The A-Z of Buying a Home (Part 3)
You found a home, negotiated a favorable contract ("ratified" = signed & delivered). You are supposed to close in 30 days. What now?
This period from contract to closing (also known as "escrow" in some states) is critical for the buyers to do their due diligence. This means investigating everything they want about the home including the bricks and mortar, the title, the neighborhood, etc. to their satisfaction. It is also the time to formally apply for the loan (you may have shopped around with different lenders before you got pre-approved by one of them. You do not necessarily have to use the same lender, but cannot hesitate to submit a formal application because most contracts include a deadline to apply for the loan, and a deadline to get formal approval.
Due diligence is not rocket science, but there are a lot of small details that need to be taken care of in a certain order. The due diligence is a TEAM EFFORT between you, your REALTOR (who can play a pivotal role), the attorney and other service providers. Here is a partial list of steps that need to be taken care of during this period:
1. Inspections - buyers need to make sure that the home has no major, unforeseen problems with its structure, plumbing, electrical or mechanical systems, and that it is safe for human habitation. These inspections may include:
- Home Inspection - looks at structure, exterior siding, roof, windows, foundation, plumbing, air conditionin, electrical and basic appliances.
- Termite and Moisture - Makes sure that the home is not infested/damaged by termites, fungi, woodrot or vermin
- Structural - necessary only if there is an issue that the home inspector recommends to be looked at in more detail
- Survey - determines the boundaries of the lot, and the location of the buildings on the lot. In the Lowcountry it is common practice to order an Elevation Certificate, stating the elevation of the main floor above sea level for insurance purposes
- Pool - if desired by buyers
- Radon and other gases - while Radon and other gases are not common in the Charleston area, buyers who are coming from areas where they are feel better if they order one for their peace of mind
2. Legal Due Diligence
You will need to hire a closing attorney (SC is an attorney state) to do the closing. I recommend you choose one who is specialized in real estate (other attorneys can do it but they may not be up to speed with legislation or the closing process and may delay or even derail a transaction). This is YOUR closing attorney (the buyers normally choose the closing attorney) and he/she is supposed to represent your interests in the transaction However, he/she will normally also represent the other parties parties (sellers, lenders). The closing attorney's functions include:
- Perform a title search to discover liens and potential problems with title marketability.
- Get a title insurance binder (most attorneys are also agents of title insurance companies and will sell you the title insurance policy - you don't have to buy it from them, but most people do)
- Order a survey (only if you request it)
- Contact current lienholders to request payoffs of existing liens as of the proposed closing date
- Prepare all closing documentation related to title, deed and new loan notes/mortgages
- Prepare a preliminary closing statement (HUD-1) for your review
3. Loan Processing
The contract normally stipulates a deadline for buyers to sumbit a formal application and to receive full loan approval. You will need to submit a formal application to the lender you choose to go with, and normally pre-pay $300-400 for the appraisal to be ordered.
4. Insurance Policies
During this period you will have to determine which insurance policies you will need/want and shop around to choose a carrier/agent. The types of insurance policies that you may need are:
- Homeowner's (Hazard) Insurance
- Wind & Hail Insurance
- Flood Insurance
- Excess Flood Insurance
- Contents Insurance
Once you choose the agent/carrier(s), you will need your agent to send the "binders" and invoices to your closing attorney, to be paid out of closing.
Unless the property is being offered "as-is", normally a seller has to provide a home that is broom-clean, free of leaks, structurally sound, and with safe and healthy plumbing and electrical systems.
After all the inspections are done, you and your REALTOR will sit down and produce a "Repair Adendum" listing the items that you want corrected or fixed before the closing (your "wish list"). Normally this lists exceeds the basic expectations and will lead to a second round of negotiations between sellers and buyers. Sellers sometimes offer the buyer compensation en lieu of actually doing the repairs. Once the repairs (or compensation) are agreed to, the seller will fix the agreed items prior to the closing...
Next: The Closing...