Escalations – Climbing the Price Ladder in Competitive Situations

By now, we’ve all heard how crazy the Northern Virginia market is for buyers.  This is nothing new but the narrative continues to be that it is crazier by the spring season.  Buyers face intense competition in a market where low inventory has been, and continues to be, a huge problem.  So long as buyer demand exceeds housing stock supply, properties that are right-priced, well-located and in good condition will attract multiple offers. How can a buyer succeed when there is more than one offer?

Waiving contingencies helps.  So does a strong down payment and earnest money deposit.  A short closing is usually persuasive. At the end of the day, though, price remains king!  Yet buyers struggle with how to gauge the maximum price to offer, unsure where that cut-off may be.  That’s where escalations come in. Here, I’ll walk you through the ins and outs of escalations, from what they are to how to harness their power to maximum effect.

What is an escalation?

In a competitive situation, a buyer will need to offer a sales price higher than list price to prevail against other buyers.  One of the ways buyers can do that is by including an “Escalation Addendum” with their offer documents.  In Virginia, this is a simple one-page document that sets forth the highest sales price to which a buyer is willing to go and details the increments they would escalate to get to that ceiling price.  The escalation addendum is a part of the contract but will only be used if a seller uses it to push one buyer or another to a price above the stated offer sales price.

How much should I escalate?

There are different schools of thought in answer to this question.  Some realtors suggest going to a number above and beyond any comparable or reasonable threshold.  Their goal is simply to win.  I’ve heard the statement, “Go big or go home(less!)”.  So long as a buyer’s escalation increment goes above the next highest buyer, that buyer will prevail if the seller’s agent follows the escalation addendum exactly.  Realtors in that same school of thought will likely advise their buyer to include escalation increments that are larger, to the tune of anywhere from $5,000 to $25,000.

I take a more surgical approach to escalations.  Looking at comparables, assessing average escalations for the property’s neighborhood and considering the likely extent of competition for that property, I will give my buyers a suggested escalation price ceiling range and range of escalation increments.  I strive for my clients not to overpay, or to feel that they have overpaid.  Of course, I try to strike a balance between that goal and the objective to win.  Generally, I will advise a client to take a more modest approach to the escalation increment – if to win, you just need to beat out the next highest buyer to the tune of $2,000, why include an escalation increment of $25,000?  In that instance, you would have paid $23,000 more than you might need to.  By the same token, some sellers like to see buyers “go big” and will reward a buyer for those larger escalations.

How does the appraisal work with an escalation?

It’s all good and well for a buyer to say they’re going to escalate to some much higher final sales price.  But if the buyer keeps the appraisal contingency, they’re essentially adding a massive caveat to their escalation – that is, they’re telling the seller they’ll pay X higher price only if the appraised value comes in at or above that escalated sales price. Otherwise the buyer retains the right to re-negotiate the price or void the contract without penalty.

In competitive situations, where there are multiple offers with price escalations, a seller will likely choose the highest price offer only in combination with a waiver of the appraisal contingency at that escalated sales price.  In so doing, they guarantee themselves a sale at the escalated sales price without risk of re-negotiation or a contract being voided due to an under-appraisal.  Waiving the appraisal contingency with these large escalations is risky.  And most definitely not for the faint of heart. My job is to help my buyer clients assess the probability of an under-appraisal by examining closely recent comparables and the state of the market. 

What’s the proof that I needed to escalate?

Buyers always ask me – “How will we have proof that there was actually another offer that escalated us?”  There’s good news here!  The Escalation Addendum includes clear language that if the Addendum is used, the seller must provide a complete copy of the competing offer that escalated the buyer to whatever is the final escalated sales price.  This is a critical obligation as it not only gives the winning buyer necessary comfort but also gives insight into why the buyer beat out their competition.  Remember, a seller must provide a complete copy.  Not the first page of the Residential Sales Contract.  Not a copy of the competing Escalation Addendum.  Sometimes, realtors will try to play fast and loose with this obligation.  Don’t let them!

Remember though, it’s always possible that a seller’s agent will decide not to invoke the escalation addendums included in the competing offers.  Instead, the listing agent may circle back to all buyers’ agents with a request for a “best and final” offer from each buyer.  That’s the worst-case scenario for buyers that want the cover and protection that an Escalation Addendum provides.  My advice for navigating those situations will have to wait for a different blog!

Please be in touch if you’d like to discuss escalations in greater detail.

It’s Closing Time

The Nuts and Bolts of “Closing” on a Purchase or Sale

Whether you’re buying or selling, you’ve probably heard that the finish line is the “closing”.  I’ve always thought the term rather non-descript.  Even unclear.  Is it that the deal between a buyer and seller is done, so the chapter is “closed”?  That the parties have agreed to transact with one another until they close the door on one another.  Once a property is sold, are we closing the lid on the deal?  In this blog, I’ll discuss the steps that lead to a “closing” of a purchase or sale and what exactly is involved in the closing (aka settlement).

Contingencies all satisfied, now what?

Assuming there are contingencies as part of your purchase/sale – i.e., inspection, appraisal, finance contingencies – and those have all been satisfied, you’re now in the part of the transaction that is fairly straightforward.  In order to close, there are a few things that have to happen.  They are:

  • If you’re a buyer, you’ll need to receive what’s called an initial “Closing Disclosure” from your lender at least 3 business days prior to your scheduled closing. The 3-business day period – required under the TILA-RESPA Integrated Disclosure (TRID) rule – is measured in days, not hours, and does not include federal holidays. Note that some lenders consider Saturdays a business day. The “CD” as it’s known is a government-designed document that accomplishes several things: (a) it details the costs a buyer will pay at closing and over the life of a loan, (b) it highlights certain loan terms, (c) it provides contact information for the parties involved in your transaction, and (d) it compares the final costs and a buyer’s pre-paid expenses with a buyer’s loan estimate. A lender will ask a borrower to review and acknowledge the initial CD via their web-based portal. This is a formality, rather than making the document binding, to ensure that borrowers have full disclosures about the rate terms and the cash needed to close.  The initial CD is a working document.  Hence, it’s possible that it will change over the course of the remaining days prior to closing, though not significantly.
  • If you’re a seller, you’ll also receive a CD if the buyer is financing their purchase.  There is no 3-business day advance requirement as there is for a buyer.  The CD for a seller’s purposes is relatively simple – it details the deed-related costs, realtor commission costs, transfer taxes and any other fees to be charged at closing (e.g., HOA/condo fees owed).  As a seller, you’ll typically receive the CD from the title company assigned to your transaction, a day or two before the scheduled closing.  This is your opportunity to make sure you are comfortable with the costs and credits that will dictate the amount of money you receive for your sale after the closing.
  • As a buyer, you’ll want to receive notification from your lender prior to closing that you are “cleared to close”.  This tells you that your loan is fully approved/underwritten and that your lender is prepared to fund your purchase right after closing.  If you’ve not received this notice a day or two before closing, you’ll definitely want to circle back with your loan officer.

T-1 (or 2) Before Closing

In the day or two before a scheduled closing, there’s not much if anything for a seller to do.  Other than confirm a date/time to sign closing documents.  For a buyer, they’ll want to confirm with their lender and/or the title company the amount they need to wire to the title company handling the closing on their behalf.  That confirmation sometimes comes in the form of the settlement statement – essentially a restatement of the CD but showing both the buyer and seller’s credits and debits in the transaction.

Note that as a buyer, it’s important that all purchase funds be liquidated well before closing.  Last minute scrambles are never fun!  One client of mine cashed out stock a day before closing only to learn that their bank wouldn’t release those funds for 2-3 business days.  That’s a problem when those same funds need to be wired to the title company the next day for a closing.  To avoid any such scramble, plan ahead where funds are coming from and be sure they’re available for wire transmission at least one business day, if not more, before closing. Keep in mind that funds should be transferred via a wire transfer (ACH transfers won’t be accepted).

It’s Closing Time

Sellers have it easy these days.  Thanks to Covid-19 and/or an overdue evolution in the way sellers can transfer their property, they can now (generally) sign their closing documents electronically.  This typically involves an e-notary and the title company facilitating an electronic closing in the comfort of a seller’s home, phone or office at time of their convenience.  A seller can sign closing documents prior to the date on which the closing is scheduled.  Those documents include the deed transferring title from a seller to a buyer, an owner’s affidavit (i.e., a seller confirms all contractors are paid, no liens on the property), and several tax disclosures. 

A seller’s side of the closing can take as little as 15 minutes.  If a seller signs their documents early, the title company will simply hold them in “escrow” until the buyer is done signing. The big thing to note is that it’s highly unlikely that a seller and buyer will meet in person these days.  Some may lament the absence of a buyer and seller meeting “at the closing table”.  Others will say it’s best to keep the exchange of a property anonymous and impersonal.  I can go either away on this.  There are certainly efficiencies in the separate document signing exercise.  By the same token, I do miss seeing buyers and sellers exchange information with one another, in a sort of passing of the baton exercise.

When it comes to the actual closing, buyers don’t have it as easy as sellers.  Lenders still require they apply “wet ink” signatures to loan documents.  As a result, buyers are still expected to meet with a title agent on the day of the scheduled closing (not before or after) to apply their John Hancock to a healthy stack of hard copy documents.  The most important documents are the Deed of Trust (which will be recorded in the land records of the jurisdiction in which the property is located) and the Promissory Note (kept by the lender on file). The Note is a legally binding agreement that commits you to repayment of the loan after closing.

In most cases, buyers will have received electronic copies of these documents from the title company or lender the night before.  Ideally, a buyer should read those documents before heading into the actual closing – that way, they’re armed with questions and knowledge.  The closing itself will take as little or much time as a buyer requires.  An hour is about the average. I’ve seen them run as long as three hours (that buyer had a lot of questions!) and as short as 20 minutes (perhaps not enough questions were asked there!).

A side bar here.  If you’re unable to be physically present at your closing, you may close via an attorney-in-fact.  Rather than explore that here, please see my separate blog on this very topic.

Closing is done? Last steps…

Once the buyer is done signing, the assigned settlement agent/title company will bring both the seller and buyer side documents together, verify they have everything and then notify the buyer’s lender of closing completion.  A lender must provide loan funds to the title company the same day of closing.  However, it’s important to note that, in Virginia, a title company will only release those funds to a seller after the deed has been recorded in the land records of a given jurisdiction.  A deed is typically recorded electronically these days, making the process quite a bit faster.  That said, the courthouses often close their e-recording in the mid-afternoon.  For this reason, I suggest my clients sign documents in the morning of their closing day.

Still with me?  If so, here’s one last thing to keep in mind.  If a closing is on the last day of the month or in the afternoon on a Friday, expect delays when it comes to deed recordation and funds disbursement. On the last day of the month, the deed might not get recorded until the first day of the month.  On a Friday, the deed might not get recorded until the following Monday.  Title companies are juggling a lot on those days and sometimes get backed up.  If that happens, don’t worry.  The title company will get it done within no more than 48 hours – they have to (barring unforeseen circumstances (e.g., power outage, court closure, weather)).  There’s a law that requires that!

If you have any questions about the lead up to the closing, the closing process itself or the post-closing elements, please be in touch.  I’m always happy to answer questions and talk through how best to navigate the process!

How to Navigate the Home Inspection Process + Maximize a Buyer’s Return

The white hot-market this past spring in Northern Virginia was pay dirt for sellers.  It was a different story for buyers.  To compete and “win”, they had to waive every which contingency.  Most importantly, buyers often found themselves waiving the all-important home inspection contingency.  Flying blind into a new home is far from ideal.  Thankfully, the housing market here in Northern Virginia has re-balanced a bit – at least for now – and buyers are now generally able to maintain their home inspection rights.  

Here, I explore how best to navigate the home inspection process and maximize the return on a buyer’s home inspection.

Who should you choose to inspect your future home?

Any good realtor will have a stable of home inspectors with whom they work regularly. The inspectors I recommend either have a contractor background/skillset or are highly trained in best practices in Virginia home inspections.  Over time I’ve winnowed my top inspectors to two that I know to be assiduous, detail-oriented, patient and to generate home inspection reports in a timely manner (which can be important if under a tight deadline, often typical in a competitive market like this). The inspectors with whom I work don’t shy away from problems.  That’s what you want when getting under the hood of your future home!

What should a buyer do during the home inspection?

Home inspections usually take 2-4 hours, depending on square footage and condition.  That’s time you’ll want to spend at the house, being an active participant in the home inspection. During that time, I always recommend my clients follow along with the inspector, learning about the operation of the home while also seeing how the inspector identifies repair concerns.  Knowing the location of the main water shut-off valve, how to change the HVAC filter and where the exterior hose bib shut-offs, to name a few, can be just as important as learning that there’s a leak in the sink.  Being an engaged participant also benefits buyers when reviewing the home inspection report that is the basis for repair or credit requests to a seller. 

How to prioritize home inspection repair items

Buyer clients usually ask me how to tell if a home inspection is “good”. It’s one of the few instances where I say you should judge a book by its length.  An inspection report of 30-50 pages is generally “good”, unless there are items listed that are significant (e.g., structural foundation issues).  I consider a report of that length equivalent to a B+ give or take. At the same time, remember that a home inspector is only as good as what his/her nose, eyes and ears can detect at the time of the inspection itself.  There will be issues an inspector will miss. A buyer should always go into the home inspection with that understanding and expectation.

To repair or get a seller credit, that is the question

Once a buyer has the report in hand, they find themselves at a decision-making crossroads.  To either void the contract on the report’s basis OR ask for seller paid repairs or a credit.  There are pros and cons to each of those latter options.  

If a seller is taking on repairs, they are both paying for them as well as handling all of the logistics of contractor selection, oversight and work completion.  There may be value of that to a buyer – i.e., less hassle, allows for a move-in with repairs completed.  A seller’s commitment to repair completion also binds them to whatever contingencies relate to a given repair.  This can be useful.  The downside of seller repairs is, of course, that sellers tend to be cost-conscious when facing repair costs and may be incentivized to select the lowest-cost contractor.  The old adage “you get what you pay for” is often true.  Hence you may want to avoid the situation where the repairs are completed, but to a minimal extent and to a poor standard. 

When it comes to a seller credit for repairs, the upside is a buyer can offset closing costs with that credit and reduce the cash they need to bring “to the closing table.”  This can be helpful for those buyers that are low on funds and comfortable deferring their completion of repairs to a later date.  That’s not always possible, though, if the nature of the repairs is such that an immediate repair is merited.  The con of a seller credit is the risk of underestimating the cost of repairs.  In that instance, a buyer finds themselves with a credit that is insufficient to cover the actual cost of repairs.  This is a real risk.  Especially when you consider that it’s generally not possible for a buyer to bring in contractors to provide specific estimates – that would, in turn, be the basis for a requested credit amount.

How to verify repair completion

In Virginia, sellers are required to provide a buyer with copies of paid contractor invoices for work completed.  Those invoices should be given before a buyer’s walk-through.  This not only allows a buyer to verify completion of the agreed-upon work but can also serve as a guide for checking through repairs during the walk-through.  They also detail the exact work completed that buyers will double-check during the walk-through.  In all honesty, some contractor repairs cannot easily be verified by a realtor and/or buyer.  Realtors typically don’t have the equipment to get up into an attic or to verify that electrical work has been completed as promised.  Ultimately a buyer needs to trust in the professionalism of the licensed contractors that complete the work and provide invoices to that effect.

I hope these tips are useful to you as you embark on your home purchase adventure.  Please be in touch if you’d like to discuss the home inspection process in more detail.

Price, Condition, Presentation & Timing = Key Ingredients for Seller Success

It’s (still) a seller’s market here in Northern Virginia.  Buyers are clamoring for the few properties that come on the market each weekend.  It’s standard practice right now for buyers to drop every contingency to beat out their buyer competitors.  No home inspection.  No appraisal contingency.  No finance contingency.  Prices are escalating wildly, upward of 6-8% on average above the list price. 

But all of this doesn’t mean that a seller can simply mail it in when thinking about putting their house on the market.  The same fundamentals apply – even in a seller’s market – when considering selling a home.  Price matters.  Condition is imperative.  Presentation differentiates.  Timing is important. In this blog, I’ll explore in more depth each of these areas.

Price Matters

As a seller in this market, it’s tempting to get swept into the idea that your property is worth a maximum price.  That impression may be rooted in what sellers hear from neighbors, read in the press or their impressions from third party valuation sites.  Zillow and Redfin often include inflated estimated values as those sites are not aware of the condition of a property, recent updates, changes to layout, etc.

What should inform pricing is comparable sales in the last 6 months.  That begs the question, however, of whether a seller should price based on properties that have closed.  Or, those that a seller knows will close after they put their house on the market. In my opinion, it’s best to base your list price on the sales that are on record.  Those are the ones that a buyer can see and, therefore, recognize as the justification for a seller’s price.  If a seller bases their price on an anticipatory closing (at a higher price than previous sales in the neighborhood), the marketplace may look at that seller’s price as an overreach.  Or as one that smacks of greed.

My general approach to pricing is to position a seller’s price within the realm of reasonable relative to recent sales.  And, in so doing, aim to attract multiple offers.  Let the buyer marketplace ultimately dictate the price, using an even-handed price as the starting point.  As they say, you can never price too low…but you can price too high.  All of my recent sales have closed 6-10% above the list price.  Equally important is that buyers of my recent listings have universally waived the contingencies, making the transactions seamless and guaranteed.

Condition is imperative

Just because houses are flying off the shelf like hot cakes doesn’t mean you can avoid putting in the time, money and sweat equity to get your property ready for the market.  What does that mean in practice?  Here are a few areas on which to focus when getting your home prepared:

  • Paint – be sure to touch up or re-paint high traffic areas.  Those are typically stairwells, corridors, insides of closets and the areas around front doors (inside and outside).  Another key high impact paint area is the front door – one of the few areas of a home where you can recapture 100% of your investment.  And it’s not an expensive one.
  • Lighting – give your home a close hard look to determine if your lighting is outdated.  You know those lights that look like part of the female upper anatomy.  They need to go!  Replace them with low profile, LED lights or drum lights.  Ceiling fans that are in that same theme or the ones with the discrete patterned globes.  Those need to go!  The “Hollywood” lights (think round bulbs in a single line) in a bathroom.  Yep, those need to go as well!  Lighting is a relatively affordable and high impact area for improvement.
  • Tile – for bathrooms with tile on the floors and wall, it’s likely the grout has become discolored and stained.  Need to replace the tile?  No!  All that’s needed is some grout cleaner and caulk.  Be sure to also replace the caulk around the edges of your bathtubs, showers and sinks.
  • Knobs and outlets – ever been in a home and noticed the beige outlets and white plate covers?  Or noticed that the door knobs are a hodge podge of brass, brushed nickel and bronze?  Uniformity is key when selling a home.  Ensuring that all outlets and covers are white is a relatively easy project.  Same thing with door knob replacement.  Keep it consistent. Both make a huge difference

Presentation differentiates

When a seller is interviewing realtors, they should consider what a realtor includes as part of the standard marketing package.  When I sell a home, I always include: (1) professional photography, (2) floor plans and (3) a 3-D video tour.  My goal with this three-prong approach is to ensure I put out in the marketplace the most comprehensive view of a property. It’s especially important in this digital age that a property make the best possible electronic impression.  It’s on the basis of pictures, floor plans and videography that a buyer will decide whether to visit a property.  You get the presentation wrong, a seller won’t get the price they want. 

Equally important is staging.  You’ve probably seen the data – it points to homes selling faster and higher when a property is professionally staged. For that reason, I always include staging as part of my service offering to sellers.  In a separate blog, I’ll show you the before and after examples of recent listings.  It’s almost mind-boggling how impactful coherent furnishings and wall-hangings can be.

Timing is important

One of the first questions sellers ask me is this – “When is the best time to sell?”  Year over year sales and accompanying data for the Northern Virginia market point to the spring months clearly being the answer.  The spring market isn’t just March through June.  In fact, it typically kicks into gear in mid-January and runs through the end of June.  It’s during this period of time that the majority of buyers are active.  In my experience, going on the market on the front-end of the season – i.e., January and February – can be to a seller’s advantage.  While other owners are busy waiting for flowers to bloom and to finish up their preparations for an April list date, sellers that go on the market in January/February face minimal seller competition and maximum buyer interest. 

All of this being said, the market here in Northern Virginia is a year-round market, with a fairly consistent flow of inventory release and sales.  There is plenty of evidence that a property that is well-priced and well-presented will do just fine in the later summer months or early fall months.  If there’s a time to avoid as a seller, it is November and December.  It’s hard for properties to compete with the big holidays over those months.  And the possibly bad weather! 

I hope you’ve found this analysis helpful.  Please be in touch to discuss in more detail my recommendations for ensuring the best outcomes when selling in Northern Virginia.

How to Choose Your Lender

Tips for Making the Right Choice

Early on in any buyer consultation, I always highlight the importance of talking to at least two loan officers before launching a purchase search.  Why?  Because only after that conversation will a buyer really know what they can (or should) afford and what makes the most sense in terms of a down payment and loan structure.  

Though I should really step into the picture after that upfront loan officer discussion, I find that buyers typically reach out to me first.  They almost always ask me for lender recommendations – which I happily make – as well as wonder how best to evaluate which loan officer/lender will work best for them.  This blog is born from the many conversations I’ve had with clients about what matters when selecting a loan officer.  

I hope these tips will prove helpful to you as you leap into the great beauty contest that is selecting your lender.

Competitive Rates  – At the end of the day, no matter how personable, responsive and skilled a loan officer might be, it’s the mortgage rate they offer you that matters most.  As one client once said when debating whether to jump lender ships upon learning that a lender I recommended would offer a better rate than the one with which they’d built a longstanding relationship – “I won’t remember the loan officer’s name in six months but I’ll remember that I’m paying more for our house than I could have.”  Harsh as that may be, it’s the truth.  So, all else being equal, the rate a lender offers you is paramount.

24/7 Availability – A loan officer who works banking hours is not the loan officer for you!  The majority of deals get done after hours and on the weekends.  It’s important that your loan officer be available at all times (even on vacation) in case you find your dream home and need a pre-approval letter to accompany your offer.  One of the reasons I encourage clients to shy away from big banks and credit unions is most of their staff and loan officers don’t work the hours necessary to get deals done here in Northern Virginia. And they’re often not available when needed most.

Plain English – I’m sure we’ve all encountered those fast talkers who know their own business so well they forget that others don’t.  Those types tend to skip across the foundational details, sometimes leaving us non-experts in the dust.  Lending is a complex business interwoven closely with economic factors like unemployment, federal government policy and the stock market.  A good loan officer is one who can explain the state of the lending market and various loan products in plain English, walking a buyer through the pros/cons of different options in an understandable fashion.  It’s so important that buyers understand the consequences of a certain loan choice (e.g., 30 yr fixed conventional v. ARM product).  It’s a loan officer’s job to help a buyer navigate to the right option and ensure the borrower understands what they’re choosing. 

The really great loan officer is the one who is solutions-oriented, able to contextualize the prospective loan into the buyer’s financial and tax picture. I always tell my clients that a loan officer is about more than the mortgage – they also serve as an adviser, helping clients make borrowing decisions that make the most sense from a financial and taxation standpoint.  Think of a financial planner, tax adviser and loan officer all bundled into one package of problem-solving excellence. 

Transparency – It’s important that a lender be open with a buyer’s realtor, especially when it comes to the appraisal valuation and status of a loan approval.  The best outcomes are from transactions where the loan officer is regularly updating a buyer’s realtor with the status of the deal – that’s because realtors are following the contract timelines and contingencies, working diligently to ensure they are satisfied.  Things go much more smoothly if a loan officer provides periodic, even proactive, updates to a buyer’s realtor.

Collaborative – I have a stable of loan officers with whom I work regularly and that I generally recommend to clients.  They are informal partners.  Collaborators if you will.  While it’s ultimately my client’s choice who they prefer to work with, I am always delighted when they select a loan officer with whom I’ve worked before and know to be open, transparent, responsive and creative.  I work hand in glove with loan officers at each key intersection of the transaction – i.e., appraisal and finance contingencies – and am always grateful when we bring a transaction to a close in a smooth and timely way.

Self-Funding – It’s important to understand the difference between a mortgage broker, a bank and a correspondent lender.  My vote is that a client go with the latter as correspondent lenders offer the best rates and most streamlined process to closing.  They fund their own loans at closing and sell them later on in the secondary market.  This allows them greater control upfront and the ability to offer the best pricing given multiple investors/outlets. Correspondent lenders have entire operations staff in-house, from processing to underwriting to closing.  This is very different from a mortgage broker who originates and places loans with multiple lenders and then adds their fees or margin on top of that loan/rate.  They do not have direct control over operations as they send the loan for underwriting through the lender.  A bank will set pricing but is generally plagued by bureaucratic-laden processes and an inability to satisfy the tight contingency and closing timeframes demanded by the Northern Virginia market.  If you want to dig deeper into this, check out this useful blog on the topic.

Timely Closings – In my 80+ transactions (as of this writing) over the last several years, 70% or so of which have been for buyers, I’ve never had a buyer fail to close on their purchase on time.  Why does that matter?  Because if a buyer doesn’t close on time, they’re in default under their purchase contract and risk losing their earnest money deposit.  That’s not something I ever want to see happen!  Hence, it’s critical that my clients work with loan officers that I know are guaranteed to help them cross the finish line on time.  In practice, that means getting a loan underwritten well before closing and issuing a closing disclosure well within the legally-mandated 3-day window prior to closing.  

I hope these tips will help guide you to the best possible loan officer/lender for you.  Please feel free to reach out if you’d like to discuss selecting the right lender.  I’m always happy to be a sounding board on this all-important decision!

Not all realtors are built the same

Tips for Finding the Right Realtor for You

Choosing a realtor is a lot like dating. There’s undoubtedly the right option out there for you but you may have to make your way through a lot of frogs to find your prince/princess. There is “someone for everyone” but getting there can be quite a journey. 

In this blog, I aim to help future home buyers and sellers leapfrog (pun intended!) over the sometimes messy and time-consuming process of selecting a realtor. As a realtor myself, I try to be the realtor I would want when considering the right realtor representation in one of the most important transactions in anyone’s life. 

Here are some of the key things that I think distinguish a great realtor from the rest of the pack and that you should look for in a realtor:

Responsiveness – If you reach out to a realtor with an inquiry of any kind and haven’t heard back from them within an hour or two, that’s not the realtor for you. This is a frenetic business, one where responsiveness can make the difference between you getting the deal you want or losing. You can’t let a realtor’s responsiveness failure get in your way. 

Follow-up – Dropping the ball in the Northern Virginia market is not an option. Neither is forgetfulness. A great realtor is one who listens to everything you as a client have said or asks and follows up on every single item. Call it crossing the Ts and dotting the Is (or whatever expression fits best) but your requests should be addressed timely and thoroughly.

Detail orientation – Let’s be honest here.  Realtors don’t typically have to draft contract documents from scratch.  They’re using boiler plate contracts issued by and through their area realtor associations (and sometimes their brokerage).  A realtor’s job is to fill in the contract blanks with correct information – e.g., price, legal description of the property, items that convey with the sale, party contact info, etc.  It’s not rocket science. Yet when mistakes get made in these legally binding documents, the consequences to a client can be significant.  You want to work with a realtor that pays attention to these important details so they don’t backfire on you!

Contract & process comprehension – I’m going to be a little self-serving here.  Most realtors do not have a legal background (like I do).  Yet they are working with legally binding documents that guide the buying/selling process and dictate the terms for the parties to follow. There is nuance and complexity to the language in the various contract documents that underpin a transaction.  You want to work with a realtor who truly understands what the contract terms mean.  What the implications are of not abiding by a contract term.  What the process for buying or selling includes, as rooted in the contract documents between the transaction parties.  Don’t let a realtor bluff you on this!

Neighborhood knowledge – No realtor can know every neighborhood like the back of their hand.  But most realtors do have a particular area of focus such that they’ll be intimately familiar with a neighborhood’s schools, parks, amenities and dynamic.  A really good neighborhood expert will even be able to speak to the unique characteristics of specific blocks and streets.  While I don’t think you need to work with a particular neighborhood expert to succeed, it can help.  And if the realtor isn’t deeply knowledgeable about an area you’re targeting – but otherwise checks your boxes – then encourage him/her to dig deep and fast to get familiar with a particular neighborhood.

Client first – Tough as it is for realtors to revolve their own lives around a client’s schedule, that is just the deal.  A good realtor will make themselves available according to a client’s needs – even if that means working early mornings/late nights and weekends.  They have to put a client first not only when it comes to schedule but also when it comes to workflow.  Realtors generally work with more than one client at a time but should make you feel like you’re they’re only client. 

Perseverance – In a competitive market, like here in Northern Virginia, there is no room for disappointment and defeat.  Your realtor needs to be dogged on your behalf no matter what the obstacle.  That means helping you navigate through multiple offer situations – potentially multiple times – until you get to the finish line.  It can be discouraging for a realtor to invest so much time without compensation – the good ones realize that the effort is not about the money.  It’s about helping a client find the best possible home at the desired price.

Choosing the right realtor for your real estate transaction is critical to ensuring your buying/selling objectives are met.  In writing this, I hope these tips prove useful to you in your selection process.  That they help you to be able to separate the wheat from the chaff.  Happy realtor shopping!

The Mighty Power of Attorney

An Essential Tool for Overseas Home Buyers and Sellers

One of the first things my overseas clients ask me when considering buying or seller is this: “We’re not going to be able to get back to Northern Virginia to sign closing documents – what do we do?”  While it’s important that they’re thinking ahead, they don’t need to worry!  Thanks to a legal instrument called a “Power of Attorney” or “POA”, home buyers and sellers not physically present at the time of closing may execute their purchase or sale documents through a third-party signatory via a POA. 

The POA has been a critical tool in 2020, especially, due to travel restrictions spurred by Covid-19.  But even before that, the majority of my overseas clients would use this instrument in order to avoid having to travel across the miles to the get to the closing table.  In the last several years, I’ve had no fewer than 30 closings where it’s been the “attorney-in-fact” designated by the POA who signs a client’s closing documents.  Though I miss being able to see my clients’ faces and expressions of excitement when they’re handed or handing off keys, I’m also relieved that this option exists to enable their closing in absentia.

Here, I’m going to walk through the nuts and bolts of the POA from its preparation through to the role an attorney-in-fact plays in a closing.

How do I get a Power of Attorney?

Once a client is under contract, I’ll alert the title company and client’s lender (if buying) to the need for a POA.  Many clients instinctively – and logically – would prefer that their realtor, a friend or a family member sign closing documents on their behalf.  Though it would be convenient, realtors are not permitted to serve as a client’s “attorney-in-fact” (a fancy word for a surrogate or proxy).  They’re too involved in the transaction.  Similarly, a representative from the title company is also too close to the transaction to serve in that role.

Friends and family seem appropriate on the surface.  However, it is often asking a lot of them to travel some distance themselves to get to a closing here in Northern Virginia, typically in the morning hours. Also, they’re not always prepared for the hand gymnastics involved!  Imagine signing “XYZ Name, as Attorney-In-Fact for XYZ Buyer Name” 50+ places in a document.  It can be draining. More than that though – it can be risky to rely on a friend or family member.  Their schedules can change.  They may not be able to travel the way they planned.  A pandemic may hit (witness 2020!).

Rather than risk not closing as a result (and losing your earnest money deposit if the closing can’t be pushed back), it’s safer to designate an actual attorney to serve as your attorney-in-fact.  Most title companies have a relationship with an attorney who is experienced in this area. The cost for this service will range between $100-$300.  In my opinion, that’s money well-spent for peace of mind and the accountability that will come with an attorney signing closing documents on your behalf. 

Once I have the POA, what do I do?

The title company typically emails the forms of POA to my clients after it obtains approval from my client’s lender.  My client then needs to sign and notarize the POA and return an original signed/notarized POA document to the title company.  This sounds easy enough, right?  Not necessarily when you’re in a Covid-19 world.  And not necessarily when you’re living in more far flung places in the world.  In the best-case scenario, a client will bring printed out copies of their POAs to a US Embassy or other location with a notary, get the original(s) notarized and return the signed/notarized documents to the title company via overnight/express mail.

In the current Covid-19 scenario, with lockdowns and other movement limitations, it may not be possible to get to a physical notary public in front of whom to sign a hard copy of the POA.  This is where technology and ingenuity come into play!  Thanks to web-based platforms like NotaryCam and others, it may be possible (subject to lender approval) for a client to “e-notarize” their POAs in lieu of an in-person notarization.  All a client has to do is log-in at a scheduled time and an e-notary will oversee their electronic signatures of the POAs. If a lender won’t allow e-notarization, a possible work-around is a Zoom session with a title company notary public staff member who watches via Zoom as a client signs the POAs.  Once the signed original POAs are returned to the title company, that notary public can then notarize the original document.  Again, this is subject to lender approval.  

A side note here is that for clients living in locales without reliable overnight/express mail, it’s important to focus on the POA process early in the transaction.  They need to ensure the original POA is in the hands of the title company well before their closing date.  Just because FedEx says they overnight mail doesn’t make it so.  Build in a cushion of extra days.  Because of this issue, I always raise the POA concern at the outset of a transaction.  And I make sure – or I encourage my client to make sure – that the lender has a clear process and established guidelines for how a client may get their POA finalized well before the closing date.

What does the Attorney-in-Fact do?

On a client’s closing date, their attorney-in-fact, as designated by their POAs, is teed up and ready to sign a client’s closing documents.  Those documents include lender disclosure forms as well as certain loan and tax documents.  Their role is not a substantive one though the function they serve is critical.  They are literally a hand and a pen – there to satisfy the lender “wet ink” requirement when it comes to closing documents.  They’ll sign in their capacity as a client’s “Attorney-in-Fact” and then transmit the package of signed documents to the title company. 

Given the non-substantive role they play, it’s important that my clients review the closing document package in advance of their closing date.  That way they know what their attorney-in-fact is actually signing.  In an ideal world, a client would receive that package days in advance.  That’s not what happens in practice.  Generally, a client will receive the package of loan documents the day or night before their closing. 

If you’re thinking of buying or selling from overseas and would like to learn more about the process, please be in touch!

Bringing the Foreign Service Home to Northern Virginia

Helping FSOs navigate the unique challenges of purchasing homes from overseas

When I left the Foreign Service (FS) due to family and health reasons, it felt like I was leaving a community that I knew and loved. A place where I belonged. Fast forward to 2016 when I launched my real estate business and my very first client was an FSO from my A-100 class. Since then, I’ve helped over 30 FSOs, individuals and families, buy and/or sell their Northern Virginia homes. It’s been an indescribable pleasure and honor to be able to serve the community of which I was a part!

As anyone in the FS well knows – whether through first-hand experience or observing colleagues’ efforts – the challenges FSOs face in buying (especially) or selling are manifold! For the outside world, buying a house sight unseen is unfathomable. It’s commonplace in the FS! The typical buyer expects to sit at the closing table and sign documents in person. That’s often not the case for FSOs who can’t travel thousands of miles to place their John Hancock on some papers! For FSOs selling properties from overseas, they can’t be physically present to manage contractors, pick paint colors/fixtures and ensure work is done to their specifications.

Over my many transactions for FS clients, I’ve developed a particular expertise – elements of which I’d like to share here in hopes it might benefit and inform my FS clients and anyone in the FS thinking about buying or selling in Northern Virginia.

Virtual showings only tell part of the story

Thanks to platforms like FaceTime and Skype, FSOs can now at least tour a property virtually with their realtor and “see” the homes they’re considering. These tours – in combination with the increasingly comprehensive photos that accompany listings – can be extremely helpful. But it’s the atmospherics and details that are lost in a standard tour. That’s where I come in. My value add is not only in the way I describe the features of the home as I show a client a property via FaceTime but also in the way I highlight the atmospherics. That might be the fact that a house is on a street with a steep grade (read: not ideal for kids’ play). Or, perhaps the neighbor hasn’t quite gotten around to mowing the grass. Then there is the all-too frequent challenge of road, highway and metro noise in places like Arlington. Sometimes there’s even a difference in noise level between the front and back of a house. If you’re talking about a condo, I always listen closely for any noise above or adjacent to a unit – you’d be amazed how many dogs I’ve heard barking loudly or music blaring!

My goal in these tours is not only to provide my clients with a good sense of the layout and condition of the home but also of the little (and sometimes big) things that might affect a client’s view of a home if they were there in person. For example, in a condominium building, it’s all good and well to have a garage parking spot. But, what if the unit’s designated garage space is practically a mile away from your unit. Perhaps not as useful! Or, if the property has only on street parking but the adjacent property has designated the spot in front as handicapped and you are not. Parking becomes a hassle.

You can be sure that the listing agent of a property has done everything possible to show a property in the best photographic light. That means omitting the tree branches that might be hovering menacingly over a roof, cropping out the commercial center that backs onto a property and angling a shot to avoid showing the speed bump in front of the house (usually a sign of a cut-through/high speed street).

My goal as a realtor is to get under the hood of a property. To the extent I can get ahold of them, I also always try to provide my clients with floorplans, surveys/plats, a list of updates, and any other relevant information that may be in the land records or otherwise obtainable. I always relay to my clients the good, the bad and the ugly – I do whatever it takes to help my clients understand all of the pros and cons so that, if they buy the home, they come in eyes wide open.

You love it! But will your renter?

I often tell my FSO clients that they have to wear two hats when looking at a property to purchase. First and foremost, of course they want to purchase a property that suits their needs. Yet, at the same time, they also have to consider the rentability of that property and whether it will be a wise investment during those times when they’re posted overseas. Sometimes, those two different priorities are in conflict with one another. My job is to help clients navigate that gap and help them to identify the property that serves both purposes.

I often find that the major points of conflict relate to price, condition, school zones, proximity to DC and access to public transportation. In other words, a client might be drawn to a house that is fully updated and in beautiful condition (which makes a house comfortable to live in) but may not feed to schools that are considered desirable (which many renters view as paramount). Or, another example of tension is when a house is close to DC in mileage terms but doesn’t have any easily accessible public transportation. Again, many renters will place a premium on access to public transportation even if it means a greater distance as the crow flies.

As soon as an FSO client tells me that they are serious about a given property, I always look into rental comparables in a given neighborhood and analyze the time it takes for those rental properties to rent. Most FSOs want to rent quickly and avoid prolonged vacancies.

Your lender can be a make or break

FSOs face a unique set of challenges when considering financing options, in large part rooted in timing and distance. Primary residence mortgages offer the best possible rates for borrowers. However, they also come with a 60-day occupancy requirement. That is, when a buyer closes on the purchase of a property, they are required to sign an affidavit that says they will occupy in 60 days. There aren’t crystal clear definitions about what “occupy” means but it’s generally understood to be that the owner will be living in the property. Buyers have asked me whether it suffices to move in some furniture within that 60 days or have a friend stay at the property or even just stop by and spend the night once or twice within that 60 days. I err on the side of caution. The last thing I ever want a client to do is commit mortgage fraud! In the best-case scenario, an FSOs timing is such that they’re looking to purchase no further out than 60 days from when they’ll be back in the Washington area.

Certain lenders with whom I work do offer loan products that either waive that 60-day requirement or provide as good a rate on a second home mortgage as they would for a primary home mortgage. Either case offers an ideal scenario for a borrower. However, those offerings often depend on top notch credit and other strong financial credentials. I always advise my clients to talk to at least one or two lenders very early on in the process to get a sense of their loan product options based on their timing. Rate and service shopping is important.

It’s also important that your lender understand the mechanics of FS employment. That is, as relates to issuance of your travel orders as well as the job or position changes. There is a certain vernacular with FS employment that is not always understood by lenders. Similarly, you’ll want to work with a lender that understands the one-off and sometimes extensive expenses that FSOs often incur around the time of their assignment transitions. Lenders don’t like to see major credit card charges or other expenses around the timeframe of loan applications and approval. That said, a lender well-versed in the FS transition rhythms will ensure their underwriter understands and overlooks such charges.

Last, assuming you are buying from overseas and can’t be physically present for the closing, you’ll want a lender who will allow all of the closing documents to be signed by an attorney-in-fact based on a signed and notarized power of attorney. In plain English, lenders still require wet ink on loan documents. That means they have to be signed by a person and cannot be signed electronically. Maybe this doesn’t sound too complicated but it often can be!  Imagine buyers in Bogota, Colombia with a co-signer in Tennessee.

If you know you can’t be at the closing, you’ll want to make sure your lender will permit documents to be signed by a power of attorney. In addition, some lenders are quite strict about who can sign in that role – they may require it to be a family member or a paid attorney. Ideally, it could be anyone with whom you are close and that you trust. Just in the last six months, I’ve had five closings where the buyers could not be present for the closing. I’ve met clients’ aunts, parents, friends… you name it!

Keep those friends on the ground

Most every FSO has a friend or colleague who is in the Washington DC area. When looking to buy a property, I always recommend that my clients give that friend or colleague a heads up. While I do my utmost to be my clients’ eyes and ears on the ground, there’s no replacing the observations and perspective of a trusted friend. I welcome the opportunity to bring those folks on property tours with me. It can prove invaluable.

That same person may also come in handy for two other purposes. First, as is the case with many of my FSO clients, they are overseas at the time of closing. Assuming a lender allows it, you may want to have that friend serve as an attorney-in-fact and sign loan documents as a power of attorney on your behalf. The second role is to be a caretaker or custodian of sorts for the property once purchased. For those FSOs who purchase prior to their return to the Washington area, there may be a few months gap before they actually occupy the property. Many of my clients figure it’s a short enough time that it doesn’t make sense to hire a property manager and pay those fees. Hence, they’ll instead ask a friend or family member to check in on the house on a regular basis. On many occasions, I’ve passed over keys to those contacts.

Open 24/7

Not all realtors are built the same. Because I practiced at top law firms and worked under the rigors of the FS, I know what it means to work and to work hard. My goal is to be as responsive to client needs as possible. To be available to them in near real-time, without sacrificing quality and accuracy. Not to let more than a few hours go, if that, without responding to them. Even if that means late nights and early mornings. I maintain that standard regardless of whether working for clients with significant time differences. Recently, I helped an FS client through three rounds of competitive offers, one each day over three days, until we got ratified. Given the 13-hour time difference, that meant early mornings and late nights to accommodate their schedule.

There are also times – especially in multiple offer situations when my clients are competing against other buyers – when I have to impose near real-time demands on my clients. I have had to wake up clients in the middle of the night for them to sign documents. I’ll never forget FaceTiming in the dark with my pajama clad clients in Malawi as they signed contract documents to get the house they wanted!

Time differences can also be meaningful when it comes to meeting contract deadlines. Most every contract contingency expires at 9 PM EST on a given date. When I have overseas clients, whether behind or ahead in time zones, I’m absolutely dogged in ensuring that we meet deadlines on time. Often, that means working on documents well in advance and ensuring my clients are prepared to sign in a timeframe that anticipates the time zone differences.

In a tough market – which Northern Virginia continues to be – FSOs need a realtor who is responsive. One who is willing to be available to you around the clock.

 

 

 

Behind the Scenes – Where Realtors Add (Often) Unseen Value

In this day and age of discount brokerages and newfangled online real estate platforms, buyers and sellers have a multitude of options. They may be tempted to try and save some commission or realize promised efficiencies from an online tool. There’s the pull and tug of those ads telling you that you can save 1 to 2% off your sales price, get a refund of thousands of dollars or that if your home doesn’t sell in 30 days, it will be purchased by your agent.

After three years in this business, I’m here to suggest that buyers and sellers should resist any such temptation! I’ve come to understand the difference in service level between a full-commission realtor and a discount agent. There is one. I’ve also come to appreciate that technology can never replace the human touch required at key inflection points of a transaction.

My goal in this blog is to go behind the scenes, to give you a sense of where your realtor can really add value, advocate for you and ensure your best interests are always represented. I’m going to focus specifically on key aspects of the real estate journey for buyers. I’ll share examples here of how having a dedicated commission-based realtor can save buyers money, headaches and complications, sometimes without them even knowing it.

A picture isn’t always worth a thousand words

Before the proliferation of Internet-based realty sites, a property was typically judged by its “curb appeal”. Today, realtors know that prospective buyers will judge a property by the pictures presented in the listing. It’s all about “photographic appeal”. That’s why realtors generally include professionally taken photos – the shots will usually have excellent lighting sometimes taken with a wide-angle or a “fish-eye” lense. The goal is to make rooms look as bright and large as possible while minimizing any negative aspects of the property.

What you won’t see in pictures of the inside – if it can be avoided – are scuffed floors, stained carpet, old fixtures and cracked walls/ceilings. On the outside, you’ll generally never see a picture of the next-door neighbor’s house, the street in front of and around the house, up-close views of the outdoor systems (i.e., roof, condenser unit, gutters, driveway) and views from the house to the front and back. A picture can be worth a thousand words – that is, unless a realtor wants it not to be!

Having boots on the ground is essential to seeing past the photographic fluff.  More times than I can count, I’ve discovered that a house that looks to be on a flat property from the pictures is on a street with a steep grade, unsuitable for kids’ safe outdoor play.  When a picture shows the back of the house from the back yard rather than the other way around, that often aims to hide what’s behind the house – like the large apartment complex, commercial building or unsightly neighbor’s junked car collection.  Or the time I discovered that the driveway-less property had street parking designated handicap only, thereby precluding anyone from parking in front of the house without a handicap placard.  Road noise is another big one that eludes pictures – in densely populated areas like Northern Virginia, it’s hard to escape but many people want to try.

Pictures help but they’re not the whole picture!

Finding the “clouds” on title

As soon as a buyer client expresses serious interest in a property, I always reach out to my go-to title company and ask them to do a preliminary search in the land records (and beyond) for anything of concern. The nature of the search may depend on whether the house is a teardown, new construction or an existing home sale but some of what I’m looking for includes:

(1) Are there any easements or encumbrances that would affect a client’s ability to do what they want to do on the property? For example, if there is a stormwater easement in a location where a client wants to install a shed, that might be an issue.

(2) Are there any building code violations or mechanics liens on the property? This may be an important issue if my clients are purchasing a house as-is and giving up the right to require the seller to address any building code violations or liens.

(3) Is there a plat of the property showing easements granted to adjacent properties for any reason? A property a client was seriously considering had a parking pad in its front lawn. The seller assured us that the neighbor had the right to park there. Only after a title company physically went to the courthouse and dug up a copy of a plat recorded over 50 years ago, was it confirmed that the adjacent property owner did indeed have that right in perpetuity.

Another important consideration for any buyer client is to have a survey of the property. I always ask a listing agent whether they have a survey they can make available to my clients. From that, we can quickly divine whether there are any fence and/or driveway location issues or other concerns. While it’s important that my clients have a recent survey of the property (though not required by lenders), an old survey can still be useful preliminarily. In one instance, a client ordered a survey that surfaced that the neighboring property had an asphalt parking lot that encroached by over 12 feet on my client’s prospective property!

Inspecting to inspect

Since Virginia is a buyer beware state and sellers have very limited disclosure obligations, the inspection is a critical opportunity for a buyer to assess the condition of a property and learn what, if anything, needs to be repaired. I am an active participant in the inspection. I don’t view it as an opportunity to kick back and review emails and catch up on other work. My job is to accompany the inspector around the property and serve as an additional set of eyes and ears (and a nose!).

Do I have the expertise of an inspector? Absolutely not.  But I do have the ability to ask questions and learn about the property along with him/her. This is especially important when I’m serving clients who are overseas and unable to be at the inspection in person. My philosophy is that I’d rather have the inspection be comprehensive and accurate even if alarming. Why would I want a client to purchase a home that has issues more extensive than they’re willing to take on or that are more significant in scope than reasonable given other factors? Putting my head in the sand or encouraging an inspector to do the same is not only unethical in my view but shortsighted. It’s to the benefit of everyone involved in the transaction that a buyer be as informed as possible about the property. Deal with the hard stuff upfront, even if time-consuming, and a buyer will be thankful later on.

One man’s junk is not another’s treasure

By the time a buyer gets to the walk-through of the property that they’re purchasing, they’re often tired. They’ve made it through the inspection, the appraisal and finance contingencies and they feel like they’re on the homestretch. The last thing they worry about is that there might somehow be an issue with the property right before they’re supposed to close. But, in fact, there is reason to focus on the walk-through. The Virginia residential sales contract requires that a seller delivers a property “free and clear of trash and debris, broom clean… “.

From this language, it’s clear that the expectation is that a property will be move-in ready for the buyer, clean and devoid of the previous owner’s personal belongings and trash. Yet, in about 30% of my walk-throughs (generally done no more than 24 hours before closing), I find the very opposite. From a stash of broken fluorescent lightbulbs poorly concealed in trash bins to old mattresses in attics to unused roof shingles from a previous roof stacked in a garage, I’ve come across a lot of unexpected items. Typically, I encounter these unwanted treasures in crawlspaces, attics and garages. Whether forgotten or overlooked by the seller, or left there with the hope that the buyer might simply absorb and deal with them, trash and debris left at properties is an issue.

My job as an advocate for my clients is to ensure that their best interests are represented. Unless my client tells me that they’re in love with grandma’s broken chandelier tucked in the nook of a crawlspace, I’m going to ensure that the seller has it removed. Sometimes, this means that the seller has to hire a junk trunk in a pinch to clear out the house. Other times, it results in the listing agent having to go to the house themselves and fill their car with their clients’ personal effects. Regardless, I ensure that the property my clients are buying is indeed free and clear of trash and debris and broom clean. Recently, a listing agent got heated with me when I demanded a proper cleanup prior to closing – he argued that I shouldn’t expect things to be “perfect”. No, not perfect…just what is required under the contract.

 

Title Companies and Title Insurance: You Need Both More Than You Might Think

If you’re like most buyers, you know you need to deal with a title company and get title insurance but you’re not sure why. In this blog entry, I will break down for you what a title company does as part of your home purchase transaction and walk-through the various items on the ALTA settlement statement that you’ll receive and sign at your closing.  I’m also going to give you an overview of title insurance and explain why it’s important and what it can protect you from.

What Does a Title Company Do?

A title company performs a number of important functions starting when a contract to purchase a property is ratified (i.e., signed by both parties). Once the title company receives the contract from your realtor, it will research title to the property by reviewing all documents related to the property in the public land records.  Their goal is to find any “clouds” or defects on title that could affect the purchasing party’s ownership of the property.  Defects might include that the legal owner and seller of the property are different, that there are liens on the property (e.g., a contractor placed a mechanic’s lien for unpaid work and it’s not been removed), or that there are unpaid taxes that will have to be cleared up before the property can be sold.  All defects the title company finds will be communicated to the seller and lender as soon as possible in order that steps can be taken to “cure” or correct the problems.  As a buyer, you want to receive clear and marketable title to your new property at the time of closing.  And, your lender is not going to give you a loan if there is an issue hanging over title to the property.

The next function a title company performs is to prepare the documents to be signed at settlement as well as the final ALTA settlement statement (which replaced in 2015 the HUD-1 which you may have dealt with before). The title company will prepare the deed transferring title to the property from the current owner to the new buyer.  Also, the lender and title company will work hand-in-glove with respect to the other documents that need to be signed at closing to effectuate the loan (e.g., the promissory note and purchase money deed of trust).  At closing, the title company acts as the settlement/escrow agent, overseeing the signature of documents by the buyer and seller and making sure that the lender has everything it needs to begin to lend to the buyer and to pay off the seller’s existing mortgage.  Right after the closing, the title company handles all the wiring of money among the parties so that the seller and existing mortgage holder get paid, the realtors involved in the transaction earn their commissions and the lender receives the down payment paid by the buyer.  Perhaps the most important function of the title company immediately post-closing is to record the legal documents (i.e., deed, mortgage, assignments, etc.) at the local courthouse. By recording the new deed, the title company ensures that the new buyer goes on record as being the owner of the property. Be sure that the title company sends you a copy of the recorded deed for your records.

What Are All These Title-Related Items and Costs on My Settlement Statement?

During the closing, the title company will use the ALTA settlement statement to guide each of the buyer and the seller through their respective sides of the transaction. The settlement statement is a critical document as it itemizes all the costs, fees and payments for each side of the transaction.  The big difference between the new format of settlement statement and the HUD-1 is that the new statement is different for each of the buyer side and seller side and doesn’t show a side by side comparison of credits and debits.  In a way, each party to the transaction is now looking at their side of the deal in isolation from the other.  Whether you think this is a positive change or not, the new format is here for now so you’ll need to work with it.  Key elements of the statement are:

  •  Mortgage lender’s charges;
  • Charges for preparing documents;
  • Title company’s fees;
  • Recording costs;
  • Amount of the payoffs to release any existing mortgages;
  • Pro-ration of city and county property taxes;
  • Pro-ration of homeowner’s insurance and condo fees (if applicable);
  • Real estate agent commission fees,
  • Survey fees, and
  • Any other costs associated with the transaction.

 When you review the settlement statement at closing, you’ll want to make sure it looks substantially similar to the Closing Disclosure that your lender will have asked you to approve a few days before closing. If there is any amount that is off on your settlement statement, seek clarification from the title company and get comfortable with the amounts.  Once you sign the statement, you’re accepting all fees, charges and payments and moving forward with the purchase so it’s important that the statement is 100% correct.

What Is Title Insurance and Why Do I Need It?

Like any insurance, the aim of title insurance is to protect you from the unforeseeable and make sure you do not lose money or your property as a result of something outside of your control and/or knowledge. Title insurance is an insurance policy that covers any problems (also known as “title defects”) that arise with respect to your title on the property after you buy or refinance a property.  Those problems can range from an undisclosed (but recorded) prior mortgage or lien that affects your title to the property to a fraudulent act (yes, sometimes people sell property they don’t actually own) to your deed being recorded incorrectly.

The last thing you want to do is bear responsibility for any of these kinds of issues. While the probability of such defects arising may be relatively low, it happens enough that you probably shouldn’t take the risk. Plus, in many instances, your lender will require a lender’s policy of title insurance so that its interests are protected and it can more easily sell the mortgage to its investors.  If you’re interested in seeing an exhaustive list of the various title defects that can arise, check out  First American Title’s 70+ Ways to Lose your Property.  When you read all these, you’ll run, not walk, to purchase title insurance.

You can buy title insurance from a title insurance company or from a title agent who sells policies on behalf of a company. The cost for the insurance depends on the value of your property.  The good news about title insurance is that you buy it at the time of closing and never pay premiums again.  The coverage goes into effect from the time of closing for so long as you have an interest (i.e., own all or a portion of the property) in the property.  If you die, the coverage runs with the property for the benefit of your heirs.  If you sell the property, and give warranties of title, the coverage also continues.  The insurance itself covers the full value of your property as well as the cost of legal expenses necessary to investigate, litigate or settle an adverse claim against your property.

When considering buying title insurance, know that there are two types of policies: (1) an owner’s policy of title insurance which protects your interests as owner of the property and (2) a lender’s policy of title insurance which protects the lender from being responsible for any title defects. Owner’s policies come in two basic forms: (1) standard coverage and (2) extended or enhanced coverage.  Standard coverage is what most buyers purchase and covers you for the full value of your property plus legal expenses against the most common types of title defects (e.g., undisclosed (but recorded) prior mortgage, easement or lien).  Extended or enhanced coverage covers additional more atypical title defects (e.g., silent/off-record liens such as mechanics’ or estate tax liens) and tends to cost approximately 20% more than standard coverage.  As for the lender’s policy, while it only protects the interests of the lender, your lender will likely require you buy the lender’s policy for them at the time of closing.  Just another cost of getting the loan, unfortunately.  It will be issued for the amount of the mortgage and the coverage decreases as you pay down the loan.  When you pay off the mortgage, the policy ends.

*Please note that I write this blog in my capacity as a Virginia-licensed real estate salesperson and not in my capacity as a District of Columbia and New York-licensed attorney.