The purchase of properties in Los Angeles by foreign nationals has seen a healthy growth lately and many may not be familiar with the mechanics. Hopefully the summary below will help shed light on what is really not such an overwhelming process.
Most foreign buyers are going to be all cash as it is difficult to get a loan. Should getting a loan be an option then a pre-qualification/approval will be required from the lender before an offer can be made. For cash buyers proof of funds will be required. This can be in the form of financial statements or a letter from a financial institution. Without this you will also not be able to make an offer.
If you are purchasing for your own use then you will have to set apart some time to look at homes, and in a sellers’ market that should be sooner rather than later. Sometimes this is not possible, and if your agent has sent you listings over a period of time, many may not be available when you are ready to see them. So the more you identify for viewing during your visit the better. And, if you find a home you really love don’t wait to long to make a decision, the likelihood is it will be gone when you do decide.
Your agent will have looked at the comps (similar properties that have sold in the area) and will help you decide on your offer price. In a sellers’ market there is not going to be much flexibility if any, and you could be in a multiple offer situation where you will be competing with other buyers. As a cash buyer you do have an advantage in that kind of situation.
The offer: your agent will go over the Residential Purchase Agreement with you. These are standard contracts the only part of which can be negotiated are the terms which you will be filling out with the help of your agent. The major terms are:
- Amount of offer.
- If you are getting a loan there is a standard loan and appraisal contingency. The standard loan contingency period is 21 days and the appraisal 17. You can extend this but it is not advisable. If you find towards the end of this period you need more time, you can ask for an extension, which is almost always granted within reason. If you are a cash buyer you will be waiving your loan contingency and it would be advisable to waive the appraisal contingency also, especially if you are in a competitive situation. Your agent will know whether your offer is at or near market price. (If a property does not appraise when a loan is involved, then further negotiations are required since the lender will only lend based on how much the home is worth).
- Length of escrow. This is usually 30 days but can be extended or shortened (without a loan) upon mutual agreement.
- Who pays for what. In Southern California it is customary for the seller to pay for buyer’s Title Insurance (CLTA) and various other reports required by City, County, or State law. This can be negotiated but rarely is. Each party pays for their own Escrow fees.
- There is an option for the seller to provide a one year home warranty for the buyer which covers appliances, HVAC, plumbing, electrical problems, etc. However in a competitive situation this is often waived by the buyer.
- All fixtures stay with the home but you can negotiate other items you would like to keep such as washer/dryer, maybe that chandelier, etc. Again, in a competitive situation you may not want to ask for too much.
- Inspection contingency. The standard is 17 days but this can and should be shortened to maximum 10 days, especially in a competitive situation. This is plenty of time to complete your inspections.
- There is a Liquidated Damages clause which should be initialed. This limits the amount of damages against the buyer to 3%, except under certain circumstances. It is also recommended that the Arbitration clause be initialed also. This avoids expensive lawsuits.
- The standard time the seller has to respond to the offer is 3 days. If the buyer wishes they can shorten this period.
An offer can either be accepted by the seller or a counter will be issued. If there are multiple offers the seller will either issue the same counter to all parties or different counters to each party. The buyer can accept the counter or counter back. In a competitive situation the latter option should be carefully considered. Nothing is binding until both parties have signed and accepted.
Once an offer has been accepted by both parties Escrow is opened. California is an Escrow state. We do not use attorneys. Escrow is a neutral party which ensures that the terms of the contract are followed by both parties.
- Within 3 days of opening of Escrow the buyer’s Good Faith Deposit, which is 3% of the purchase price, must be deposited into escrow. This can be by personal check or wired if the buyer is out of the country.
- Time is of the essence during escrow and all contingency periods need to be met including the seller contingencies which are basically to provide all mandatory disclosures and, if applicable, homeowners documentation.
- A home inspection must be conducted within the agreed time period, and any additional inspections that may result from that inspection. At that time a Request for Repairs may be given to the Seller. In a competitive situation this should be carefully considered. The seller can either agree with the request or counter back. Many a deal has fallen through due to lack of agreement at this stage.
- Once there is a meeting of the minds and you have approved all the disclosures from the seller you will remove all your contingencies, at which point there is no backing out. Until all contingencies are removed and you have a valid concern, you may cancel the contract and your deposit will be refunded in full.
- You will need to decide how you will be taking Title to the property and should consult your CPA or a real estate attorney if you have questions.
- Make sure that the transfer of funds to close the deal are going to be available in time. Unless you have a local bank account transferring money from abroad can sometimes get complicated and delay the transaction.
- Once the funds have arrived in escrow and everything is in order, an agent from the Title company will go down to the County Recorder’s office and change of ownership will be recorded. This usually happens the next day. Then the home is yours.
- Sometimes it may work out that the seller would like to stay after the close of escrow. This would be negotiated as part of the contract, but during the course of escrow things may change. It might be to your advantage if you are not ready to move in. At this point you can negotiate a rental price and a Residential Leaseback contract will be drawn up.
- Your agent will help you identify the utility companies servicing your area and you will change the utilities, cable, etc. into your name. The previous owner will have taken it out of their name first. This should be coordinated.
- It is a good idea to change the locks on the day of closing.
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