Before you get started in reading this post, which is full of a lot of information about the terms used in the process of purchasing a house in Massachusetts. Please know that your agent/brokerage that you have hired is bound by confidentiality. The agent or anyone working for you must not disclose any part of the transaction, unless directed by you, as the client. All those professionals that you hire on your behalf do communicate and share information in order to move the process through the contractual steps. You want this to happen so the purchase of the property and the eventual sale is completed on time.
Terms to know when buying a home in Massachusetts
- Offer to Purchase
- Conditions of a Offer to Purchase
- Offer Deposit held in Escrow
- Home Inspection Condition
- Appraisal Condition
- Clean Title Property Condition
- Property Disclosures
- Purchase and Sale Contract
- Repair Addendum
- Mortgage Commitment Letter
- Breech of Contract
- Conditional Mortgage Commitment Letter
- Closing Disclosure
- Government Requirements to Close
- Walk through
What is an Offer to Purchase Real Estate?
An Offer to Purchase Real Estate is a written contract used to delineate a proposed real estate transaction. It is presented to the seller from the buyer. Typically it is called an “offer” and is used when someone wants to purchase a house, condo, multi-family, or commercial property that is for sale but there are conditions that need to be met before the sale can be finalized. The offer will list out:
- The buyer (names and address)
- A description of the property (usually the address and the book and page number of the associated “Deed” on record at the Registry of Deeds)
- The offer price (i.e. the price being offered for the property)
- The amount of the offer deposit (usually $1,000)
- The amount of Purchase and Sale Deposit (Usually 5%)
- The dates of the Offer, execution of the Purchase and Sale, Mortgage Commitment and the Closing Date.
Conditions of an Offer to Purchase Real Estate?
Conditions are in all offers and refer to specific action steps that need to take place for the real estate sale to be executed however, it can get confusing because within each action step there could be several milestones that also must be completed. For example, in order to receive a “Mortgage Commitment Letter”, the buyer must submit an application for a mortgage, an appraisal of the property must be completed, property/ home insurance, by the buyer, must be purchased, and the buyer must meet the terms of the loan requirements. Technically four action items for one milestone.
Common Conditions of an Offer To Purchase
- The buyer must sell their existing home before the purchase can be completed.
- The buyer must receive a mortgage approval from a bank or lending institution.
- The house must appraise at or above the purchase price.
- The seller must arrange to have repairs completed before the buyer takes possession (such as mold or radon remediation, painting, cleaning the carpets, making repairs, etc.)
Typically in Massachusetts, depending upon where the home is being purchased, the initial deposit with the offer can range from $500 – $5,000. Most of the time it is $1000 and a personal check is usually the form of payment. The amount of deposit money is also tied to the type of housing market; in a “buyers” market the buyer determine the dollar amount in and a “sellers” market the opposite is true.
An offer deposit is an initial deposit of money that is given to the seller with the offer to indicate an intent to purchase the home. This deposit is held in escrow until the date of purchase. This money is also refundable if you choose not to move forward with the purchase at specific intervals. Once some of the milestones are met then the deposit is not refundable. Also, should the negotiation specifically indicate the deposit money is not refundable then the terms of the negotiated contract shall prevail.
Home Inspection Condition
If the buyer makes an offer and includes a home inspection period, typically the buyer can back out of the transaction and get the offer deposit back in full, minus the cost of the home inspection (which has been paid for separately). The grounds for the return of the deposit money are numerous however, one example includes the house did not meet the buyers expectations or the house can not meet the loan term requirements (ie peeling paint, cracked windows and torn carpet are not permitted in FHA Loans).
A home inspection is an optional part of the process. Most real estate agents recommend completing the home inspection and typically in the homebuying process in Massachusetts it is typically 10 days from the date of the accepted offer. A home inspector is a 3rd party independent contractor that will evaluate the house from a structural and safety perspective. Just as many service professions, there are good and bad inspectors. Typically there is a checklist every inspector uses and they methodically go through the entire house. Their knowledge can be invaluable as they are comparing the current situation with current code regulations. The home inspection can take anywhere from 2 to 5 hours depending upon the size of the house. It’s a good day to take off from work and other obligations! Additionally, most inspectors do not look at detached sheds but will inspect garages, detached or attached. In general, they are looking for anything that would compromise the structure, for example pests, water, potential fire issues, health issues like mold, asbestos, lead, radon etc. Each home inspection company charges different rates and provided different services (other wise it is against the potential to price fix) so, check around for an inspector that meets your time frame and your level of evaluation.
As mentioned, home inspections are not “required” under the law and are a “condition” of the offer so, in some cases buyers waive the home inspection if they are competing with other buyers.
Sometimes sellers complete their own pre-home inspection so as to speed along the process, or to put the buyers at ease. Other times buyers state the home inspection is for information only so, even if the results of the home inspection are not favorable they are accepting those conditions and will move forward with the purchase. This is an area where the real estate agent you have hired will negotiate on your behalf.
Home Inspection can be an overwhelming day for buyer but, at the same time, it is very hard to get back into the house so if you are really going to buy the house, it is a good day to bring a tape measure and measure things not on floor plans. Often requests to get back into a house include measuring things like windows, space between windows and stairwells, door openings, fireplace openings and depths of the fire box, washer and dryer space, refrigerator space etc. Often times while the mortgage is in process move-in plans begin and decisions are made for changes after the purchase but before moving in and the sellers do not want the buyers to come back in because:
- They think the buyers are going to back out.
- The house is not show ready.
One thing to keep in mind is not to purchase anything while in the mortgage process as, large purchases, like furniture and appliances can, you guessed it derail your mortgage and cause you not to get the loan.
An appraisal is a method that a bank uses to verify the property the buyer wants to purchase is equal to the value the buyer is willing to pay. The bank orders the appraisal and the order request is sent to a 3rd party vendor that assigns the appraisal to one of many people they have on sub-contract. The appraisal professional completes the review of the subject property and similarly sold properties with in the last 3 -6 months. The subject property is reviewed and analyzed based upon commonly accepted appraisal standards and a specific value is given. The value is given for the property and is valid for the day it is issued only. The reason for this stems from the fact market conditions can exist on one day and change the very next day. An example of market change typically given in the industry includes, 9-11. One day you had certain market conditions and the very next day the financial markets changed. This caveat was not the result of 9-11 but was implemented in the 1980’s due to the Savings and Loan Scandal, where banks were holding mortgage loans on property much higher than the property was worth due to a financial crisis. We then,again, had the 2008 financial crisis where there were other issues in the financial sector which impacted the housing market for multiple years.
If you are buying a property and plan to hold the property for more than 10 years you most likely will not be wrapped up in these debacles but, the economy will always play a role in the property value so, it is a good idea to understand housing markets and the valuation techniques used by financial institutions.
Clean Property Title Condition
A title search is completed prior to ownership transfer and the property must have “clean” tile or another way to say it is without encumbrances prior to the ownership change. Encumbrances can be things such as property taxes owed, lien(s) for payment to a vendor where work was completed but not paid, people having ownership to a property but have not agreed to sell (typically in estate sales). Before a property can be sold the property, needs to be free and clear of any issues that are attached to the previous owners. It is the responsibility of the current property owner to take care of those issues and pay for the removal of encumbrances should there be any. When the property is sold most of the time, if there is a lender the bank will want to you purchase Lender’s Title Insurance. They will also give you an option for Owner’s Insurance. These policies will protect you if there was a mistake and the property was not “clean” when transfered to the new owner. A notable example I was told about included, an attorney requested the local town provide the final payoff for the property taxes owed. The town submitted the bill and then several days later, the town called and said they forgot to add “in” the previous quarter. The house had closed and the funds had been disbursed therefore, the tile insurance kicked in because this was a problem going to “clean” title from the previous owners. Fortunately the insurance premium covered the outstanding bill and error the town had made. Here is a link to understanding insurances required or at least to be considered when owing a home.
A property disclosure form is a common practice in real estate but in Massachusetts it is not required by law to procure a sale and therefore is not part of the formal process. In the State of Massachusetts it is Buyer Beware so, when you select an agent make sure they know exactly where to find the answers for you or at least guide you in the correct direction so, you can get your questions answered. Typically there are over 50 questions that some big companies have their sellers answer. It is a good guide but don’t worry if the house you are buying doesn’t provide this document as you should be independently verifying the property conditions. The real issue is what is the current state of the property at the time of purchase. No better way to understand current conditions than to have the property evaluated by a home inspector. Sometimes it is helpful for buyers to understand the utility costs so, they know what the total outlay will be for the house on a monthly basis. The utility companies will not provide this information as they view it confidential so, the only place you have a resource is the seller. Oftentimes the seller is willing to provide this information but, sometime sellers have passed away and the costs are not available. Most of the time with respect to the disclosures, answers can be found at the government entities that issue permits.
Purchase and Sale Contract
The Purchase and Sale Contract is the final contract between the buyer and seller and a lot of actions steps take place after this document is executed. It is important to get this document correct because once all parties sign any changes to the contract must be made in writing and all parities must agree. That’s not always so easy, as multiple parties are included in one side of the transaction and money is being spent.
The Purchase and Sale contract base is taken from the initial offer, and typically any results from the home inspection are incorporated in the Purchase and Sale. Some attorneys prepare the Purchase and Sale and then there are Addendums that are attached to the document such as a Repair Addendum that delineates the repairs required prior to the sale of the property. It depends on the situation and the financing as to how the “deal” is crafted.
All dates and terms of the contract must be adhered to or the party that has not met the terms is in “breech”. This is another critical juncture where an agent’s negotiation skill really make a difference.
The Purchase and Sale Contract is drawn up by Attorneys in the State of Massachusetts. The attorneys work on the buyers and sellers behalf, and then provide a final document where by both parties execute the document(s). For the Seller, once executed the seller can not back out of the sale. For the buyer, this starts the process to get the mortgage. If the buyer is purchasing with cash then all the conditions normally associated with a mortgage approval process are waived and, there too, the buyers are locked into the sale… well sort of. See It’s never over til its over below.
Once executed, the Purchase and Sale contract is sent to the bank/lender and then the bank orders the appraisal.
Purchase and Sale Deposit
The Purchase and Sale Deposit is the second deposit and is submitted to the listing brokerage and held in escrow until the sale. All the escrowed monies (including the Ofer Deposit monies) are put toward the purchase of the property. Should there be a dispute, the listing brokerage is required by law to hold the money in escrow until the dispute is resolved. Typically all parties must agree in writing and the attorneys or the courts will provide written direction as to the disbursement of such funds.
Typically the Purchase and Sale Deposit is no more than 5% of the purchase price. Most listing agent’s require this amount so, if you are the buyer recognize these funds must be available in cash and within, typically 10 days, from the accepted offer day. Most companies accept personal checks. It is a good idea to give the deposit check to the buyer agent when you are making the offer so, the agent has the tools necessary to meet the contractual mile stones. The deposits secure the transaction. If the deposit money does not show up then the contract is not enforceable. One clarification, the 5% is the total amount, typically, including the offer to purchase deposit.
Mortgage Commitment Letter & Due Date
The Mortgage Commitment Letter for buyers and sellers is very important because it represents the lender is willing to lend the amount between the down payment and the purchase price to the buyer on a specific property. It is very customized to the buyer and the property. It’s important to realize once the mortgage commitment has been issued professional teams on both sides are working to get the final contractual requirements completed, like Deeds signed, mortgage documents issued etc. when the Mortgage Commitment letter is issued all parties recognize the transaction is in the final stages, sellers need to move out, buyers need to arrange for utility transfers. to move in.
Should the Mortgage Commitment Letter not be issued the agent or attorney must notify the seller in writing the Mortgage Commitment Letter has not been obtained. Sometimes an extension of time is all that is required and sometimes the underwriters have determined the loan can not be issued based on some determining factor.
Other times there are “Conditions” of the Mortgage Commitment Letter that is technically called a Conditional Mortgage Commitment Letter and those conditions must be satisfied prior to the final purchase. It can range from anything such as pay stubs from the last two weeks, a bank statement , gift letter verification of funds etc. It can be a whole slew of items the underwriter wants to see and it is customized for each purchase.
Regardless of the situation all needs to be in writing in order to protect the deposit money being held in escrow. Should the notification not be in writing, the deposit money is at risk and the seller can keep the deposit.
Issuance of the Closing Disclosure
The attorneys contact the Buyers and Sellers and issue a Closing Disclosure. This documents outlines all the charges associated with the transaction – line by line. This is a tough document to look at because on 1-2 pages there are a lot of charges. One thing to keep in mind for either party is that the process to buy and sell the house has taken months on both sides of the transaction and there have been over 25 people involved in all stages of the transaction. This document represents all those professionals being paid on the same day. Tough document to look at but, at the same time it’s achieving a goal both parties requested to be executed.
Government requirements in order to “Close” in the State of Massachusetts
There are a few documents that need to be produced by the seller in order to close on a property:
- A Smoke Certification indicating the property has passed a smoke inspection by the local town with in the last 60 days. The Town Fire Departments inspect the premise to make sure the property has the correct type, number and location of smoke and carbon monoxide detectors.
- Title V is a report that is required verifying the property has a functioning septic system. This report is due, typically well before closing, but can also be given on the day of closing. One caveat here is that if the buyers are accepting the property with out a septic and the loan, includes placing a system, as part of the financing, then the Title V is not required.
- Final bills associated with the property need to be paid in full and verified by the town the bills include: property taxes up to the day of closing; final water bills up to the day of closing and some towns issue a final paid bill with a separate fee indicating the bill has indeed been paid – so check with the water officials. This reading usually needs to be done at least 3 days ahead of time so call a couple weeks ahead to schedule it. If the property is serviced by oil/propane for heating then a final reading needs to take place and the seller is usually reimbursed for the energy not used. It’s not a guesstimate it is an official reading from the company so, that too needs to be scheduled ahead of time. Buyers can be surprised by having to reimburse the seller for that energy so, be aware. Sometimes the seller gifts the oil to the buyer.
The attorneys schedule the closing and the in the good old days both parties met and a nice exchange happened. The sellers get the proceeds check, if warranted and the buyers get the keys. Now days the closing is split. The buyers and sellers sign the paperwork for the respective sides, the Deed is recorded at the appropriate Registry of Deeds and the property is official sold. Before the Closing happens, the parties are told what to bring to Closing.
For the buyers; the buyers bring a picture form of Id (government issued); a cashier’s check for the closing costs and the rest of the down payment.
The sellers also brings a picture form of Id, the smoke certification, and if not already provided verification the conditions associated with the negotiated details in the purchase and sale.
The walk through takes place on the day of closing and the purpose is for the buyer to accept the condition of the house as the seller has delivered it. Should the buyer and seller disagree then there are additional negotiation conversations between the representative agents to secure an agreeable outcome. I have had everything from a snowplow crashing into a garage to an entire house full of the sellers personal items still in the house on the day of closing.
It’s never over until it is over
In Massachusetts the buyer can walk away up until the day they purchase the house. No one can force someone to buy a home and so buyers can even walk away on the day of closing. Most brokers and agents don’t want to touch this topic because it’s uncomfortable but that is the truth. This is another part of the negotiation phase the agents negotiate. Some attorneys get involved but not usually. Lets share some examples so, you can see how some scenarios can be resolved.
Lets say for example the buyer lost their source of income and can no longer purchase the house. Then the buyer would be entitled to the deposit back because they could no longer repay the loan. You see the mortgage lender/bank runs the credit 24 hours before the purchase and if something has happened and the buyer no longer meets the requirements then the transaction can fall apart. Debt to income ratio is usually the biggest issue so, that is why purchasing a car, appliances and furniture while you are in the mortgage process , for most people, is not a good idea. Even on the day of closing the debt to income ratio needs to be inline with the bank requirements.
Say the buyer changed their mind because someone went into the hospital (other than the buyer) then if the buyer decides they don’t’ want to purchase but, the bank is still able to fund the loan then the buyer’s deposit is in jeopardy. Even though the buyer can walk away the typical penalty is forfeiture of the deposit money.
Or say the buyer went to a meeting and didn’t like the neighbors and decided against the purchase the night before the sale, or the buyer decides they don’t like the type of septic installed on the property but, the Seller has the Title V Certification then in these scenarios again, the buyer’s deposit is in jeopardy.
Lets say the seller hasn’t gotten all their stuff out of the house and the buyer has planned to move in and the buyers are paying for labor and equipment while the seller is still moving out of the property. The seller then can be in a bad position, such as losing the personal property to the buyer or there is some type of negotiation that takes place so the seller can get the personal property out of the house. Often when this happens the seller has to pay an additional fee to use the house when they don’t own it, a penalty in such, and it can be stiff.
Or say a snowplow crashed into the garage the morning of the closing. Or the repairs that were to be done by the seller were not completed satisfactorily to the buyer. These are all things that can delay the sale or cancel it all together. That is why it is never over until it is over and the negotiation skill of the real estate agents and the relationship the agent has with the attorney for one particular side is an intangible strength during the final stage of the process. My advice, play nice in the sandbox because you never know when you will need to re-negotiate the transaction.
We hope this post of When purchasing a house in Massachusetts ~ 15 Terms to Know is useful! If you have any questions please reach out and take a look at the links within this post – there is a lot more information we have available.