You’re Under Contract on a House Hack

Congratulations! You are under contract. Now that you’ve identified a great property and are officially under contract, we want to talk about the next steps. We’ll discuss your responsibilities, our responsibilities and what you can expect moving forward.

This module covers:

• Next steps including the activity/deadline calendar, earnest money, inspection, and appraisal.
• Dates and deadlines including earnest money deadline, inspection objection deadline, various title deadlines, seller’s disclosure deadlines, and appraisal deadlines.

Four Learning Options!

1. Order the book on Amazon or grab a copy from us
2. Listen to episode “#214: UHHG – #11 You’re Under Contract on a House Hack” on the Denver Real Estate Investing Podcast
3. Watch the YouTube video (at the bottom.)
4. Read this blog post, which is from the book.

Start at the Ultimate House Hacking Guide for Denver Overview for a list of all the modules.

The information below is going to be detailed but note that you should use this as a reference. Don’t get caught up on too many specifics now because we will go over each of these steps once you are under contract. We will also send out an email for the next steps, which will help you know what to focus on. Hold on to your hats, the next steps happen pretty quickly.

Next Steps:

1. Activity/Deadline Calendar – The online contract software generates a calendar that you can sync with your current calendar. It lays out what items are coming up and when they are due. Helps clients follow along and always know where we are in the transaction/process.
2. Earnest Money – This is usually about $3k-$10k and is submitted with a personal check, wire transfer or smartphone app. You will know the amount before you go under contract. This is “good faith” money that will be used towards your down payment, unless you terminate the contract appropriately, in which case you will get this money back. If you do not terminate the contract appropriately, you could lose the money. It’s usually the first thing that will be outlined in the activity calendar as it’s usually due within three days of the offer being accepted. It’s typically deposited with the title company. The earnest money solidifies the contract as being accepted, active and in full force.
3. Lending – Your agent should always send an executed contract to the lender so they know it’s time to start finalizing everything on their end. The executed contract allows the lender to calculate the interest rate options, PMI options and closing costs. You’ll sit down with your lender to go over various scenarios. Make sure you do this as soon as possible!
4. Inspection – We usually schedule the inspection to take place within three to seven days of going under contract. Scheduling it ASAP is in everyone’s best interest. Once we have videos and reports back from the inspector, we will review the property again and prepare an inspection objection or have a professional (roofer, HVAC, Plumber) check any issues. We also re-run the numbers to make sure it still makes sense as a rental.
   • There might be something that needs time to fix, and you want to have as much time as possible to allow industry professionals to rectify any problems and negotiate those with the seller. The quicker items get addressed, the better chance you have at staying on track with your activity deadlines.
     • We recommend that house hackers hire a home inspector, conduct a sewer scope and complete a radon test. While these three items will cost you between $500-$800 out-of-pocket, this is money well spent for due diligence on a $400,000 purchase. Spending that money is miniscule compared to having to replace a $15,000 sewer line a few weeks after closing.
     • Overall Home Inspection. This is done by a third party who will walk the property and send you a detailed report. This will cost between $300-$500. We highly recommend that you attend your inspection to talk with the inspector and really learn the property.
     • Sewer Scope. This is done by a third party who puts a camera down the sewer line to see if there are any major cracks, blockages or tree roots intruding into the line, which could cost thousands if they are not addressed timely. Many of the properties we buy were built in the 50s and 60s and have clay sewer pipes. It’s very common to have root intrusion and other line issues. This should cost between $100-$150.
     • Radon test. Radon is a colorless, odorless, radioactive gas that is very common in Colorado and is a health and safety concern. Long-term exposure can lead to long-term health issues. If there are high levels of radon, installing a radon mitigation system is a relatively easy fix and costs around $1,000. The cost for the radon test is between $100-$150.
5. Insurance – Reaching out to your insurance agent will be another task that is a high priority. The insurance company will need to communicate with your lender as well as check into any claims previously made on the house. What if there’s an outstanding roof claim, or you’re located in a flood zone? You want to be sure you know any and all issues so you have the right coverage and don’t get caught with any old baggage. Insurance is required by lenders and needs to be in place by closing.
6. Appraisal – This is ordered by your lender and is completed by a third party to get the value of the property to make sure the lender isn’t over-lending on the property. This can be one of the bigger hurdles that will determine if your loan can be approved or not. The lender usually orders it right away in case there are any issues with the appraisal. Note that just because you put in an offer “over asking” doesn’t necessarily mean it’s over the valued price. The majority of property appraisals come in at value or above. We have low appraisal issues with less than 5% of our properties under contract. Appraisals typically cost $600 ($625 if FHA loan) for a single-family home, $800 for a multi-family home, and $700 if it’s an investment property.
7. One strategy to have a more competitive offer might be to “rush” the appraisal. It will cost an additional $600 approximately, but it could be something that sets you apart from other offers as it allows for a quick closing within 10 days. We’ll use this when speed matters and we’re up against cash offers.
8. Closing – The closing is where you sign a lot of paperwork and officially become the owner of the property! Closings typically take place at a title company.

Dates and Deadlines

This next section discusses section 3. Dates, Deadlines and Applicability of the contract. Don’t worry about understanding all of the details in this guide. When the time comes to put in offers, we’ll walk you through all the dates. Below is a screenshot of that section of the contract. The right-hand column will have actual dates when you’re under contract. For this example, we’re putting in the typical time frame of when the deadline is.

MEC stands for “mutual execution of contract.” You’ll sign the offer before we submit it. It becomes an executed contract once the seller signs it. If you sign the offer on a Monday and the seller signs on a Tuesday, then it’s mutually executed on Tuesday. Look at the example for item number #1, “Alternative Earnest Money Deadline” below. Our notes say, “2 to 3 days after MEC.” Assuming the contract is executed on Tuesday, it’ll be two or three days after Tuesday when the earnest money is due. Again, don’t get hung up on the specifics, just get the gist.

1. Alternative Earnest Money Deadline – date the earnest money needs to be delivered to the title company
   • Title Items – The title company will initiate and pull these records for the buyer, then provide the buyer with results of what was found for them to review. It can expose any liens or judgements put on the property by the seller. These documents will also be sent to the lender who needs to double check that there are no additional liens, judgements or bankruptcies that would be ahead of the new mortgage if they were to lend money.

2. Record Title Deadline – Date title company is required to provide the buyer with an initial title commitment.
3. Record Title Objection Deadline – Date buyer has to respond to the seller if there are any issues with the title.
4. Off-Record Title Deadline – Date title company is required to provide the buyer with a list of items that might not pull up in a normal title search or haven’t been officially recorded with the county but items that the seller is required to disclose.
5. Off-Record Title Objection Deadline – Date the buyer has to respond to seller if there are any issues with items not recorded with the county.
6. Title Resolution Deadline – Date all negotiations between buyer and seller need to be resolved with a plan in place as to how to move forward with fixing any title issues if necessary.
7. Right of First Refusal Deadline – N/A

Owner’s Association – Listing agents may have info on how to obtain these or they can be ordered by the title company. We want to see the status and “health” of the homeowner’s association (HOA) if one is present (meeting minutes, financial statements, guidelines and regulations). The buyer is not able to object to anything of the HOA, but they can terminate the contract if they don’t feel comfortable purchasing a property under that HOA. Note that the HOA will not change anything based on your preference, which is why you are allowed to terminate the contract if the HOA doesn’t fit your goals. For example, if the HOA does not allow long- or short-term rentals in the community.

8. Association Document Deadline – Date association documents are required to be delivered to the buyer for review.

9. Association Documents Termination Deadline – Date by which buyer may terminate the contract if they find something in the documents provided that would cause major concern in purchasing the property.

Seller’s Disclosures – In Colorado, sellers are required to disclose any known material facts that might affect the property.

10. Seller’s Property Disclosure Deadline – Date by which seller must fill out any known facts about the property and deliver to the buyer (known roof replacement, water damage, structural issues, electric rewire, etc.)

11. Lead-Based Paint Disclosure Deadline – If the property was built before 1978, there is a chance that lead-based paint was used. This form is from the seller to the buyer stating whether or not the seller knows if any lead-based paint was used in or on the house. Buyer has the right to test the property for lead-based paint.

Loan & Credit – While you have a pre-approval, there are more steps required by the lender to fully approve your application now that you have identified a property.

12. New Loan Application Deadline – Date by which you need to have sat down with your lender and gone over all your options and decided on a course of action to go through with the loan for that specific property.

13. New Loan Termination Deadline – Usually the last opportunity to get out of the contract and get your earnest money back if something dire happens like you lost your job during the time you’ve been under contract, or you bought a new car and no longer qualify for the loan.

14. Buyer’s Credit information Deadline – Date by which you must get all your information to your lender regarding credit and lift any freezes so the lender can accurately qualify you.

15. Disapproval of Buyer’s Credit Information Deadline – If you have an issue with what was found on your credit report or disagree with something on your credit report, this is the date you can object to that.

16. Existing Loan Deadline – Only applies if you are taking over an existing loan. Not very common, but if it occurs, this is the date you have to determine that.

17. Existing Loan Termination Deadline – If you don’t like the terms of taking over an existing loan or you can’t qualify, this is an opportunity to get out of the contract and get your earnest money back. Again, it’s not common.

18. Loan Transfer Approval Deadline – Date by which the existing loan would need to be transferred into your name and you assume responsibility for the loan.

19. Seller or Private Financing Deadline – If the seller is giving you a loan or if there is another individual who is giving you some of the money required to buy the property (not including down payment), there is another process with that. This is the date all that paperwork is required to be completed. This is also uncommon.

Appraisal – A key piece for the lender to let them know how much the property is worth and determines if they can lend you all of the money needed for the transaction.

20. Appraisal Deadline – Date by which you need to have completed the appraisal.

21. Appraisal Objection Deadline – Date by which the buyer can go back to the seller and ask for more money if the appraisal doesn’t come back or is greater than the contract price. For example, you are under contract on a property for $400k, but the appraisal comes back at $390k. You can ask the seller to lower the purchase price to $390k, terminate the contract or increase your down payment. It’s common for buyers and sellers to split the difference.

22. Appraisal Resolution Deadline – If there is an objection from the buyer on the purchase price based on the appraised value, there will be a negotiation period between buyer and seller to work out a solution. This is the date that resolution needs to be submitted in writing.

Survey – Buyer always has the right to do a survey of the land associated with the property through an Improvement Location Certificate (ILC), which is a mini survey and will show the boundaries and lot lines of the property as well as any easements. You can also request a full survey.

23. New ILC or New Survey Deadline – Date by which the new survey or ILC needs to be completed.

24. New ILC or New Survey Objection Deadline – Date to let the seller know that the buyer has an issue with something that was found in the survey or ILC. For example, if a newly-built garage encroaches on the neighboring property by two feet.

25. New ILC or New Survey Resolution Deadline – Date all negotiations need to be completed by between the buyer and the seller to find a solution and move forward with the transaction.

Inspection & Due Diligence – Time to find out any major issues with the property that might change a buyer’s mind if they want to follow through with the purchase.

26. Inspection Objection Deadline – Date by which a buyer needs to let the seller know all the terms they want to negotiate or issues that need to be fixed before the purchase is complete.

27. Inspection Termination Deadline – The buyer has the option to terminate the contract and get their earnest money back as long as they terminate the contract in writing by this date.

28. Inspection Resolution Deadline – Date by which the buyer and seller end negotiations and determine a solution for all issues in the inspection objection to move forward with the transaction.

29. Property Insurance Termination Deadline – Date by which the buyer can terminate the contract and get their earnest money back if they are not comfortable with the terms of the insurance or there are any adverse effects of the insurance. For example, if the insurance company cannot insure the property or it’s in a flood zone that raises the premium higher than you expected.

30. Due Diligence Documents Delivery Deadline – Date by which the seller must provide all documents to the buyer so they can accurately do their due diligence on the property (ex. appliance warranties, previous appraisals, receipts or permits for newly-rehabbed items on the property).

31. Due Diligence Documents Objection Deadline – The buyer must deliver to the seller any items that they want further information on.

32. Due Diligence Documents Resolution Deadline – Date by which the buyer and seller must come to an agreement on a solution for any issues brought up in the objection. If no solution is made by this date, the transaction self-terminates.

33. Conditional Sale Deadline – This is the last date a buyer is able to back out of the contract if they need to sell their current property before purchasing the property in this transaction.

34. Lead-Based Paint Termination Deadline – Date by which the buyer can terminate the contract if they are worried about the amount of lead-based paint that is in/on the property.

Closing and Possession – Plan as to when the purchase is finalized, and the buyer officially becomes the new owner!

35. Closing Date – When the transaction expects to close.

36. Possession Date – Date when the buyer gets the keys and can officially walk into their new home. Many times, this is the same day as closing, as long as there is no agreement that the sellers will stay in the property longer. Also, any leases that are currently in place will supersede the possession date.

37. Possession Time – Time of day when the buyer gets the keys and can officially move in or take possession of the property.

38. Acceptance Deadline Date – Date by which the seller needs to let the buyer know if their original offer has been accepted. If there is no communication by this date, it is assumed that the offer has NOT been accepted. Typically, it’s 24-48 hours after the offer is submitted to allow the seller time to review and decide if they want to accept the offer.

39. Acceptance Deadline Time – Time of day when the seller needs to let the buyer know if their original offer has been accepted.

Overall, these dates and deadlines can change and be negotiated on with good communication from the real estate agents on both sides of the transaction. Typically, in Colorado, this is about a 30-day process.

Again, there are a lot of details, so it’s ok if you don’t understand or follow everything right now. We will hold your hand through this process. If you need time to think or fix something, we can push these dates to get things resolved.

If you have any questions, please reach out.

YouTube Video: You’re Under Contract on a House Hack