REAL ESTATE FREQUENTLY ASKED BUYER QUESTIONS

Here’s some of the most frequently asked questions from buyers. Or, if not these questions exactly, a pretty close variation.

Why Are They Selling?

While there are many things Sellers have to disclose, why they are selling is not one of them (in most instances). Sometimes we have an indication based on the type of sale: foreclosure, short sale, probate or trust sale, relocation, new construction, etc. Other very common reasons might be downsizing, divorce, illness, or other changes in the seller's personal or financial circumstances such as the birth of a new child (need a larger home) or an increase in their income affording them the opportunity to buy a larger move up home.

What might be a better question to focus on is what terms are the sellers looking for, ie long or short escrow, leaseback after the close of escrow, seller contingency on finding a replacement property.

Often by pursuing those questions, you can get a better understanding of what's going on behind the scenes. But, truthfully, in most cases it doesn't really matter why they are selling. If the seller has gone through the trouble of listing their home for sale in the MLS (or off market), they want to sell and that's all you really need to know (at least at the beginning).

Will The Seller Take Less?

That's going to depend on whether we are in a Buyer's or Seller's Market. A Buyer's Market is generally defined as more than 6 months of inventory on hand and a Seller's market by less than 3. If there is between 3-6 month's of housing inventory listed, the market is considered "balanced". The second determining factor will be how long has the home been on the market. Lastly, you will need to know if the seller can afford to accept less and you also have to factor in what kind of sale it is and who are the decision makers.

Better questions to focus on are whether the Seller has multiple offers and when the offers are being reviewed. If it is a new listing and they already have offers in the first week to 10 days or so, it pretty much will sell above the asking price unless someone has some extraordinary terms they can offer (such as all cash and closing in 7 days with no contingencies). That’s true even in 2023.

If the listing has been on the market for a while, is not moving, has not had any price reductions, and activity is low, then yes the seller may very well accept an offer below the MLS list price.

As I also mentioned above, whether the property will sell for less or not is often also a function of who the decision maker is. In a short sale or REO, the loss mitigator or asset manager may only have authority up to a certain limit to discount the home. On the other hand, if the seller is someone who inherited a property owned free and clear they very well might accept less than the asking price if the property has been on the market for a while.

How Do I Make An Offer?

In most instances in California, we are going to use what agents refer to as the “RPA” or more formally the Residential Purchase Agreement. This is a document that has been created by the California Association of Realtors (C.A.R.).

To the pre-formatted boilerplate, the agent adds the specific price and certain terms. The document is usually put into DocuSign or some other electronic signing software (very rare to wet sign these days) and you are ready to go.

It is common practice to submit your “proof of funds” (POF) with your offer showing that you have the available money to close. If you are getting a mortgage, you should also present your “pre-approval” letter. That is a letter from a lender stating that you have applied for a loan. (Pre-approval letters are discussed elsewhere.)

Please note: in some instances like probate sales or if you are buying a property from a large builder a different form may be used.

Once accepted, offers become contracts. It is best to have your agent explain what you are signing and in some instances seek legal or tax advice before you sign.

What Is A Counter Offer?

A seller can accept, reject or counter your offer. Over the last few years many listings have received multiple offers at once and sellers can respond to all of them, what we call SMCO, Seller Multiple Counter Offer. With a multiple counter, a seller is allowed to accept whichever offer they deem to be the most attractive based on price and terms. When only responding to one offer at a time, the seller has to accept if the buyer agrees to the terms and conditions. A different form is used for a single counter offer. That form is the SCO - Seller Counter Offer.

Sometimes buyers ask how we know if the seller really has multiple offers. Short of seeing the other offers there is no way to verify this and there is probably some misrepresentation going on from time to time. Chances are that most agents are playing it straight.

What Happens After An Offer Is Accepted?

After an offer is accepted, the buyer has 3 business days to get their initial deposit, also referred to as an earnest money deposit (EMD) to escrow. The EMD is most often 3% of the final purchase price. Usually this is done by wire but some escrow companies accept personal checks. The EMD is one of the few times we are counting business days and not calendar days in the transaction.

The next step is typically to do buyer inspections and investigations. These can include a general home inspection, a termite inspection and a sewer line video. Depending on what is discovered during these inspections there may be further inspections.

After the inspections are completed, the buyer can make a request for repair which can include actually doing the repairs, giving the buyer a credit for the repairs or lowering the price.

What’s a Home Warranty?

A home warranty is like an extended warranty you might get for a car that is out of the manufacturer warranty period. If you have a home warranty and six months after escrow closes your water heater breaks, the home warranty may fix or replace it.

It is typical to ask the Seller to pay for the home warranty and for that to be noted in the purchase contract.

What About Disclosures?

During the buyer inspection period, the seller will provide the buyer with a number of disclosures many of which are “boilerplate” and not specific to the subject property.

The most important disclosure document by far is the Transfer Disclosure Statement (TDS) closely followed by the Seller Property Questionnaire (SPQ). These forms give the seller the opportunity to disclose what they know about the property.

While the Seller disclosures may be useful in some instances, it is best to rely on your own investigations conducted by professional inspectors.

What Inspections Do I Need?

Everyone should get a general inspection. The general may recommend other more specific inspections depending on where the property is located and what kind of property it is.

Termite inspections are very common - particularly for Single Family Residences (houses) and many Townhomes. The next most common inspection is a sewer line video. Digging up your yard or worse yet the street, can become quite costly.

If an inspector notices water intrusion or surface growth, a mold inspection may be recommended. Or if you are extremely sensitive to mold.

Everyone should get a general inspection even if they are buying a condo where the HOA covers the plumbing and termites.

Home inspections are similar to going to your doctor. No matter how great your health is, chances are you will be told to lower your cholesterol, blood pressure and weight.

Just remember that even brand new homes have issues.

Can I Lose My Deposit?

Yes, but it is not likely to happen if you have a good agent who explains the process to you and a reliable lender.

In the standard CA purchase contract (CA-RPA), you can only lose your deposit if you remove ALL of your contingencies and then do not close escrow. And, the amount you can lose in most instances is limited to no more than 3% of the purchase price or the actual amount of your earnest Money Deposit (EMD). There are some variations to this specifically in some REO contracts, builder's contracts and Probate Sales. But sticking to the most common standard transactions, if you have removed all of your contingencies in writing and then do not perform, that EMD may be forfeited.

Now that I have your attention, let me add that it has never happened to any of my Buyer clients and if I am representing you, you won't be the first.

One of the most common ways Buyers lose their EMD is because their lenders can not perform. So, let me continue on that theme as I answer the next questions.

Why Do I Need An Appraisal?

Well if you are not getting a loan you really don’t except for piece of mind. But if you are taking out a mortgage, the bank wants to know the value of their collateral because chances are they will have more skin in the game (money) than you. If you are putting down 20%, that means the bank is putting up 80%.

Just remember that an appraisal is defined as an “opinion of value”, not a hard and fast fact. Sometimes the emphasis is best placed on “opinion”.

What If My Loan Isn't Approved?

To finish up on the previous question, assuming that you have done all of your inspections and there is nothing wrong with the house (or the Seller repairs or otherwise compensates you), and that you aren't a total flake who at the last minute decides that rather than buy that cool Craftsman fixer at the Beach you really want to move to Australia, or that you don't lose your job the day before your loan is supposed to fund, the most common reason that Buyer's default is because their Lender can not perform and you aren't notified until you are beyond the point of no return (contingencies removed).

Unfortunately, there are some lenders that say they will fund your loan and then do not perform meaning the loan documents never show up and they start giving you excuses at the 11th hour when it is too late to get out of the deal. This most typically may happen when you are dealing with a "mortgage broker". That is someone who can not directly fund the loan but is only taking your file to someone who can fund your loan.

Under normal circumstances, if for some reason you can not get the loan and you have not removed contingencies you can cancel the contract. Many sellers or their agents may ask for the actual document from the lender showing you were in fcat turned down. But if you acted in good faith, you can get out of most contracts and have your EMD returned.

When Can I Get The Keys?

I think what you are really asking here is when can I move in? In the CA Residential Purchase Agreement (RPA), the standard time of possession is 5 PM the day of Close of Escrow (COE).

That measn the day that the Title Company records the deed at the County office. In LA County where I do almost all of my sales (Redondo Beach, Hermosa Beach, Torrance, Long Beach, Rancho Palos Verdes are all LA County), in most instances recording is the day after the loan funds.

What usually happens is that when the Escrow Company has "confirmation" from the Title Company they call or email the agents to notify them that the escrow has closed.

Equally important to when you get your keys is how you get your keys. Sometimes, the listing agent will leave them in the lockbox (if there is one) and other times they will be turned over directly. It’s also important to make sure that in addition to the keys you also get any garage door openers (clickers), mailbox keys or if it is a condo or gated community, those keys as well. And please have your locks changed or re-keyed as soon as you can after your own the home.

What Are Real Estate Closing Costs?

Simply put, the money you need to in addition to your down payment before you can get your keys.

So if you are buying a house for $1,000,000 with 20% down that means in addition to the $200,000 down payment, all the additional funds to cover your expenses related to closing the transaction (transfer of title from the seller to the buyer).

In most instances the costs are between 1-2% of the purchase price but can be higher or lower depending on a lot of factors such as loan origination fees, the type of loan, transfer taxes, escrow company fees, where the property is located, when during the year you close and other items that will be discussed below.

Both buyers and sellers each have closing costs and their expenses will not be the same.

Closing costs are identified as either “recurring” or “non recurring”. A non recurring cost is one associated solely with that escrow such as a recording fee, transfer tax or appraisal. Recurring costs are things like property taxes, homeowner’s insurance or (pre-paid) mortgage interest.

Let’s look at some examples of both.

Non Recurring Closing Costs

Escrow Fee: This is the fee paid to the escrow company (or title company) that oversees the closing as an independent 3rd party.

Lender’s Policy Title Insurance: This is insurance to assure the lender that you own the home and the lender’s mortgage is a valid lien. It protects the lender if there is a problem with the title. Please note - an Owner’s Policy of Title Insurance is an insurance policy that protects you in the event someone challenges your ownership of the home. It is usually paid for by the seller.

Origination Fee: This covers the lender’s administrative costs. Lender’s have different fees.

Recording Fees: A fee charged by the local recording office for the recording of the grant deed transferring title.

Transfer Taxes: This is the tax paid when the title passes from seller to buyer. While it is often entirely paid for by the seller, some cities, like Redondo Beach, split it 50/50 between buyer and seller.

Recurring Closing Costs

Home Owners Association Dues: If you are buying a property subject to a HOA, you will have to pay whatever your pro-rated portion of the dues for the month are at closing.

Homeowners’ Insurance: This covers possible damages to your home. Your first year’s insurance is often paid at closing.

Prepaid Interest: Lenders will require that you prepay interest that will accrue between the closing and the date of your first mortgage payment. “Points” are also considered prepaid interest. This is a lump sum payment that lowers your monthly payment for the life of your loan.

Property Tax: Typically, property taxes due are paid at closing. Often the amount you pay may be lower than your property tax bill going forward because the property has not been re-assessed yet.

These are just some examples, there are others such as notary fees and courier fees which may appear on your closing statement. Some fees associated with closing such as your appraisal are considered “POC”, paid outside of closing, because you may be paying for that directly. And then some types of loans such as VA and FHA have other specific fees associated with those loans (and which sometimes can be rolled into the loan amount). And for those putting down less than 20% the lender may require the creation of an impound account which will escrow a few months of property taxes or other charges.

All of the above is why there is no one size fits all easy formula for what your closing costs will be. What is easy to understand is how much will be paid on your behalf when Ellis Posner is your Broker and you receive a credit for closing costs.

Contingencies in Real Estate Purchase Contracts

The RPA as drafted by the California Association of Realtors (C.A.R.) has a number of standard contingency clauses which give the parties the right to back out of the contract under specified circumstances that are pre-defined between the Buyer and Seller.

Buyers will typically have an inspection contingency, an appraisal contingency and a loan contingency. They also may have a contingency for the sale of their current home. If any of those contingencies can not be satisfied, the Buyer can cancel the contract and in most instances have their earnest money deposit (EMD) returned.

Once all the contingencies are removed, the buyer may be at risk of losing that deposit (typically 3%) if they default and do not close escrow. Also, once a contingency is removed, the party can not go back and un-remove it. Contingencies have to be removed in writing* and there is a pre-defined timeline for when those contingencies are to be removed.

Sellers have fewer contingencies but some contracts do include a provision for the Seller to cancel the contract if the Seller can not purchase a replacement home. If the Seller cancels under that contingency that does not entitle them to the Buyer’s EMD.

Let’s take a deeper dive into each of the contingencies.

Buyer Investigation

This is what is commonly called the “inspection contingency” but what it really covers is the Buyer’s investigation of all matters related to the property including insurability. Beyond the physical inspection of the property, Buyers investigate the neighborhood, the CC&Rs or HOA if applicable, and any other of a number of factors.

As an example, the home under contract may not have any specific physical issues but a Buyer may discover that there are HOA rules preventing them from leasing the property out or having a pet.

As part of the disclosures Buyers receive during escrow they may discover many things that may make them change their mind on a specific property. In CA the “Buyer Beware” disclosures seem endless.

Sometimes Buyers do discover things during a home inspection that are wrong with the property. Buyers can requests a Seller to make certain repairs or compensate them in another way such as lowering the purchase price or providing credits in the form of off setting closing costs.

Request for repairs (RR) is another misunderstood aspect of the purchase contract. Before we get into that, let’s diverge for a second and discuss how the “inspection contingency” as it appears in the current version of the RPA (as of this writing) in paragraph 14 B (1).

The default time allowed for the Buyer investigation is 17 days. But as this is the most subjective and easiest out of the contract, and we’ve been in a Seller’s market for quite a while, it is more common to see the number of days here lowered to 10 or less.

Paragraph 2 of 14 B (1) states that the Buyer may “within the time specified” may request the Seller make repairs. Paragraph 3 of this section states that by the end of the time specified, the Buyer shall deliver to Seller a removal of the applicable contingency or a cancellation. This paragraph is entirely misinterpreted by most agents.

Here’s what often happens.

On day 10 or whatever the end of the 14 B (1) contingency period is up, the agent representing the Buyer sends a Request for Repair (RR). The mistaken interpretation is that they have made the request within the time specified - which they have. But that does not modify the subsequent paragraph that states that by the end of the time specified the Buyer shall remove the contingencies or cancel the contract.

In other words the contract does not state that the Buyer gets an extension of time on that contingency if the Buyer submits a Request for Repair.

I’ll discuss the RR and how that is handled in a separate post.

There is a difference in Northern and Southern CA as to how this entire topic is handled. It is much more common in NoCal for the Seller to post or otherwise provide a lot of the information relative to the property prior to opening escrow. In SoCal things like pre-listing inspections are not as common and more deals fall apart based on the Buyer Investigation than should.

Appraisal Contingency

Paragraph 3 I of the RPA discusses the appraisal contingency and the time frame for removal. The default is 17 days but in the Seller’s market we have been in it us more common to see this reduced for 14 days or less.

The specific language in the RPA states that the agreement is contingent on the property appraising for no less than the purchase price.

If the property does not appraise for the purchase price, the Buyer can cancel the contract. Often when there is an appraisal shortfall, the parties may renegotiate the sales price.

Unlike the Buyer investigation contingency where a Buyer can cancel for virtually any reason, to cancel because an appraisal did not meet the purchase price, the Buyer should provide the written appraisal to the Seller.

Recently there has been a trend of offers submitted with the box checked off that the sale is not contingent on an appraisal. Unless you are an “all cash” Buyer or have a lot of money to throw at an appraisal shortfall, that is a rather risky strategy for reasons I will discuss elsewhere.

Last comment on appraisals: an appraisal is an “opinion of value” and not an absolute. Two different appraisers may have two entirely different opinions.

Loan Contingency

For most, this is the big one and the last step before all contingencies are removed. A property can check out when you do inspections and it can appraise but without a loan nothing is going to happen if you are financing the purchase.

Even if Buyers have a pre-approval, the operable word there is “pre”. Once escrow is open, the lender will look at other factors such as the title prelim, appraisal, and other conditions relative to the Buyer’s loan. If the property is a townhome, condo, or has any CC&Rs, those all have to be reviewed by an underwriter.

If the lender turns down the loan based on final underwriting approval and the Buyer wants to cancel using that contingency, the written documentation must be presented to the Seller when the contract is cancelled.

Over the last few years, some lenders have started to tell Buyers that their loan has been pre-underwritten and the Buyer does not need a loan contingency. That is not advisable.

Contingency for Sale of Buyer’s Property

While the three contingencies discussed above are pretty standard, it is pretty hard these days to get an offer accepted that is contingent on the sale of a current home. But it is an option.

When the Seller has accepted this term, everything else can go right and those contingencies can be removed but if the Buyer’s current home does not sell, they can cancel the contract.

The contingency for the sale of the Buyer’s property involves adding a form to the standard RPA. There are many options on this form and it will be discussed elsewhere on this site.