc. Higher earnest money amounts signify to sellers that a buyer is serious and more likely to close the transaction.

Can I lose my earnest money? The short answer is yes. The complete answer is maybe. Again, generally speaking, your earnest money is “safe” unless you default on the contract. Should the seller default, your earnest money will be returned. In Arizona, the typical “inspection period” (or “due diligence” period) is 10 days. If the property you make an offer on doesn’t “pass” inspection, or if the seller declines to do requested repairs, the buyer can cancel the contract and get their earnest money back. There are also contingencies in the standard residential resale contract that a home must appraise for the asking price and the buyer must be able to secure financing. If neither of these contingencies are met, then generally earnest money is returned to the buyer.

Most earnest money is lost when the buyer backs out after the inspection period. In this case, the seller will almost always retain the buyer’s earnest money.

There’s nothing to be afraid of with earnest money. If you are serious about purchasing a home, you need to indicate to the seller you are serious. They’ll be taking what is probably their single largest asset off the market if they accept your offer. They need to know you are serious about completing the sale. That’s why a seller wants to see that you can get a loan, that you aren’t “fishing” with multiple offers, and that you aren’t going to back out at the last minute. A reasonable earnest money deposit helps reassure the seller you are serious about buying their home.