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What are the Contingencies in a Missouri Real Estate Contract?

I’ll say it: real estate transactions are complicated. You’re signing a million forms, splaying open your finances, coordinating your move (sometimes cross-country), talking to Realtors, lenders, inspectors, and title companies. There are countless moving parts and it’s imperative that your Realtor keep everything on track and, more importantly, on deadline. Contingencies are milestones set forth in the contract that allows a buyer to back out if certain conditions aren’t met in a timely fashion. These are mechanisms that protect the interests of both the buyer and the seller, preventing an instance where perhaps you get all the way to the closing table just to learn that the buyer can’t obtain financing to purchase the house. While several possible contingencies can be added, there are four main contingencies that come standard in a Missouri real estate contract.

  1. Title Contingency
  • At closing, the seller must transfer to the buyer “marketable title” to the property via a deed. Marketable title means that the ownership of the property is free and clear of any clouds, such as liens or other potential claims of ownership. Once you are under contract, a title company will conduct an examination of the title in order to issue a title insurance policy. If the title company discovers any clouds or defects on the title, this contingency allows the buyer to object to these conditions. The buyer may request that the seller clear up the issue prior to closing, or if they wish, the buyer may simply back out of the contract with their earnest money returned.
  1. Inspection Contingency
  • When a contract falls apart, home inspections are often the culprit. The contract allows a buyer to obtain professional inspections of the property in order to gain a better understanding of the home they are purchasing. If the inspections uncover any issues that are unacceptable to the buyer, the inspection contingency gives the buyer a couple of options. First, the buyer can choose to back out of the contract with their earnest money returned, though they still must pay for the cost of the inspection(s). Or, the buyer can request that the seller fix the issue. This opens up a negotiation window allowing the parties to go back and forth about what and how the seller will fix the problem, either through repairs or sometimes a closing cost credit or price reduction in lieu of repairs. If the parties can’t reach an agreement within the specified time period, the buyer may back out of the contract with their earnest money returned.
  1. Financing Contingency
  • The buyer is likely already pre-approved for a mortgage at the time their offer is written, but the real work begins once the contract is finalized. The buyer’s lender will get to work on securing the loan, which can include a formal loan application, credit report, appraisal (more on this later), pay stubs, tax returns, and more! If the lender discovers something that will prevent the buyer from obtaining a loan at the contracted purchase price, the financing contingency allows the buyer to terminate the contract with their earnest money returned.
  1. Appraisal Contingency
  • Though the buyer’s loan may depend on an appraisal, it is a separate contingency. In most cases, the buyer’s lender will require a formal appraisal to ensure that the property is worth the amount that it is being purchased for. If the appraisal reveals that the home is worth less than the contracted purchase price, the lender will only loan the buyer the appraised amount. Enter: appraisal contingency. In this scenario, the buyer has three options: terminate the contract with their earnest money returned, make up the difference between the appraised and contract prices in cash, or ask the seller to reduce the purchase price to the appraised amount. The buyer and seller can negotiate on the purchase price and if they fail to reach an agreement, the buyer may back out of the contract.

All of these contingencies are important safety tools in a real estate transaction, but they only exist within a timeframe. If a buyer slips up and misses a contingency deadline, they could forfeit their earnest money or worse: end up in litigation. Make sure you enlist a trusted, experienced Realtor to keep the transaction on track and get to the closing table on time.

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What Does a Home Inspector Look For?

Having a home inspection done before closing the deal on a new home is critical. Even though it may not be required by your lender, getting a thorough evaluation by a reputable inspector will be money well spent. I believe it’s the very best money you can spend!

It’s important to begin by explaining who a home inspector is and is not. A home inspector is not a licensed plumber or electrician, roofing contractor or HVAC technician. While an individual inspector may have a high degree of proficiency with or prior experience in one or more specialized areas of construction, they are typically more of a “generalist.” They are professionals with a thorough understanding of the home-building process, are familiar with construction materials, and have a working knowledge of local building codes. In my experience, the best home inspectors have spent a number of years working as a contractor or tradesman before becoming a home inspector.

Home inspectors are trained to find problems that may not be apparent to most people. You should expect to receive a written report with the inspector’s findings. If a deficiency or problem is discovered or suspected, they will almost always refer the buyer to a specialized contractor, i.e. plumber, electrician, etc., for further evaluation.

During the course of the actual inspection, they’ll check for possible structural defects by taking a careful look at the outside of the house. They’ll examine siding, doors, windows, decks, the roof, and even driveways and walkways. Proper grading is also something they’ll check, as improper drainage can damage a home’s foundation.

Inside, the inspector will check ceilings, doors, and walls for defects and signs of structural damage or water leakage. The attic will also be inspected for similar problems, as well as adequate ventilation and insulation. Basements and crawl spaces are other important areas that are checked to ensure there are no critical weaknesses or signs of water intrusion or other defects.

The inspector will evaluate the home’s electrical system to look for wiring problems, proper capacity and size of the electrical panel, and to make sure that unsafe wiring materials aren’t present. They’ll also check the plumbing system to determine the types of pipes are used, ensure that they are functioning correctly, and check for adequate water pressure and flow. They will inspect all fixtures, toilets, and drains for damage and proper function.

Heating and air conditioning systems will be examined for functionality and safety. They will check for the presence of smoke and carbon monoxide detectors, and possibly advise you if there are any ways that energy efficiency can be improved.

Most home inspectors are generally not trained to conduct termite, radon, fireplace or septic inspections themselves, although these are also important inspections that you should consider having done. Mortgage lenders often require buyers to have some of these inspections conducted. Your Realtor or the home inspector you are working with can recommend a list of providers for these more specialized inspections.

Lastly, it is important to understand that the inspector is making an assessment of the condition of the home on that one specific day. They can’t forecast when the water heater will stop working, when a shingle might blow off the roof, or when the A/C will need to be replaced. The home inspector is taking a snapshot of the home in time.

My best advice is to buyers when they receive their home inspection report is to focus on negotiating with the seller to resolve immediate safety issues, repair or replace big-ticket items, and not to sweat the small stuff. Many problems may not even be known to the home’s current owner. And remember, no home is free from repair needs so you’ll just need to determine which items you’ll ask the seller to address, and which issues you are willing to take responsibility for after closing.

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Understanding Earnest Money: It’s all about commitment

(Note: each state and municipality adheres to a standardized process for residential real estate transactions, including earnest money disposition and escrow management. This blog entry is written relative to the Missouri Realtor-approved residential real estate contract and the process that is customary here in Mid-Missouri.)

Earnest money is just what it sounds like. It’s a good faith deposit made by a buyer to convey an “earnest” desire to purchase the home for which an offer has been written. While earnest money isn’t technically required, a buyer’s failure to include earnest money in an offer can be viewed by the seller as a lack of sincerity or commitment to the property. Earnest money also serves to protect the interests of each party as they move through the transaction (more on that, below).

It’s all about commitment

Missouri doesn’t require any specific amount of earnest money; however, a general rule of thumb is 1.0% to 1.5% of the contract price. Generally speaking, the greater the earnest money the greater the buyer’s desire and commitment to complete the transaction. Most sellers will look favorably on a higher earnest money amount, particularly if there are multiple offers on the property. Supply and demand in a particular market can also impact the amount of the earnest money deposit. Ultimately, the final amount of the deposit is whatever the parties agree upon.

Once the contract is negotiated, accepted and signed by both parties, the buyer has a set number of days specified in the contract – typically five in Missouri – to deposit their earnest money with the escrow agent. An escrow agent is a third party (also specified in the contract) – usually the title company or the buyer’s broker – who holds the funds in a non-interest-bearing account until closing.

If the transaction successfully makes it to the closing table, the earnest money is credited to the buyer, reducing their “cash to close” by the corresponding amount. In most cases, buyers are eligible to terminate the contract and have their earnest money returned if problematic issues arise during one of the four main contingency periods: inspections, appraisal, financing, and title search. If the proper protocol as outlined in the contract is followed within the stated time period, the buyer is entitled to their earnest money. However, if the contingencies and the associated timeframes are not managed properly, or if the buyer attempts to terminate the contract without cause, the seller could be entitled to receive the earnest money. This is one of the biggest reasons why it is so important to use the services of an experienced, vigilant Realtor who does everything they can to protect your interests!

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WTF? (What The Flood) Why Flood Insurance Isn’t Included in Your Homeowner’s Policy

Homeowner’s insurance is an important thing for any homeowner to have. It covers your home and belongings if they are destroyed by disasters such as storms, tornadoes, or fires and the like. But many homeowners don’t realize that standard hazard policies don’t cover flood damage. Flood insurance is not included in regular homeowner’s insurance because most people don’t live in places with high flood risks. It stands to reason that if you live far from any bodies of water, you shouldn’t be required to pay higher premiums to be covered in the unlikely event of a flood. If you want — or are required to carry — flood insurance, you’ll have to get it from a separate policy.

Flood insurance is provided by the government through the Federal Flood Insurance Program, although it can be purchased at the same time from the same insurance agent writing your general homeowners insurance. Flood insurance is relatively inexpensive, so if you live near a body of water it may be worth considering, depending upon your circumstances.

Flood insurance is not required by your lender in most cases unless you are in a designated flood plain and it is commonplace for lenders to order a flood certification as part of your loan approval process. If you are getting a federally-backed mortgage (i.e. FHA, VA) in an area with high flood risk, the law requires you to have flood insurance. Whether it is required or not, flood insurance can give you the security of knowing that your damages are covered in the case of a flood.

Those who are not in flood-prone areas may be able to get a lower premium on their flood insurance. Even if you’re not near a body of water, flooding is possible from melting snow or water running downhill. If you are potentially at risk for these occurrences, you may want to consider flood insurance, as well.

Flood insurance covers the replacement value of your home and the cash value of your belongings, however, there is a limit to how much the insurance will pay on both. To compensate, some specialized insurance companies sell excess flood insurance. It picks up where the federal policy leaves off, covering the remainder of replacement value on your house and cash value of your personal belongings.

People in flood-prone areas sometimes don’t feel they need to purchase this insurance because the Federal Emergency Management Agency (FEMA) offers assistance after a flood. But FEMA can only provide assistance in areas that have been declared federal disaster areas. If the President does not make this formal declaration, those without insurance won’t receive any assistance to rebuild and recover.

FEMA assistance is limited to declared federal disaster areas

It is important to note that flood insurance has a 30-day waiting period. If you think you can ‘rig the system’ and buy flood insurance after a flood warning is forecasted, think again. Your policy will not cover any damages that may be incurred from that incident. If you think you’re at risk for flooding, consult your insurance agent. Getting the right kind and amount of insurance right away is the practical thing to do.

When considering the purchase of a home you should always determine if it’s in an area at risk for flooding BEFORE submitting your offer. The added cost of insurance could affect your loan eligibility or represent an expense you are unwilling to pay.

To see if your home is in or near a 100-year flood plain, use this link:

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