It is a little known secret that the residential real estate market in Eastern Massachusetts, particularly the Greater Boston area, is a Sellers' market. There is a shortage of turn key homes at affordable prices and, at the same time, mortgage interest rates have been climbing slowly. The prices of residential homes, particularly in the "starter home" category, in the $300,000 - $400,000 range continue to rise. And with a healthy economy in Massachusetts, and a vibrant job market, the demand for real estate also continues to rise steadily.
Our Lynnfield real estate lawyers have made numerous observations concerning potential home buyer's decisions while making a new offer to purchase a single family home or condominium. In an effort to make a more compelling offer to purchase that will be accepted by the sellers of the home, buyers are electing to waive inspections and are offering prices that exceed the listing price. Our real estate attorneys, who typically begin representation during the purchase and sale agreement, have reviewed numerous offers whereby buyers demonstrated that they have made aggressive efforts to secure the right to purchase a home. But at what cost?
Before you overbid the listing price on a residential property in Massachusetts, it is important to consider the possible results of your overbid. If you are borrowing from a mortgage lender, that company will conduct an appraisal of the property to ensure that there is sufficient equity in the property to secure the lender's mortgage. Lenders will also want to see a lower loan to value ratio (LTV) that averages 80.00% (Check with your mortgage broker for specific requirements). In other words, the amount that you are borrowing should be 20% less than the purchase price.
If you are overbidding the purchase price of a home, and do not have sufficient cash on hand to achieve an average 80.00% LTV ratio, you may: 1. Not receive a mortgage commitment, or be denied financing that may put your deposit at risk depending on the language and timing the mortgage contingency clause in your purchase and sale agreement. 2. Receive a higher interest rate from your lender, which means that your overall cost of borrowing the funds will increase and so will your monthly payment. 3. You may have to purchase private mortgage insurance (PMI), which will increase your monthly payment and the overall cost of borrowing; and/or 4. You will be scrambling to pull together additional cash proceeds so that you may close the transaction. These are less an ideal scenarios, and it is recommended that you remain in close contact with your mortgage broker and real estate lawyer when you are considering an overbid on a property.
Our real estate lawyers have also noticed that many potential purchasers of real estate are waiving inspections. In other words, the inspection contingency clause contained in the offer to purchase has been stricken and waived. When in effect. this clause makes the transaction contingent on the buyer's satisfactory inspection of the property, which is usually conducted by a certified home inspector. These inspections can reveal potentially expensive and critical defects in the structural, electrical, plumbing, mechanical, heating and air conditioning systems, as well as other features of the property. It is not recommended to waive property inspections (even with new construction) and this appears to be an imprudent concession by a potential buyer who is making one of the largest financial investments during their lifetime.
If you are a potential buyer or buyer of real estate and require assistance with your offer to purchase or purchase and sales agreement, please contact one of our real estate attorneys at 781-463-6063. We provide all real estate legal services throughout Eastern Massachusetts.