Q: Can you take us through the buying process of a real estate transaction?
A: A quick rundown of the "buying side" process: In a typical financed transaction, first the person(s)/entity needs to be pre-approved from a lender and to identify a property they'd like to purchase. Once the buyer and seller agree to terms, which typically include the sale price, closing date, inspection period(s), down payment and earnest money amounts, the inspection period begins (10 business days is standard in Oregon) and an escrow account is opened.
During the inspection period the buyer can bring in an inspector and various other experts to examine the home and property and provide a report(s) for the prospective buyer. The key takeaway for the buyer is that during the inspection period they can terminate the sale contract, without forfeiture of their earnest money should they discover something they don't like about the property. The other major takeaway is that the inspection reports allow the buyer to renegotiate the terms of the contract, in the form of a reduced sale price, credit toward closing costs and prepaid expenses or having the seller fix or repair any agreed upon issues. I've never seen an inspection report that didn't find multiple issues — generally small items that can be taken care of in a weekend or two, and often a few larger issues that may take some expertise or chunk of change to fix.
The next "hurdle" after the inspection is the appraisal, where the lender hires someone to provide "expert" opinion on the value of the property. An appraiser typically reviews recently sold properties (three to six months) of similar square footage, lot size, same number of bedrooms, bathrooms and in a similar location. They also review current market trends in the area, along with the neighborhood itself. Once they determine the value of the property, the underwriting of the loan can be completed, or if the value is below the purchase price, the seller can reduce the price. The buyer can increase the down payment amount to account for the difference in sale price versus appraised value, or the transaction can be terminated. If the latter, the buyer will not forfeit their earnest money, as it's standard practice to have a financing contingency in place when using a lender.
The final step is closing. This is where you get hand cramps from signing what feels like thousands of documents, as well as getting the keys to your new property!
Q: Why does it seem like agents don't like to use or receive escalation clauses with an offer?
A: Before we get to that, we should explain that an escalation clause is a tool buyers can include in their purchase offer. Basically, it allows their offer to increase in price by a fixed amount, to beat out other offers in terms of price, up to a certain amount. An example would be an offer of $400,000 that can increase by $1,000 increments with a maximum of $420,000.
Personally, I don't like escalation clauses. On the buyer side, it shows your ability to potentially pay more, and a savvy seller or their agent can use that to gain leverage through the course of the transaction.
On the seller side, it can get downright confusing if you get a bunch of offers with competing escalation clauses. If I am the listing agent, I find it to be far more effective to let all offering parties know that multiple offers have been received and ask for highest and best offers by a set time.
