handshake home purchase from Neighbor Ned
August 24, 2021 10:56 PM Subscribe
Who needs to be involved? I like the house. The price is fair. We're friendly. I trust him. I'm interested. It's 100 years old. I know I need to have it inspected. He's taken excellent care of it over 20 years. There's a title company in our small town. Can they handle everything, what more to know, and other words of advice?
In my 6+ years in our small town, I've lived in the best neighborhood in the same tiny rental between two houses with longtime owners. The three of our households have interconnected yards and we care about and respect one another. It's my 'hood and I'd love to stay.
Neighbor Ned says that I'm at the top of his list to notify before he either a) tells others and/or b) lists it with his realtor friend. His house is on the smallest lot in a very desirable neighborhood, which means it's more affordable than most. His eyes are open, he's not elderly or infirm, he knows how to use the internet. Point is: he's not naive. He likes the idea of selling to me. We are in handshake territory and I don't want to muss it up.
I assume we will agree on a price (~20k over Zestimate). After a very detailed loan prequal application, seems I qualify. I'd want to engage an inspector. But I'd rather not suggest a broker, attorney or appraiser (is that one up to the lender?). I worry an appraiser could come in and price it much higher given the crazy insane market here (where 500k cash offers are common and 100k over asking happens), which could give him pause. Insights about that?
Knowing all this, if we're both game, could we just agree on a price and call the title company and have them handle the transfer? Can they roll in all closing costs there? Who typically pays those, and is it fair to split them? How/when do I connect loan company and title company? Who else needs to be involved? Of course I'd need to take my prequal the next step for an actual loan but I'm in a good position and optimistic about that.
What's the general order and timeline of things? What else should I be considering? Feels like a healthy handshake deal, though I'm fully aware he could still shift gears if someone swooped in with a big pile of cash that was too good to pass up. I have had my eye on the market and it's a great opportunity, but if that happened I'd be ok, stay put in my flexible longterm arrangement, and keep looking.
In my 6+ years in our small town, I've lived in the best neighborhood in the same tiny rental between two houses with longtime owners. The three of our households have interconnected yards and we care about and respect one another. It's my 'hood and I'd love to stay.
Neighbor Ned says that I'm at the top of his list to notify before he either a) tells others and/or b) lists it with his realtor friend. His house is on the smallest lot in a very desirable neighborhood, which means it's more affordable than most. His eyes are open, he's not elderly or infirm, he knows how to use the internet. Point is: he's not naive. He likes the idea of selling to me. We are in handshake territory and I don't want to muss it up.
I assume we will agree on a price (~20k over Zestimate). After a very detailed loan prequal application, seems I qualify. I'd want to engage an inspector. But I'd rather not suggest a broker, attorney or appraiser (is that one up to the lender?). I worry an appraiser could come in and price it much higher given the crazy insane market here (where 500k cash offers are common and 100k over asking happens), which could give him pause. Insights about that?
Knowing all this, if we're both game, could we just agree on a price and call the title company and have them handle the transfer? Can they roll in all closing costs there? Who typically pays those, and is it fair to split them? How/when do I connect loan company and title company? Who else needs to be involved? Of course I'd need to take my prequal the next step for an actual loan but I'm in a good position and optimistic about that.
What's the general order and timeline of things? What else should I be considering? Feels like a healthy handshake deal, though I'm fully aware he could still shift gears if someone swooped in with a big pile of cash that was too good to pass up. I have had my eye on the market and it's a great opportunity, but if that happened I'd be ok, stay put in my flexible longterm arrangement, and keep looking.
Response by poster: Oh right, location, thanks for that reminder. I'm in small town Washington state. Not teeming with all the professionals that are easily found in more populated areas. Probably will get my loan from an online source that friends highly recommend (it has an affiliated title company, but it seems like it would make more sense to use the local one in town, so we can do all the signing there...don't know pros/cons around that).
Totally get that the usual costs still apply, just unclear without realtors who drives that whole process--because this must be common--and if the title company can.
You're probably right about a required appraisal, and that the lender requires it is my very valid excuse. So then I wonder... if the seller gets to see it, if it matters that I'm far from urbanity (so, like, if the lender works with preferred appraisers and there's not one for 100 miles) or that this house is likely valued among the lowest 30% in my square mile.
I also wonder if it would be the most straightforward to suggest splitting all closing costs right down the middle--and the title company manages that?--so there's no dickering about this and that expense.
posted by AnOrigamiLife at 12:15 AM on August 25, 2021
Totally get that the usual costs still apply, just unclear without realtors who drives that whole process--because this must be common--and if the title company can.
You're probably right about a required appraisal, and that the lender requires it is my very valid excuse. So then I wonder... if the seller gets to see it, if it matters that I'm far from urbanity (so, like, if the lender works with preferred appraisers and there's not one for 100 miles) or that this house is likely valued among the lowest 30% in my square mile.
I also wonder if it would be the most straightforward to suggest splitting all closing costs right down the middle--and the title company manages that?--so there's no dickering about this and that expense.
posted by AnOrigamiLife at 12:15 AM on August 25, 2021
At least here (IL) The appraiser is mostly looking to compare the loan to the house. If the house is worth more than the loan, you are fine. The appraisal isn't something that the seller sees.
Mortgage companies are used to houses in rural areas with little nearby, they will be able to find someone to do what they need done.
I can't answer your other questions about handling a sale without a realtor, sorry.
posted by AlexiaSky at 1:14 AM on August 25, 2021 [4 favorites]
Mortgage companies are used to houses in rural areas with little nearby, they will be able to find someone to do what they need done.
I can't answer your other questions about handling a sale without a realtor, sorry.
posted by AlexiaSky at 1:14 AM on August 25, 2021 [4 favorites]
With a mortgage, the house itself is collateral. The appraiser and inspector are required by the bank to make sure the house is worth enough that the bank can expect to recoup its investment if you default. Part of that is confirming that your down payment is enough to cover your share of the closing costs, plus any amount you’re paying over the appraised value, plus typically 20% of the appraised value. If you can’t cover the 20%, they’ll require mortgage insurance. Negotiation is also probably unavoidable since you’ll need to address the question of who covers the cost of problems that the inspection reveals.
You don’t need a realtor, but you probably will want an attorney. I’ve only been involved in a few such transactions, but I’ve never gotten the sense that a title company was in the position to handle the many critical details.
posted by jon1270 at 1:32 AM on August 25, 2021 [4 favorites]
You don’t need a realtor, but you probably will want an attorney. I’ve only been involved in a few such transactions, but I’ve never gotten the sense that a title company was in the position to handle the many critical details.
posted by jon1270 at 1:32 AM on August 25, 2021 [4 favorites]
We're currently in the due diligence period of buying a new old house, and in tracking Zestimates for some of the houses we looked at as well as our own neighborhood as we prepare to list our current house, I've found them to be on the high side for the most part - sometimes a little, and sometimes wildly. So I guess I'm wondering why you've settled on giving your neighbor $20k over the Zestimate, when you could end up overpaying in a situation that's way more advantageous for him (no realtor commission, to start; no hassle of staging his home and dealing with visits).
If you're determined not to involve professionals in this transaction, then I would suggest you do your own research on comps based on actual sales, not an algorithm. My local MLS has neighborhood-specific sales data on its website, and I suspect that's pretty common. Zillow also lists the final price for recently-sold properties, so you can check there as well.
Regarding the appraisal (which will absolutely be required by your lender, as others have said) and inspection, you can write escape clauses into your contract. (Your state's standard contract is probably available on the real estate commission's website.) The seller would end up keeping your earnest money but you would be protected if the inspector finds something really expensive to fix, or the appraisal comes back very low. You can think about what your deal-breakers would be, e.g. major structural issues, active termite infestation, a million small repairs that add up to $X. Or, you can write into the contract that you'll cover the difference between appraisal value and offer with cash, and/or you can agree to accept the house "as-is, where is." Caveat emptor on that (I am learning the hard way on both; it's not going to break us financially, but it does make one feel like a sucker.)
Also: Be sure to get a survey, even if your lender doesn't require it (although they or the title company probably will). Super important to know your lot boundaries and any easements.
Good luck! It's been generally torturous for us, but we are still excited to move to our new place (as soon as our seller decides his close date - last advice, don't leave the close date undetermined in your contract as a favor to the seller!).
posted by Sweetie Darling at 4:26 AM on August 25, 2021
If you're determined not to involve professionals in this transaction, then I would suggest you do your own research on comps based on actual sales, not an algorithm. My local MLS has neighborhood-specific sales data on its website, and I suspect that's pretty common. Zillow also lists the final price for recently-sold properties, so you can check there as well.
Regarding the appraisal (which will absolutely be required by your lender, as others have said) and inspection, you can write escape clauses into your contract. (Your state's standard contract is probably available on the real estate commission's website.) The seller would end up keeping your earnest money but you would be protected if the inspector finds something really expensive to fix, or the appraisal comes back very low. You can think about what your deal-breakers would be, e.g. major structural issues, active termite infestation, a million small repairs that add up to $X. Or, you can write into the contract that you'll cover the difference between appraisal value and offer with cash, and/or you can agree to accept the house "as-is, where is." Caveat emptor on that (I am learning the hard way on both; it's not going to break us financially, but it does make one feel like a sucker.)
Also: Be sure to get a survey, even if your lender doesn't require it (although they or the title company probably will). Super important to know your lot boundaries and any easements.
Good luck! It's been generally torturous for us, but we are still excited to move to our new place (as soon as our seller decides his close date - last advice, don't leave the close date undetermined in your contract as a favor to the seller!).
posted by Sweetie Darling at 4:26 AM on August 25, 2021
If you were buying for cash you could avoid a lot if you wanted, but the lender will insist on title insurance and appraisal as discussed, and the insurer might want a survey. You could find a fill-in-the-blanks contract and avoid an attorney, but the lender will have an attorney and it's never a good idea to go into a room where the only lawyer represents your counterparty.
If you're worried about the seller seeing the appraisal, the good news is that the appraisal doesn't have to happen before you sign a contract. In terms of next steps, I would engage an attorney to drop a contract of sale. This contract will include a price and a closing day, and any costs the seller is responsible for. Your attorney will also let you know which closing costs the seller is usually responsible for if any, and which are customarily negotiable.
Once you have the contract and it's countersigned, which probably involves putting down a deposit, the seller is committed to sell you the house for the agreed price and you are committed to buy it, except for any listed contingencies. Now you call up the lender and they get to work arranging your loan. They will arrange the appraisal. They may also have a preferred title insurer, or you can call one up if you prefer at this point.
The next step is that the lender asks you for more documentation. They are mostly the one driving the process at this point. At some point, the title report will be returned and the insurer will let you know if they can insure you. The lender's documentation will include a list of closing costs that you are responsible for.
Assuming that both of these things go fine, then you have a closing. This often takes place either at an attorney's office or the title insurance office. You bring a bunch of checks and the seller brings the keys. The lender's attorney brings a big check too. You spend an hour signing lots of copies of everything and the title insurance company records the deed transfer. Now you own a house!
If your goal is straightforwardness and keeping your negotiated price, just draw up a contract ASAP. Get it as standard as possible. Once the seller has signed the contract, their work is pretty much done, and you can breathe easy.
posted by goingonit at 5:09 AM on August 25, 2021 [2 favorites]
If you're worried about the seller seeing the appraisal, the good news is that the appraisal doesn't have to happen before you sign a contract. In terms of next steps, I would engage an attorney to drop a contract of sale. This contract will include a price and a closing day, and any costs the seller is responsible for. Your attorney will also let you know which closing costs the seller is usually responsible for if any, and which are customarily negotiable.
Once you have the contract and it's countersigned, which probably involves putting down a deposit, the seller is committed to sell you the house for the agreed price and you are committed to buy it, except for any listed contingencies. Now you call up the lender and they get to work arranging your loan. They will arrange the appraisal. They may also have a preferred title insurer, or you can call one up if you prefer at this point.
The next step is that the lender asks you for more documentation. They are mostly the one driving the process at this point. At some point, the title report will be returned and the insurer will let you know if they can insure you. The lender's documentation will include a list of closing costs that you are responsible for.
Assuming that both of these things go fine, then you have a closing. This often takes place either at an attorney's office or the title insurance office. You bring a bunch of checks and the seller brings the keys. The lender's attorney brings a big check too. You spend an hour signing lots of copies of everything and the title insurance company records the deed transfer. Now you own a house!
If your goal is straightforwardness and keeping your negotiated price, just draw up a contract ASAP. Get it as standard as possible. Once the seller has signed the contract, their work is pretty much done, and you can breathe easy.
posted by goingonit at 5:09 AM on August 25, 2021 [2 favorites]
As far as splitting closing costs down the middle, that sounds good in abstract but doesn't really work in practice. Are you going to pay half of Ned's final utility bills? Is he going to pay half of your loan origination fee? In most cases there's a common sense answer to who covers a given cost.
posted by goingonit at 5:45 AM on August 25, 2021 [1 favorite]
posted by goingonit at 5:45 AM on August 25, 2021 [1 favorite]
I've been involved in a few small town deals and several big city ones. In a "normal" big city real estate transaction you'll have ~4 professionals involved: A seller's agent, a buyer's agent, a seller's attorney, and a buyers attorney. The attorneys are usually fixed fee - they charge to represent you through the closing. The agents are percent-of-deal based, with the seller's agent charging the seller usually 5-6% and then splitting that with the buyers agent.
I would echo some of the advice above and say that ideally in theory you would have an attorney to represent you. This is usually a fixed cost / flat rate, and and they will be able to do things like work with the title company, work with the lender, make sure costs are split in a standard way, etc. You should have a person or people in mind now, but you'll engage them when the process actually starts.
With that said, at that point I'd also try and get a better idea of what Ned has in mind - it's possible you might be in an area where having attorneys at closing isn't standard at all, and he's proposing to have a real estate friend of his or the title company do the work. I've been a part of a transaction like this, and it did work out just fine. It just requires a bit more research on your side as to what costs are standard and trust in your neighbor and community, but in a very small town sometimes that's the way it goes.
posted by true at 6:08 AM on August 25, 2021 [1 favorite]
I would echo some of the advice above and say that ideally in theory you would have an attorney to represent you. This is usually a fixed cost / flat rate, and and they will be able to do things like work with the title company, work with the lender, make sure costs are split in a standard way, etc. You should have a person or people in mind now, but you'll engage them when the process actually starts.
With that said, at that point I'd also try and get a better idea of what Ned has in mind - it's possible you might be in an area where having attorneys at closing isn't standard at all, and he's proposing to have a real estate friend of his or the title company do the work. I've been a part of a transaction like this, and it did work out just fine. It just requires a bit more research on your side as to what costs are standard and trust in your neighbor and community, but in a very small town sometimes that's the way it goes.
posted by true at 6:08 AM on August 25, 2021 [1 favorite]
It doesn't sound like this is something being considered, but in some transactions the seller carries the loan (i.e., you would owe money and make payments to the seller, not the bank). That's more unusual and definitely would be a situation where you would want your own lawyer to assess the paperwork, but I thought it should be mentioned as well as the more typical scenarios of getting a bank mortgage or paying cash.
How closing costs are split and what contingencies you can add are going to depend both on how things are typically done locally, and how competitive the market is. In some places buyers are paying tens or hundreds of thousands of dollars above asking and waiving inspection and appraisal contingencies, for example.
posted by Dip Flash at 6:13 AM on August 25, 2021
How closing costs are split and what contingencies you can add are going to depend both on how things are typically done locally, and how competitive the market is. In some places buyers are paying tens or hundreds of thousands of dollars above asking and waiving inspection and appraisal contingencies, for example.
posted by Dip Flash at 6:13 AM on August 25, 2021
I bought a house with no broker. I got an inspection; it revealed some issues that the seller repaired. I would never skip the inspection, there can be hidden trouble. I got an appraisal - the result was given directly to me because no banks were involved. We closed through a title agency; they did a title search. No matter how honest the seller is, there can be issues, so don't skip the inspection, appraisal, and title vreification.
posted by theora55 at 6:54 AM on August 25, 2021 [3 favorites]
posted by theora55 at 6:54 AM on August 25, 2021 [3 favorites]
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I think friendly deals like this happen all the time but I’ve only ever heard of people avoiding the cost of a realtor and listing/advertising, because that’s the only bit of the transaction you and neighbor are avoiding - all the rest of the usual costs still apply. And it’s definitely a deal for the seller to avoid realtor costs, because he would pay the fee that goes to both your and his realtors.
Again all MA centric so take with grain of salt.
posted by Tandem Affinity at 11:23 PM on August 24, 2021