Real Estate Glossary – Earnest Money

WHAT IT IS

Earnest money is the amount of money a buyer submits with an offer to purchase a house. You actually write a check (or a copy of the check) and send it with the purchase offer.

Earnest money proves the buyer is ‘in earnest’, or serious about buying that house. If the seller accepts the offer, the earnest money is immediately deposited with the escrow/title office. It becomes part of the purchase price of the house.

A personal check is usually acceptable for earnest money.

Working with a lot of Canadian investors lately has taught me that many Canadians call it the “Deposit”.

HOW MUCH IS RIGHT?

A really common question I’m asked by buyer clients (especially first time buyers) is, “How much earnest money is the right amount?”

Technically, I’m not supposed to tell you. At least that’s what I remember from my rookie training classes. If I’m remembering correctly, I think this was a rule dreamed up by the legal eagles in our profession. They worry that if Realtors simply tell clients what to offer, how much to put down, how much earnest money to offer and so forth. . . . well, we’re essentially price fixing and could be sued later by disgruntled buyers who are having buyer’s remorse.

I used to be a paralegal and have lawyers in the family, so I’m pretty ultra-sensitive to the myriad of ways agents get themselves sued. Since I like to keep on the right side of my company’s legal department, and since I haven’t got a brass farthing worth suing me over, I won’t state a ‘proper’ earnest money amount here.

But it’s typical to put 1% to 2% of the purchase price up as earnest money.

HOW MARKET CONDITIONS CHANGE EARNEST MONEY

2005 and early 2006 were boom-boom years in the metro Phoenix real estate market. Sellers received multiple offers after only days or hours on the market. Sale prices were frequently above list price, and buyers often waived many of their usual inspections and contingencies just to secure the house. This is an extreme seller’s market.

In a seller’s market earnest money often amounts go up. Buyers are competing against each other to buy the few properties available and increase their earnest money and/or down payments to make their offer look better than others’ offers. I commonly saw earnest money amounts in the tens of thousands. It wasn’t unusual to see earnest money amounts that were 4% or 5% of the purchase price, or more.

Today we’re in an extreme buyer’s market. In many cases earnest money amounts have dropped as a result. I’ve recently seen purchase offers for average priced homes ($200,000 to $300,000-ish) with earnest money of only $1,000 (that’s less than 1%).

Properties that first time buyers typically buy (condos, any property under $125,000-ish) often bring earnest money amounts at $500 and under. Some cash-strapped first time buyers using FHA loans even ask that earnest money be refundable at close. They often apply that money to the closing costs. (see more about buying with little or no money down here.)

EARNEST MONEY EXAMPLE

For example: Buyer looks at a house with an asking price of $299,900. Buyer makes an offer of $280,000. That $280,000 is made up of – (1) $3,000 earnest money, (2) $40,000 cash down payment, and (3) a promise to get a home loan for the remaining $237,000.

RULE OF THUMB

One rule of thumb about earnest money is, “put up as much earnest money as you can afford to risk.” The risk bit is important. Earnest money is forfeitable if the buyer breaches the contract. In plain English this means that if you, the buyer, back out of the purchase after your Due Diligence period, the seller has the right to keep your earnest money as compensation for the lost time on the market.

Related Posts -

• see all FAQ file posts here
• see all Glossary posts here
• Real Estate Road Signs – “Buy With $500 Down”

Glossary – Fixtures

My broker Jay Thompson explained “what’s a fixture?” on his real estate FAQ blog, which I’d like to expand on. Normally I think everything Jay does is perfect and no expanding is needed. Buuuut, I’m running a little low in the inspiration department, even lower in the time department, and I realized that I haven’t written a Glossary post in a long while. Plus, some new trendy household items can cause confusion.

Briefly, fixtures are items attached to the house using screws, nails, glue or similar means. Where things get a little tricky lately is with items some of the newer must-have pseudo luxury items, such as:

• satellite dishes
• flat screen TVs
• those fancy new bathroom mirrors that look like art because of their beautiful frames
• the trendy new bathroom cabinets that look like a piece of free-standing antique furniture and often have (expensive) marble tops

Two other possibly confusing items are

• above ground pools (OK, they’re uncommon these days, but not extinct by any means)
• heavy concrete patio benches or garden gnome type decorative items

If you follow the rule of thumb – is it attached using screws, nail or glue – all of the items in the first list are attached, are therefore are fixtures and therefore must stay with the house when it’s sold. Following the rule of thumb again says all the items in the second list aren’t attached and therefore go with the sellers.

If one were of the attorney persuasion, one could make an argument that the antique-look bathroom cabinets aren’t technically attached, it’s the plumbing that’s attached, and so the plumbing stays but the cabinets don’t… and [insert lawyerly babble here].

Court room arguments aside, I’d bet that most sellers with these items in their home expect to take at least some of the items when they move out. In my experience, satellite dishes have become almost disposable and most sellers expect to leave them behind, while most buyers expect them to stay.  So we generally have agreement there.

But sellers often spent lots of time and money tracking down the fancy schmancy bathroom mirrors and expect to take them with, while buyers don’t want to spend said time/money tracking down a replacement and therefore expect the mirror to stay. Many buyers don’t want the above ground pool… but then again many sellers don’t want to take it down and take it with and are secretly hoping the buyers will just take the darn thing and spare them the misery of dealing with it. And so on.

It can put you in a pickle if you assume too much on either side of the deal. Save time and trouble up front! Sellers – it’s best to specify in the listing agreement, and the MLS, and on flyers in the home whether these items go or stay. Better yet, get it out of the house and replace it with something that stays. Buyers – ask your Realtor to specify in the written purchase offer whether you expect these things to go or stay.

When’s The Money Due?

Like a lot of metro Phoenix Realtors, lately I’ve been working with lots of out of town buyers (especially Canadians). These buyers are often used to the way purchase transactions are handled in their hometowns, but somewhat baffled by the way we do things in metro Phoenix.

From the standard AAR contract, line 13, “Close of Escrow (“COE”) shall occur when the deed is recorded at the appropriate county recorder’s office.”

Notice it doesn’t say anything about the buyers and sellers being present. Recordation is handled by the folks at the escrow office who record the sale documents online with the Maricopa County Recorder’s Office.

Many buyers from the East Coast, the Midwest and even Canada are used to “closing” describing a giant conference table with the Buyer, the Buyer’s Realtor, the Buyer’s attorney, the Seller, the Seller’s Realtor, the Seller’s attorney a notary public and a title officer. Oh, and donuts too.

Buyers and Sellers in metro Phoenix don’t have to hire lawyers to represent them. They can, but don’t have to. Documents can be handled via express mail and email/fax. Money can be wired. No need to come to Arizona for your Arizona closing.

If buyers do plan to come to town for their closing, it could be helpful to arrive about 2 or 3 days before closing and plan to stay for 2 to 3 days afterwards too. That way you can sign the documents in person, pick up the keys in person, and then spend a few fun days moving stuff in and decorating.

Now, down to brass tacks. When’s the money due?

Earnest money is due immediately upon contract acceptance. Usually the buyer’s Realtor delivers it to the escrow officer in person or through a messenger. The escrow officer issues a receipt for the money received. Personal checks are acceptable unless negotiated otherwise by the parties. Buyers should note that their earnest money is cashed right away, so it must be liquid funds.

Any cash down payment is due on closing day. (Buyers paying all cash should apply this paragraph to their situation.) Arizona is a good funds state, which means that money for closing real estate deals must be “immediately available.” Cashier’s checks and wire transfers are acceptable. Contrary to logic, cash is not acceptable. Buyers who send a wire transfer should note that the USA Patriot Act slowed down the US wire system significantly. Expect your wire to take an entire day to transit the system. It will probably take less than 8 hours, but if it takes the whole day, at least you’ve planned ahead and not delayed your own closing. Got insomnia? You can read all 132 pages of the actual Patriot Act here. By the way, if you read the entire Act (and especially if you actually understand it) you should run for Congress immediately.

Buyers getting a home loan should be aware that by signing the standard AAR purchase contract you’ve agreed to sign all loan documents “no later than three (3) days prior to COE” (line 69). This language has been in place for 3 years, but I still sometimes encounter lenders who aren’t aware of the requirement. Buyers should also note that lines 68 of the standard AAR purchase contract binds them to two further responsibilities: (1) making diligent and timely efforts to provide their lender with all the documentation requested, and (2) ensuring that their lender provides status updates to both agents. This means that the seller’s Realtor is approved to talk to the buyer’s lender about the progress towards getting a loan approval.

That should cover all the angles on getting money to the table in a metro Phoenix residential real estate purchase. Got more questions? See the FAQ files or related posts below.

• Cash Buyers Should Prove Liquidity When Offering
• Buyers’ Info on the Valley of the Sun

Cash Buyer? Got Your POF?

POF? What’s that? Proof of Funds. By the way POF is an acronym I use, it’s not used by everybody or even by every Realtor or lender.

It might sound basic and redundant, but cash buyers sometimes don’t think about the fact that they really should provide a proof of funds statement when they make an offer to purchase real estate in the metro Phoenix region.

Why Use a POF?

There’s nothing in the Arizona Association of Realtors’ (AAR) Purchase Contract that requires that proof statement. But it’s just good business and a good idea to do so.

When buyers who are getting a mortgage loan make a purchase offer on a metro Phoenix property, they must provide a document called an LSR or Loan Status Report. It proves that the buyer has (at the very least) talked to a mortgage lender who verbally reviewed the buyer’s assets, liabilities and income and has come to a preliminary decision that the buyer is good for the loan. In fact the AAR Purchase Contract actually states on lines 62 and 63 that the Buyer’s LSR is attached to the purchase offer.

Cash buyers aren’t getting loans (of course) and so there’s no LSR to back up their ability to purchase.

Sellers are entitled to make a decision about accepting, countering or rejecting a Buyer’s purchase offer based on not only the price offered but the Buyer’s ability to pay for the home. Buyers who provide proof that their purchase funds are in liquid form present stronger offers.

With many bank owned homes in the metro Phoenix region selling in days or even hours, it’s important to demonstrate the strength of your offer right up front. The savvy seller/Realtor combination is going to counter an offer without a POF attached with a request for it anyway so it’s easier to get it done upfront.

What’s Sufficient as Proof of Funds?

Recent bank statements are the best and in this day of internet banking, are often the easiest to obtain. The statement should be dated within 30 days of your offer date.

Brokerage statements are a good POF too.

In my opinion, letters from your bank(er) are acceptable, but not nearly as convincing as the first two, which show not only that the Buyer has liquid funds, but where they’re located. A letter from a banker usually doesn’t specify just how liquid the funds are. The last thing Sellers (and Buyers for that matter) want is to get to the closing day only to find out that the Buyer’s purchase funds are in a retirement account that can’t be touched for weeks.

Your Realtor should be careful to obscure all account numbers, personal ID numbers, social security numbers and the like from the POF document. Really with-it Realtors shred these documents when the deal is complete and before putting the file into archives. I provide client with a short video of me shredding their documents as part of my closing gift.

Got POF? Then let’s shop!  Search the metro Phoenix MLS here

See all entries in the FAQ files here.

Spuds and SPDS

photo credit to yongzaho.en.alibaba.com

Sellers who use a Realtor to sell their metro Phoenix area home quickly become familiar with enough acronyms to make the Federal government proud (and confused). ER, SPDS, BINSR, CLUE. It’s enough to make any sane person wonder if their slightly daffy relation ran over a potato farm with the car and needs a ride to the hospital.

(That sentence is mildly smile-inducing inside my head; let me know if it evinces a grin in your neck of the woods.)

So, what’s a SPDS? And is it anything like the edible tuber that’s yummy when served with butter, sour cream and chives next to a big juicy Porterhouse? Read on, intrepid blog browser.

What Are SPDS?
Arizona law requires sellers disclose to buyers all known, material problems about properties they sell. The Seller’s Property Disclosure Statement (SPDS) document created by the Arizona Association of Realtors is a convenient form for doing this. Not working with a Realtor? You’re not exempt from disclosing what you know about the property. You’re just unlikely to have ready access to the nifty form.

Why Do I Need to Do This?
If you sell a property that has a material defect of which you were aware but didn’t tell the future Buyer, you could be liable to a lawsuit. Disclosing everything you know about the property you’re selling can protect you in the future.

What Should I Disclose?
The short answer is everything. The longer answer is that you should disclose everything that could influence a buyer’s decision to buy (or not buy) your property. This includes improvements you’ve made and problems you’ve had, as well as what you did to solve those problems. It also includes anything prior owners did to the property of which you are aware, or even things prior owners did that you suspect or only partially remember.

The bulk of the SPDS questions are phrased, “Are you aware of ….?”  If you aren’t aware, or don’t know the answer, you should answer “no”. Your Realtor is not allowed to fill out the SPDS for you, and is generally not supposed to tell you what to put on the SPDS.

On the last page of the SPDS form, you can add explanations. It’s OK to say things like -

• I think the prior owner replaced some of the PVC plumbing with copper but I only got verbal info on that.
• We had a tub leak in 2003. We repaired the leak and our insurance company replaced the drywall and carpeting.
• We converted the garage into a living room in 1999. We didn’t get permits or HOA permission but we had licensed contractors do the work.

Can I Disclose Too Much?
Don’t worry about ‘killing a deal’ by disclosing what you know about the property. If there’s something that’s so wrong with the property that it’s bad enough to be a potential deal-killer, you should be more worried about getting sued later for not disclosing it now. It’s better to be honest on the SPDS and discuss the property’s condition upfront with your Realtor. Then let your agent make recommendations about marketing the property so that it sells to a buyer who knows all about it and buys it anyway.

How Long Do I Have to do This?
By contract, Sellers (through their Realtor if they have one) must provide the future Buyer with the completed Disclosure Statement within 5 days of contract acceptance. Buyers, be aware that you should receive this document promptly. Ask questions if you don’t understand the answers! Sellers, remember that honestly and completing filling out the SPDS form will take a little bit of time and some record pulling. So, the sooner you complete the document after listing the home for sale, the better. The last thing you want is to be scrambling to fill out a SPDS form at the 11th hour. It’s kind of like waiting to start your 1040 tax form until April 14.

You Can’t Eat It, But It Can Help You Sell
A complete and honest SPDS will help your property sell. Even if the property has problems, know that every property will sell . . . IF it’s priced right and marketed correctly. There is a buyer for every home. You just need to inform your Realtor and the buying public so the right buyer can find yours.

Related Posts at The North Phoenix Agent

1. Inspection Period
2. Home Inpsections Explained
3. Stuff About Your Neighborhood Your Realtor Can’t Tell People

Related Posts at the Butterhomes Blog – Selling A Home Full of Lizards

Related Posts at The Phoenix Real Estate Guy – Info You Get During the Inspection Period, How to Buy Your First Home and Do I Really Need a Home Inspection?

See all the entries in the FAQ files here.

Real Estate Glossary – Absorption Rate

“Absorption rates are a  calculation of how long it will take for all the homes on the market to be sold, or absorbed, based on how many homes are on the market and how many were purchased in the last 30 days.”  – This is courtesy of blogging legend Theresa Boardman from Minnesota.

Think of it this way – if no more houses were put up for sale, and buyers continued buying at the current pace, the absorption rate is the number of months it would take to sell all the available homes for sale.

Why’s this important? Absorption rate is a good indicator of how balanced the market is. Most real estate experts and practicing Realtors agree that a 6 month absorption rate is about ‘normal’.

Absorption rate less than 6 months? It’s a seller’s market. Sellers have the upper hand and are in a position to be choosy about who they sell to, and to demand a little more from buyers: more earnest money, a bigger down payment, a nonrefundable clause for the earnest money, buyer to pay their own closing costs, etc. In extreme sellers’ markets like metro Phoenix experienced in late 2005, homes sell in hours or days for significantly more than list price.

Absorption rate more than 6 months? It’s a buyer’s market. Buyers have time on their side. They can be picky about finding exactly the right house, and take their time making a decision about which house to make an offer on. Buyers can also offer less than asking price and request that the seller pay for negotiables like closing costs and appraisals. In severe buyers’ markets (like much of metro Phoenix has been in for recent months) buyers can also ask for seller assistance towards down payments.

Related Posts

1. How Much Earnest Money?
2. May 2008 – Metro Phoenix at 9 Month Absorption Rate
3. Dec 2007 – When Will it End??
4. See all posts in the FAQ files here

Mortgage Terms Defined

Thinking about buying a home? Have questions, need info, but aren’t ready to speak with a lender yet? Have a fear that a pushy salesperson will bug you till you sign?

See this awesome glossary of mortgage terms compiled by Jack M. Guttentag. Jack is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, and founder of GHR Systems, Inc., a mortgage technology company. He contributes to InmanNews.com where I get my daily fix of real estate news. You can see excerpts of Inman headlines on my main website, the NorthPhoenixAgent.com.

Related Entries:

• PMI Defined
• What’s an 80/20 Loan?
• How Much Earnest Money is Enough?
• See all entries in the FAQ files here

Twitter

FINALLY. I get it. I had the V8 moment. Now I understand why every blogger Realtor I know is tweeting. 

Life happens between blog posts. Use Twitter to send & receive interesting little snippets of daily life as it happens to people you know. You can follow me at @northphxagent

This video by CommonCraft, posted by Daniel Rothamel over at The Real Estate Zebra explains it all.

Real Estate Glossary – Fair Housing Law

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Federal Fair Housing law prohibits discrimination in housing because of:

• Race or Color
• National Origin (the country in which one was born)
• Religion
• Sex
• Familial Status (whether one has children or not, whether married or not)
• Handicap/Disability

Some states include additional groups, such as “sexual orientation”. You can check your state’s protected classes here.

The most common question I hear from buyers is “Is this a good neighborhood?”

What they’re really asking about of course, is either the crime rate or the type of people living in the area. Fair Housing law prevents me, your Realtor from telling you about the neighbors if that conversation might stray into discussing one of the protected classes. Most Realtors just don’t discuss the topic at all, for fear of violating Fair Housing law. It’s rumored that the FHA sends testers out to work with Realtors, secretly checking for violations of the law. True? I don’t know but I don’t want to find out.

Besides, my idea of “nice” or “good” neighbors might vary wildly from yours. Some people find the idea of living near folks of another race, religion or sexual orientation is a big problem. Others don’t care. My best advice to buyers in this scenario is to drive through and walk through the neighborhood yourself, at different times of the day, to see what you see. Talk to your potential new neighbors. Realtors can’t ask or answer questions about the protected classes but buyers can, and should. You’d be surprised what neighbors will tell you!

As for crime, I can and will point you towards websites that list crime statistics, usually by ZIP code. I usually beg off answering the ‘crime’ question, because one person’s ‘safe neighborhood’ is another person’s ‘fringe neighborhood’ is another person’s ‘hood.’

Housing not covered by the Federal Fair Housing law

• Single family housing not sold through a broker
• Owner-occupied housing of no more than 4 units (you own a duplex & rent the other side)
• Housing operated by private clubs which limit membership (co-op’s)

The first bullet above applies to For Sale By Owner homes. Selling it yourself? Discriminate all you want. I’m kidding of course, but the government can’t interfere if you want to sell your home yourself but intend to refuse to sell it to someone who practices the B’hai faith or was born in Australia.

The second & third bullet points don’t apply much in metro Phoenix. But there are duplexes and fourplexes in our Valley, and even a few co-op’s down in South Scottsdale. No one can force you to rent ther other side of your duplex to a family with 17 kids if you abhor children. Similarly, the co-op board reviews applicants who want to purchase a unit, and they make their own rules about who can move in.

For more information, see the Federal Fair Housing booklet and information about updates to Fair Housing law. Think you’ve been discriminated against in housing? The National Fair Housing Advocate Online can help. Note that all these resources apply to housing you buy. For help with rental situations, see the Arizona Residential Landlord Tenant Act.

Related Posts

• See all entries in the FAQ files here
• Click here to find online resources to check out neighborhoods, including demographics, crime statistics, HOA contact information, etc.

Real Estate Glossary – PMI

Private Mortgage Insurance is just what it sounds like – insurance. It’s required on home loans where the buyer puts less than 20% cash down. Statistically, buyers with less than 20% cash down payment are more likely to default on their home loans than those who have ready cash.  Issued by private companies like MGCI Investment Corp and PMI Group, these policies paid off the mortgage lender if the buyer defaulted.

PMI fell out of favor in the boom-boom years of the early 2000’s (see entry for 80/20 Loans). But with the credit crunch roiling the markets since early 2007, it’s back in a big way. PMI will add $50 or $100 (or more) to your monthly mortgage payment. But for most buyers, it’s cheaper to pay a little every month than scrape for years (decades?) to save 20% of the purchase price of their new home.

Related Posts – 80/20 and 80/15/5 Loans, FAQ files, and Buyer Neighborhood Information

Real Estate Glossary – 80/20 and 80/15/5 Loans

These were home loans that were essentially creative ways to get around the rule that you must pay Private Mortgage Insurance if you put less than 20% cash down on a home purchase. They were the darlings of the market in the late 90’s and early 2000’s.

Lenders issued the buyer two loans. Loan #1 was for 80% of the purchase price; Loan #2 was for the remaining 20% of the price. For buyers with 5% cash down, the lender issued an 80% loan and another 15% loan. Voila! No PMI payment required. This also made the monthly payment more affordable, since PMI payments can add $50 or $100 (or more) to the monthly payment.

80/20’s and 80/15/5’s are totally gone since the credit crunch of early 2007 changed the lending landscape. See my friend Shailesh Ghimire, The AZ Mortgage Guru for more on how these loans are totally unavailable.

Related Posts: Real Estate Glossary – PMI, FAQ files

Real Estate Glossary – “Due Diligence Period”

The Due Diligence Period in a home purchase contract is the time during which the buyer conducts any and all inspections of the home that she/he chooses.

The Due Diligence used to be called the Inspection Period. Many agents and home buyers/sellers still call it that. The AAR changed the terminology to Due Diligence when they overhauled the language in the purchase contract in May 2005.

Typically, the Due Diligence Period lasts for 10 calendar days, although buyer and seller may negotiate for more or less. The Due Diligence Period begins on the first full day after the contract is signed by both parties and delivered to both. It’s important to note that the Due Diligence Period — and all contract time periods — are counted on calendar days. Weekends count. Holidays count.

Legally, buyers can pretty much take the house apart brick by brick and inspect it all, as long as they put it all back together again the same way it was. Practically speaking, most buyers get a general home inspection and often a termite inspection. Some add a roof inspection, a pool/spa inspection, a mold inspection, and maybe an inspection of the heating & cooling systems. The seller(s) should provide the buyer(s) and the home inspectors with the Seller’s Property Disclosure Statement prior to the inspections. By contract, that document is due within 5 days after contract acceptance.

Buyers usually pay for their own inspections (although who pays is technically and legally negotiable). Almost all inspectors require payment up front, with the exception of many termite inspectors. Many termite inspection companies take payment out of the escrow funds when the transaction closes.

After the Due Diligence Period ends, the buyer and seller have a chance to negotiate again over which recommended and/or requested home repairs are completed.

Related Posts – FAQ files

Real Estate Glossary – “Earnest Money”

A really common question I’m asked by buyer clients (especially first time buyers) is, “How much earnest money is the right amount?”

Technically, I’m not supposed to tell you. At least that’s what I remember from my rookie training classes. If I’m remembering correctly, I think this was a rule dreamed up by the legal eagles in our profession. They worry that if Realtors simply tell clients what to offer, how much to put down, how much earnest money to offer and so forth. . . . well, we’re essentially price fixing and could be sued later by disgruntled buyers who are having buyer’s remorse.  I used to be a paralegal and have lawyers in the family, so I’m pretty ultra-sensitive to the myriad of ways agents get themselves sued.

Since I like to keep on the right side of my company’s legal department, and since I haven’t got a brass farthing worth suing me over, I won’t state a ‘proper’ earnest money amount here. But I’ll explain what’s typical, and what earnest money is and does.

Earnest money is the amount of money a buyer submits with an offer to purchase a house. You actually write a check and send it (actually, usually it’s a xerox copy of the check) with the purchase offer sent to the home seller. Earnest money proves the buyer is ‘in earnest’, or serious about buying that house. If the seller accepts the offer, the earnest money is immediately deposited with the escrow/title office. It becomes part of the purchase price of the house.

For example: Buyer looks at a house with an asking price of $299,900. Buyer makes an offer of $280,000. That $280,000 is made up of – (1) $3,000 earnest money, (2) $40,000 cash down payment, and (3) a promise to get a home loan for the remaining $237,000. The earnest money amount I’m using here is typical. Most of the buyers I’ve worked with feel comfortable offering about 1% to 2% of the purchase price as earnest money.

Once the contract is accepted by both buyer and seller, the buyer’s Realtor sends the earnest money to the escrow company. A personal check is usually acceptable for earnest money.

One rule of thumb about earnest money is, “put up as much earnest money as you can afford to risk.” The risk bit is important. Earnest money is forfeitable if the buyer breaches the contract. In plain English this means that if you, the buyer, back out of the purchase after your Due Diligence period, the seller has the right to keep your earnest money as compensation for the lost time on the market.

Related Posts – see all FAQ file posts here

Glossary – “Scraper”

Generally, a scraper is another term for a total tear-down. These homes are often 40+ years old (in metro Phoenix), and require a complete gut-and-remodel to bring them up to contemporary livability standards.

Scrapers are usually built on an old floorplan model and have a formal dining room and living room, low ceilings, and a generally dark and dated feel. Owners will frequently tear down all interior walls to the studs, move the mechanicals (duct work, plumbing, electrical wiring, etc.) and then rebuild.

(BTW, for my younger readers, the formal dining room was where the family gathered for Thanksgiving and Chrismukkah dinners. The formal living room was where your Grandma would have kept the “good” furniture covered in clear plastic that nobody was allowed to sit on.)

I’ve also heard scraper used to refer to a house that needs a complete cosmetic remodel — you need to rip out and replace every bit of flooring, cabinetry, countertops, appliances and fixtures because it all looks like the Brady Bunch could move right in.

Either way, it’s a whole busload of work, not to be undertaken lightly. Remember the old Tom Hanks movie, The Money Pit? Yeah, that’s what we mean by ‘scraper’. If you’re considering a remodel on any scale, contact a knowledgable Realtor to ballpark the return on your investment, and get hooked up with reliable contractors. Live in the metro Phoenix region? Good news! I know lots of reputable contractors, and can give you a great idea of the current market ROI on your remodel. . .

Related Posts – FAQ files