This past week our listings saw an average of 1.6 showings each. Traffic is still slow but holding steady. Next week we’ll publish our E-newsletter with real estate stats from October. I couldn’t wait that long so I checked October sales and the current pending home sales count today. October sales are down over September and I expect that trend to continue because of the holidays. However, I would also expect pending sales to be slowing this time of year, yet at present they appear to be holding steady which is a good sign for December & January closings.
This week I thought I’d focus on some upcoming contract changes in North Carolina that will significantly impact the offer process when buying real estate next year and beyond. Beginning January 1, 2011 the NC Association of Realtors will be requiring us to use a new contract form that eliminates many of the conditions that we are used to. In the current contract, a buyer makes an offer and once the seller agrees and it becomes a contract, but there are still many conditions that must be satisfied before the deal is closed. For example, the buyer has to get financing, home inspections, an appraisal, and title work. Each of these items is a potential deal killer if buyer and seller can’t work through them and they can all happen sequentially creating one hurdle after another.
The new contract and offer process will eliminate all the individual contingencies. They will be replaced with a period of time called a ‘Due Diligence Period’ during which the buyer can investigate everything and anything he/she desires. It is during this time that the buyer might conduct inspections, appraisal, legal work, and attempt to obtain financing. Before the end of the due diligence period, the buyer can terminate the contract for any reason whatsover and be entitled to a refund of their earnest money deposit. However, once the due diligence period is over the buyer either consumates the deal or loses the earnest money.
This sounds great for the buyer, but it potentially sets the seller up for several weeks off the market and no sale. In order to make things fair, the buyer will have to pay the seller a “Due Diligence Fee” in exchange for the time to investigate the house. This fee is non-refundable (except if the seller breaches the contract). So if the buyer chooses to terminate the contract before the end of the due diligence period, the seller keeps the fee. If the buyer goes forward to closing, the due diligence fee is applied to the purchase price at closing.
The changes are a great improvement over the old way of doing things. Under the current process, there was always one hurdle after another and lots of ways for a buyer to get out of the contract and thus countless disagreements between the parties. The new process is simple. The buyer pays the seller for time lost on the market. At the end of the agreed time, the buyer decides to move forward or not. The seller keeps the due diligence fee either way.
Sounds simple in theory. We won’t really know how well it works until several months into 2011 when the new process becomes tested. The Due Diligence Period and associated Due Diligence Fee will be negotiated between buyer and seller and the time and amounts are currently untested. It is my hunch that the first few months of next year will determine what becomes normal. But to be sure, both the buyer and the seller must agree on both so it is a fair process nonetheless.
The new contract process does change things slightly for me from a listing agent’s perspective. I am assuming that buyers are going to be a bit more hesitiant to write offers next year if they have to pony up the extra ‘Due Diligence Fee’ knowing that they will not get it back if they walk. This is good because it will weed out buyers who are not serious. But it might also make things more difficult for sellers who are already having a tough time finding a buyer.
Going forward, I am going to be recommending that all my sellers perform substantially more up front work prior to listing their home. This could include home & pest inspections, appraisal, title work, insurance reports and more. The idea is to provide buyers with as much information about the house as possible leaving as little out as possible. Buyers will probably still have such reports done independently but armed with the knowledge already prepared by the seller, they will be verifying what they already know instead of discovering it for themselves. Providing buyers with more information up front will give them more peace of mind, making it easier for them to submit offers with confidence.
I have always felt that the best way to get a home sold in the least amount of time and for the most money is to do as much as possible up front. A home that is carefully prepared for the market shows better and sells faster. With the new changes to the process in North Carolina, this motto becomes even more important.