Updated: Jun 27, 2019
As you read this article, please keep in mind there are exceptions to everything I discuss. Rather than getting bogged down explaining what might happen in a worst case scenario, I'm going to stick with what typically happens when a home goes under contract.
Agents might say "contract pending", "under contract", or "in title", but it all means the same thing. The buyer and seller have agreed to a contract of sale, the contract is now signed by both parties, and it's on its way to the title company. Here's what happens and who does what.
Option Fee and Earnest Money
In Texas, we normally use what's called an "option contract". The buyer gives the seller a small "option fee" (not to be confused with the earnest money) for the right to decide of they want to purchase the property. The seller can cash that check immediately. If the buyer ends up closing on the home, the option fee is returned to the buyer (if stated in the contract) but if the buyer doesn't close, the seller is not required to reimburse the buyer for the fee they've already received.
The earnest money is different from the option fee. It's a much higher amount and is meant to be. The seller wants to know the buyer has a sincere interest in purchasing the home and is willing to show it with a substantial amount of earnest money.
Like the option fee, there is no set rule for how much the earnest money should be, but when I represent sellers I like to see at least 1% of the contract price. The earnest money can be at risk through the entire term of the contract. The buyer may or may not get their earnest money back if they don't close on the home but again, this is one of those areas where there are just way too many scenarios to cover them all.
What the Buyer Does
The buyer will be busy during the option period. They start incurring costs right away with all their inspections. They have to have all of their inspections completed during the option period and give themselves time to negotiate repairs, if any, with the seller. The option period usually lasts 7 to 10 days but that's also a negotiable point in the contract. The inspections should cover the home, any existing out buildings, plus pool and septic system if they are there. If there is a lender involved, a wood destroying insect inspection will also be required.
During the option period, all the seller has to do is make the home available for inspections. They'll also negotiate the request for repairs with the buyer if there are any.
Once the option period is over, the seller will probably be asked for a copy of their survey and documentation about their homeowner's association, if they are in one. The title company and their lender will be in touch with them guiding them through the rest of the process, but I've found there is much less required of the seller than the buyer on a typical transaction.
What Happens During the Inspection?
The inspection typically takes from three to six hours depending on the size of the home and whether it has a pool and/or out buildings. I always recommend sellers not be there during the inspection.
Inspectors like to get in, conduct the inspection, and get out. If they have to stop and answer questions from the seller, it slows them down.
Inspections can be stressful for sellers so I don't like to put them through that. Someone they don't know is going through their home with a fine tooth comb looking for potential issues and that can be unnerving.
Keep in mind, the inspector is working for the buyer, not the seller. The buyer is paying their fee. They don't want to get into discussions with the seller about what they've found.
If the inspector has questions about something they've found, they'll write it up in the the report they give to the buyer. Then, the buyer can get clarification on those items in writing so there's always a paper trail.
If you're on the buying side, an inspector won't appreciate you looking over their shoulder either. I encourage buyers to meet with the inspector when they arrive, pay them for the inspection, then leave. The inspector can call them when he's finishing up the work and is usually happy to go through the report in detail and answer any questions.
The Buyer's Request for Repairs
Unless already stated in the contract, the seller has no obligation to make the repairs requested by the buyer. In contract terms, the seller is selling the home on an "as is" basis.
At the same time, the buyer doesn't have to buy the home. When it comes to repair requests, it always comes down to how much the seller wants to sell their home and how much the buyer wants to buy it. If both parties are reasonable, they usually come to terms on the repair requests.
If the home passed the inspection with just some minor handyman repairs, it's easy. But if the inspection discovered substantial issues in the foundation, roof, electric, or plumbing, it's not quite as easy. Those can be "deal killers" if the seller refuses to make those repairs.
Does the Seller Get To See The Inspection Report?
Because the buyer paid for the inspection, it's their property. They don't have to share it with the seller. They usually will, however, because it substantiates the repair items they want the seller to address. They might also want the seller to see they aren't asking for every item on the inspection report to be repaired. They're being reasonable.
From the seller's point of view, they obviously will want to see the sections of the inspection report which relate to the items the buyer is requesting to be repaired, but they might not even want to see the rest of the inspection report.
The Title Company
A good title company can be invaluable in a complicated transaction. They are there only to help expedite the transaction, but they don't represent either the buyer or seller. They'll ask you to acknowledge that in writing at closing.
The contract might say "seller shall deliver to buyer ...", but it's almost always the title company taking care of those things on behalf of the seller. Agents rely on title companies to keep their clients in compliance and that's why many are selective and loyal about the title companies they use.
One of the main tasks of the title company is to research the property making sure the title is "clear". That is, there are no liens nor encumbrances nor is anyone other than the seller claiming possession. They also calculate the tax prorations, deliver the homeowner's association documentation to the buyer, and communicate with the buyer’s lender all the way through from contract to closing. The title company funds the closing proceeds to the seller.
What Are the Listing and Buyer Agent Doing?
Once the home is in title, that's when the agents really go to work. Anything, and I mean anything, can happen on a transaction all the way to the day of closing. And believe it or not, even after the closing. The agents have to keep both the buyer and seller informed, updated, and engaged.
Agents might have conversations with the inspector, surveyor, title company, lender, city, homeowner association, etc to clarify questions or issues. They are the ones both buyer and seller rely on to help clear obstacles. Sometimes, the only thing keeping a sale from unraveling is the agents on both sides.
What Happens After The Option Period Is Over?
Once the option period expires, the buyer has contractually accepted the condition of the property. The buyer cannot require the seller to make further repairs other than what was already agreed upon. The second big hurdle has been crossed (with the first being the buyer and seller agreeing on the price). But it's not a "done deal" yet.
The Financing Period
Most contracts are contingent on the buyer being able to obtain financing on the home. They're given a certain period of time to obtain their financing. It's called the "financing period”.
Whereas an option period might last as little as 7 days, the financing period is usually somewhere between 21 and 45 days. Sellers like to see shorter financing (and option) periods and buyers tend to like longer option periods and financing periods.
Seller’s don't want buyers wasting time in trying to decide whether they want to buy their home or not. If the buyer elects not to purchase the home (or isn't able to purchase the home) the seller wants their home back on the market right away so someone else can.
Will The Seller See The Appraisal?
Like the inspection, the appraisal is paid for by the seller one way or another so it's their property. Listing agents and sellers rarely get to see the appraisal if the home appraises. If it doesn't appraise, the buyer is usually more than happy to share it with the seller. After all, in their eyes it proves they're paying too much for the home per the contract.
I could write volumes about the problems with appraisals and appraisers, but I'll leave it at this. Appraisals are only the opinions of the appraiser and quite often, agents don't agree. Any agent you talk to will tell you they've had disagreements with appraisers at one time or another and it's probably cost them a deal.
If the home doesn't appraise, and it's being financed, several things can happen.
The buyer can agree it was a poor appraisal and ignore it. They'll just put down more money to make up the deficit between the appraised price and the contract price.
The buyer will terminate the contract..
The buyer can ask the seller to reduce the price of the home to meet the appraisal
the buyer and seller can meet somewhere between the contract price and the appraisal price
or if the buyer has good credit, is a good customer of the lender, and is putting down a large sum of money, the lender might make the loan anyway.
Who Pays For the Survey, Title Policy, Appraisal, and Residential Service Contract (if there is one)?
These are all negotiable items in a contract. If the buyer is getting a great deal on the home, they may be inclined to pay for some or all of these costs. If the seller is getting a great price for their home, they may be inclined to pay for some or all of these costs.
Who Has The Right to Terminate an Option Contract, the Buyer or the Seller?
Although there are exceptions to every rule, in general, once the sellers have signed the contract, they don't have the right to terminate the contract. Buyers, on the other hand, can terminate without penalty in several ways, some we've already discussed.
What’s the Difference Between Closing and Funding?
“Closing” is when the title work prepared by the title company has been signed by the buyer and seller. “Funding” is when the lender wires the seller's proceeds to the title company. So we're talking about two different things and yes, a home can close and never fund. It might also close and fund days or even weeks afterwards.
Here's an example of what can and does happen. A home closes on a Friday and for whatever reason, the lender doesn’t get the wire out to the title company by the time wiring is cut off on Friday. That means funding to the seller may won't occur until Monday, the next business day.
Now let's say the following Monday is a bank holiday and the title company is closed. That means funding might not take place until Tuesday. On Friday, the buyer is sitting there with their furniture in trucks waiting to move in and the seller tells them they cannot take occupancy until the property has been funded. The seller is usually still in the home, so this scenario doesn't hurt them too badly, but what's the buyer going to do?
It takes a lot of people working in the background to make sure a property closes and funds on time. There are way too many potential obstacles that might come up to mention here. Just remember this, It’s never a deal until it’s a deal!
If you're the seller, don't sign anything that binds you to another property which isn't contingent on your home closing and funding.
If you're the buyer, there are some risks if the property doesn't close and fund on time. You are relying on lots of things to happen, most of which are completely out of your control.