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  • Writer's pictureJamie Koehler

Save Your Sale And Control Expenses Amid New Changes to the Real Estate Contract

Baltimore sellers - the Maryland residential real estate contract has changed. Effective October 1, 2022, here's what you need to know and how I'm going to navigate the changes and protect your bottom line on settlement day.

I've been in the Baltimore real estate industry since 2008. Prior to becoming a full-time realtor, I spent eight years operating a large rental portfolio consisting of more than 700 single-family homes in the Baltimore Area. During this time I learned what it really meant to operate real estate, how to boost income and limit expenses to realize the most profit possible. When I meet sellers in the Baltimore Area now, they are aware of at least some actions needed to generate the highest sales price possible. But often, they aren't aware of how to navigate the decisions ahead to protect their bottom line. That's where I really excel. As we adjust to the changes in the new Maryland residential real estate contract and its most commonly used addenda, I am helping sellers understand the ramifications of the new language and forge forward in selling their homes and earning the most profit possible on settlement day.

There Are Two Major Contract Changes Baltimore Home Sellers Need To Be Aware Of

Effective October 1, 2022, there are changes to the contract forms commonly used for the sale of residential real estate in Maryland, including Baltimore. The major changes pertain to inspections and will impact the strategy I use when representing sellers.

The major changes boil down to : 1) termite inspections are now being addressed at the same time as all other inspections on the property - a win for sellers 2) during the inspection phase, buyers now have the option to negotiate for repairs, negotiate for a credit towards repairs, or terminate the contract without specifying a reason - an obstacle for sellers

First, I will address how termite inspections have changed, then I will move onto how the inspections phase more broadly has changed, and lastly how I will navigate these changes to best protect you, the seller.

The Former Maryland Real Estate Contract

Overview of Termites - The Former Maryland Real Estate Contract : Previously, there was a wood destroying section embedded into the Maryland residential real estate contract. This kept the termite provision separate from any inspections addenda. It stated that the Buyer had the right to have a termite inspection done to ensure that there were no termites in, or within three feet of, the residence or the garage. Additionally, the Buyer had the right to have the termite inspector ensure that there were no termites in any outbuilding located within three feet of the residence or garage and within 10 feet of a fence that was three feet or closer to the residence or garage.

There was no specified time frame for when this inspection had to be done.

There was a requirement, that if the existence of termites was found, the seller would be required to pay for the termite treatment and damage caused by the termites up to a total cost of 2% of the sales price. The Problem For Sellers : Included with the contract, most offers have an inspection addendum that states that the buyer has X days to do an inspection and submit a repair request to the seller. The number of days would be filled in by the buyer at offer submission. The buyer would do their inspections and commence negotiations with the seller. Perhaps a seller had a $3,000 budget to perform repairs. It was possible that a careless or inexperienced seller’s agent would not educate the seller that the termite inspection could be done at any time and the seller could end up exhausting the full $3,000 repair budget negotiating with the buyer on the buyer’s personal repair requests.

The buyer still had the right to get the termite inspection, at any time. If termites were found, the seller was ADDITIONALLY on the hook to pay for treatment and correction up to 2% of the sales price. So in this example, if the home was being sold for $400,000 and termites were found, the seller would be required to pay for termite treatment and corrections as long as they did not exceed $8,000 (2% of the sales price). This caused sellers to overspend in overall repairs and was an important point of my prior post 'The Most Expensive Mistake Sellers Make Negotiating Repairs.' If the termite remediation and correction cost exceeded 2% of the sales price, the seller could negotiate with the buyer to try to get the buyer to pay the overage. Another Squeeze - The Loan : Further, for buyers using FHA or VA loans, the lender requires a clear termite report before the lender can issue a ‘clear to close’ on the loan. In the above scenario, if the termite remediation and correction cost exceeded $8,000, the seller could try to get the buyer to pay the overage. But if the buyer couldn’t, ultimately sellers were backed into a corner – pay the full amount to get the loan to close and the sale to go through, or re-list the property and start all over again. The result - sellers using careless or inexperienced agents could find themselves really overspending on the repair front.

The New Maryland Real Estate Contract

Overview of Termites - The New Maryland Real Estate Contract : There is no wood destroying section embedded in the contract. Termites are now part of a revised inspection addendum. There is no requirement for the seller to pay for termite remediation and correction. The Benefit for Sellers : All inspections, including the termite inspection, are performed at one time within X amount of days. The number of days will be filled in by the buyer at offer submission. There should not be any lagging inspection requests (see more information below under 'Know What Kind of Loan The Buyer Has.')

Less of A Squeeze - The Loan : For buyers using FHA or VA loans, the lender still requires a clear termite report before the lender can issue a ‘clear to close’ on the loan.

Overview of Inspections :

There is one inspection form with one time frame – the buyer fills in X amount of days to perform all inspections and then has a choice to do any of the following :

1) negotiate for repairs

2) request a credit in lieu of repairs

3) terminate the contract without specifying a reason

Inspections Now and The Concern for Sellers :

Previously, on a regular inspection addendum, the buyer did not have the ability to terminate the contract unless the buyer and seller could not come to an agreement over the repairs. Now, if your house is found to need too many repairs and/or you have a skittish buyer, the buyer can walk without giving you an opportunity to negotiate, forcing you to re-list the property and start over. This is a concern for sellers.

How do I increase the likelihood of getting a deal done in Baltimore and control costs during the inspection phase?

The concern that a buyer might walk after the inspection phase may be more troubling for Baltimore Area sellers than sellers in other parts of Maryland. Why? In the Baltimore Area, our housing stock is older, with some homes being built as early as the late 1700s. There may be more unique findings on an inspection of a Baltimore home than elsewhere. Additionally, Baltimore offers very affordable housing - I have helped several clients sell move-in ready homes under the $250K price point, making Baltimore a great place for a starter home. The question becomes - will our uniquely older homes scare off our less experienced home buyers, creating heightened contract cancellations? My niche is representing sellers in Baltimore City and Baltimore County. Understanding this concern, the most important thing I tell sellers is the inspections phase is active, not passive. I lean into this phase to keep the deal alive and also control your expenses. Here's what I do and what you need to know : Know What Kind of Loan The Buyer Has If the buyer has a VA loan or FHA loan, a termite inspection and clearance report is required for the loan to be approved, period. Don't be fooled if "termite" is not checked by a VA or FHA buyer on the inspection addendum. The buyer may not have a desire to do a termite inspection, but the lender will require it, so it will need to be done - I will get in front of this immediately. Technically, if termites are found in a house where the buyer is using a VA or FHA loan, this repair will fall into the category of a 'lender-required repair', but the seller is only required to pay for remediation and correction up to the amount entered on the financing addendum (separate from the inspection addendum). However, unless the buyer is going to cover the rest, you need to prioritize this repair. Otherwise, there is no loan, and therefore no sale.

I Will Proactively Open Dialogue And Keep The Conversation Going The idea that the buyer now has the option to terminate the contract during the inspection phase without specifying a reason is a concern for my Baltimore sellers. As the seller's agent I always have an open dialogue with the buyer's agent going into the inspection, about our desire to make the transaction work for all parties, and immediately after the inspection to check in and try to get in front of any concerns. The inspection phase must be handled actively, not passively in order to get a deal done.

I Will Determine How to Prioritize Repairs I will find out what repairs, if any, are required by the lender. Then I'll check the financing addendum, it will specify how much of those repairs you, as the seller, are required to pay. I'll determine if the buyer is going to pay the overage. If not, lender-required repairs will come first, to get the loan done. Then I'll have a conversation about what is most important to the buyer before addressing the other requests.

I Will Help You Vet Contractors

Once we've come to an agreement with the buyer about what repairs will be done, I will help you vet contractors for price, quality, and service.

Timing Is Everything There are certain milestone within the contract that I'll recommend be met before you spend money on the repairs. I will review the terms of your contract and discuss timing with you; the time frames are unique to each individual contract.

Selling in Maryland : The Inspections Phase Is Active, Not Passive

For Baltimore sellers, and sellers throughout Maryland, given the changes in the residential real estate contract, now more than ever, it's important to use a real estate agent that's active and not passive. As a sellers' agent, I lean into the inspections phase to open the dialogue with the buyer's agent and get in front of concerns, then work with you to control expenses. This helps save my sellers from losing deals altogether and allows us to stay in control of expenses so they don't deplete your proceeds on settlement day.

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