THE LIFE OF A first-time condo buyer today is not an easy one. A newbie could spend weeks, maybe months, attending open houses, dealing with real estate agents and mortgage officers and piles of paperwork — and all while our nation’s financial system is in the worst shape since the Great Depression. Many new buyers are understandably nervous about making such a big purchase now: “What if I lose my job?” “What if the market falls further?”
Responding to these insecurities, real estate firms have begun to promote new safeguards. Long & Foster Real Estate started offering insurance in April that would pay up to six months of a homebuyer’s mortgage in the event of a layoff. Drees Homes, which builds townhomes and single-family residences in Frederick and Laurel, has created a similar program.
Still, there are plenty of reasons why a rookie buyer might hesitate to sign a contract. Maybe financing falls through at the last minute, or by the time you’ve gotten your mortgage, the value of your home has plummeted. Maybe you just lost your job. Maybe you want to buy that townhouse, but you’re just … worried.
But there are plenty of ways to protect yourself — contingency plans smart buyers can use to back away from property they no longer want, and methods they can use to get more for their money. Learn these tips well and use them responsibly.
» The Inspection Contingency
Most contracts work like this: Before going to the final closing, the buyer pays the seller a percentage of the condo’s value as “earnest money.” This isn’t a down payment (which is typically much more money), but just a way for the buyer to signify, “I’m serious about this purchase.” The seller gets to keep that money if the buyer then decides to walk away — unless certain contingencies are met.
Most contracts, says Katie Wethman, a Realtor with Keller Williams Realty, have a clause that says buyers can back out of the deal if a home inspection turns up issues that they don’t want to tackle — even a broken garbage disposal is enough for someone to walk away.
But even when there aren’t major problems, buyers can change their minds without penalty. “What a lot of agents don’t realize is there’s a clause in the home inspection that gives a buyer an out for any reason,” Wethman says. She likes to structure her buyers’ contracts to give them a little more wiggle room, changing the typical three-day window to a week or more, if the seller is amenable.
Two of Wethman’s clients recently took advantage of one of her extra-flexible, buyer-friendly contracts. First-time buyers Adam Calabrese and Valerie Jones put an offer on a three-bedroom townhouse in Del Ray, which was accepted in March. Two days later, Calabrese got a call offering him an interview for his dream job — but it would have involved a relocation. So the new buyers faced a dilemma: Forget about the career move and buy the house, or give up on the house for just the possibility of the job?
Calabrese, 28, a consultant, and Jones, 29, a library aide, didn’t know what to do. “I had [asked Wethman if she could buy us more time so I could be able to get out of the contract," Calabrese said. "She worked it so we waited until the very last day to submit the inspection report, and she loaded the inspection report with pretty much everything that was wrong, being pretty sure that [the seller] would counter, which would then buy us three more days.” Calabrese was able to go to his interview knowing that, if needed, the couple could walk away from the deal without consequence.
» Appraisal Contingency
Simply put, the appraisal contingency means that if the property isn’t worth about as much as you’re paying for it, you can renegotiate without breaking the contract. Smart agents try to write these contingencies into contracts, but there are certain times when this doesn’t work.
Developers selling whole condo buildings are much less willing to negotiate with individual sellers. They have standardized contracts they don’t like to budge from, says Taylor Connolly, a lead real estate agent at Redfin, which sells homes in D.C. and Maryland.
» Financing Contingency
Still, in this economy, first-time buyers may find there’s some wiggle room for financing, even when dealing with developers.
The financing contingency essentially means that if you can’t get a mortgage, you may be able to back out of your contract. Connolly says, though, that he’s been able to negotiate a larger window for buyers to try to get a mortgage — 60 or 90 days rather than the standard 30 — because of the extraordinary market circumstances.
Once, he had a buyer who was still stuck looking for a mortgage a month past the closing date. “[The buyer] had to start over with a whole new lender. The developer was pretty much, ‘Hey, do what you have to do. As long as you’re at least trying to get a loan, we’re fine with it.’ A year ago, they would have taken your money and told you to try again later,” Connolly says.
» Other Loopholes
The lawyers at N.Y.-based No-Condo.com think they’ve struck gold. They’ve been using condo developers’ failure to file papers under the Interstate Land Sales Full Disclosure Act as a basis for rescinding a buyer’s contract.
It sounds like legalese, and it is; the ILSFDA is a law meant to prevent speculators from selling uninhabitable plots of land. Interpreted in a different way, the law could also apply to developers’ building condo complexes with more than 99 units. The No-Condo lawyers say they can use a developer’s failure to comply with this act as a way to get buyers out of contracts they don’t want to be in.
Brian West, of the West Law Group in Tysons Corner, represents No-Condo.com in Washington. “The key is, did you register [with the department of Housing and Urban Development] or not? If you didn’t, your clients get to rescind.” No Condo is working with a few clients in New York — none of whom have yet succeeded in breaking their contracts — but none yet in D.C.
» What Could Go Wrong?
If you back out of a contract without using one of these contingencies, kiss your earnest money goodbye.
But even if you can take the financial hit, you may want to think twice before ditching a deal: While breach of contract won’t ding your credit report or make it harder for you to buy a condo in the future, the seller has the right to sue.
Connolly says he’s heard of cases where sellers sued defaulted buyers for the losses incurred by not being able to market their property to anyone else. If the condo loses value between the time of the initial earnest money payment and the buyers’ backing out, sellers can win the difference between the previous asking price and the current value.
» Home Sweet Home
After their initial hesitation to sign a contract due to a potential new job, first-time buyers Calabrese and Jones decided to buy their Del Ray townhouse after all (Calabrese had decided not to take that out-of-town job). But they had another scare the evening before they were supposed to close: Their mortgage broker (a family member) hadn’t come through, so they wouldn’t have the money in time.
“We were technically in default,” Calabrese says. The seller could have taken the couple’s earnest money and cancelled the contract.
“We were homeless,” says Jones, who needed to move out of her Arlington apartment only an hour after learning about the problem.
Over the weekend, while the issue still hadn’t been resolved, the couple slept in Jones’ parents’ RV — they’d driven down to help the two move — with their cars full of “random things, things you can’t give the movers,” like birth certificates and valuable jewelry. Movers stored the couple’s boxes.
Finally, on a Monday — after essentially restarting the entire mortgage application process and sending W2s and bank statements to a new broker — Calabrese and Jones obtained their loan, signed all the paperwork, and officially became homeowners.
“We had no furniture [yet], but we were determined to sleep in the house that night,” says Jones.
“On an air mattress with nothing but the things we brought [in our cars],” adds Calabrese: “Lamps, jewelry, and paperwork.”
» Shop Around:
The Federal Housing Administration can help you get a loan with just a 3.5 percent down payment, compared to the 10 percent or higher usually required by lenders. Many restrictions apply, though, from the property type to the number of days it’s been on the market, so check with a lender with FHA loan experience.
» Quick and Dirty?
A short sale — popular these days with deal-hunters — can end up being anything but short. Since the bank servicing the current owner’s mortgage must agree to the sale price, you’ve got more people to negotiate with than just the owner(s) and a real estate agent.
The FHA also offers a loan for homes that need a bit of TLC: the 203(k) program. The program can essentially help you lock in extra money for repairs at the same low interest rate as your primary mortgage.
» Extra Costs:
Private Mortgage Insurance (PMI) guarantees the lender payment if you default on your loan, and it’s often required if you’re putting less than
20 percent down. When calculating how much home you can afford, be sure to figure PMI costs into your monthly payments.
» Money For Nothing:
Until December 1, 2009, first-time buyers can receive an $8,000 tax credit, thanks to the government’s economic stimulus plan. This credit does not have to be repaid. Miss the deadline? First-time buyers in the District of Columbia are eligible for a $5,000 tax credit — with no time limits.
» … And Your Credit For Free:
Don’t ever pay for a “free” credit report. You can get a legitimately free copy of your report from each of the three major reporting agencies once a year from Annualcreditreport.com.
Written by Express contributor Rachel Kaufman
Photos by Regan Kireilis for Express