On January 1, 2011, a new Offer to Purchase and Contract debuts and will be the basis for nearly all residential resale purchases in the state of North Carolina. It is vastly different from it predecessor, which was written to benefit the buyer rather than the seller. Here are the highlights:
1. The Due Diligence Period
For the last few years in North Carolina, the statewide contract had always given buyers the ability to back out of the contract and keep their Earnest Money Deposit (money deposited at the time of contract, credited to the buyer at closing, that could be liquidated to the seller in the event the buyer breached the contract) so long as they did so before a series of separate dates. They were:
- Inability for loan approval
- Home inspection / Negotiation / Cost of Repair Contingency
- Mortgage Application
- Closing Date
- Receipt of Property Disclosure…and so on.
Savvy buyer agents could structure the old contract in such a way as to always enable their client retain their earnest money. This has now been consolidated into one date called the Due Diligence Period. This is a hard date (noted by Time is of the Essence…meaning that it is a firm date). During the Due Diligence Period, the buyer must:
- Complete all inspections and negotiate repairs with seller
- Review all Homeowner Association and Condo Documents
- Investigate and agree to the cost to insure the property
- Order the appraisal and find it the results satisfactory
- Order a survey to assess if any fences, sheds, etc are over the property boundaries
- Investigate any special assessments that may be pending for the property (i.e. city to install sidewalks and charging the homeowner for the work)
- If the home is in a flood hazard
- Zoning and Governmental Regulation (i.e. buyer discovers that the school assignment for the upcoming year is no longer desired).
The buyer's inability to get a loan is no longer apart of the equation as well as many of the other provisions of the old Offer to Purchase and Contract. During the Due Diligence period, the buyer may elect to walk away for any reason or no reason and the seller MUST forfeit the Earnest Money Deposit. If the buyer backs out after this period, the Earnest Money is liquidated to the Seller.
The typical closing in North Carolina currently takes 4 weeks and much of that time deals with the buyer staggering how they investigate a property and the financing. For example, a buyer may obtain a mortgage pre-approval letter but not apply for the loan and pay for the appraisal until after the home inspection has been completed. Under this new setup, everything will need to be investigated altogether of the buyer might risk losing their Earnest Money.
2. Due Diligence Fee
For Sellers, this means taking the home off the market for a few weeks while the Buyer completes the Due Diligence Period. For the privilege, the Buyer will pay the Seller a non-refundable (except in the case of material breach) "Due Diligence Fee" that will be credited to the Buyer at closing. The amount of the fee is completely negotiable but expectations will be the seller wants $1000 and the buyer will only offer $10. Earnest Money is still apart of this contract as well.
The remainder of the contract is fairly straight forward with another variance from the current Offer to Purchase is that closing can be delayed for up to 14 days without agreement while currently, the figure is 30+.
If you are a prospective home buyer, you might be thinking that purchasing a home has just got a lot more complicated but not so. More expensive for you…no, but there is more required earlier in the transaction.
Tips For Home Buyers in 2011
Here are a few tips that will help you when using the new contract and your purchase:
1. Investigate up front what has been completed by the Seller.
When I sold real estate in Maryland, I learned quickly that gathering as much information up front was the best way to ensure that the property was headed for a smooth closing. Even today, I follow the same tactics which involves gather HOA docs from the seller, any surveys they have on file, completed disclosures ahead of time, etc. As a buyer, a property where the seller has taken these steps in advance should be a HUGE green flag that there's nothing to hide and that they want to sell their home more than they want your Due Diligence Fee. Consider holding off from making an offer until the disclosures are completed and submitted for your approval. If the seller is unable to supply some items, consider holding off until either you, your agent, or their agent has gathered the required information.
Some sellers may even complete a home inspection up front and complete the recommended repairs.
2. Don't just get a pre-qualification letter, get a Conditional Loan Commitment.
Even to this day, I get pre-qualification letters from lenders that do not state what program the buyer was qualified for, how much they are qualified for, if credit, employment, accounts have been verified and they are WORTHLESS. As a buyer, it is essential to meet with a lender before ever making an offer on a home to determine exactly how much you can afford, exactly how much they charge, and the time they will need to complete the appraisal and loan review. On the phone with someone you've never met while driving back to the agent's office to make an offer is NOT the right time. Ideally, you want the lender to issue stating that aside from a contract, completed appraisal, and final underwriting, this buyer is approval.
3. Bank-Owned sales will Nullify the New Contract.
If you have purchased a bank-owned home in the past, you will know that the addendum that follows will completely overwrite any contract that you have on a local level. The same is true here. Actually, the new contract is exactly like a bank owned sale, minus the as-is clauses, as the bank requires that everything is completed within 3-10 days of Contract.
4. Be Mindful of your Due Diligence Date
Keep in mind tht the due diligence date allows the buyer to back out of the contract for any reason or no reason. Once that date is reached, if the appraisal isn't completed and it comes back for less than the purchase price and you, as the buyer want to back out, you will in all liklihood lose your Earnest Money as well. Therefore, schedule yourself enough time to complete what is necessary to make an informed decision. Longer dates will cost your more money so speed is essential.
I am certain that the next few months will be interesting as we all adjust to the new contract in North Carolina. The good news is that now that you've read this post, you're prepared to use the new contract to your advantage.