Ill-Considered Real Estate Offers and Contracts

| | Comments (0)


There's an old literary tradition that cautions the reader to "Be careful what you ask for. You may get it."

Many real estate purchase offers are good illustrations of that principle.

The rule followed by good agents is, "Never make an offer that you wouldn't be pleased to have accepted, exactly like it is." An Offer is a legal term. You're making an offer to fulfill these terms if the seller will. By simply signing the offer in acceptance, the other side can create a binding document with legal force, and at least potentially sue for specific performance. Specific performance is more often used by buyers than sellers, but it is available to both. An offered and accepted purchase contract is roughly equivalent to creating both a "call" for the buyer and a "put" for the seller in options trading. The seller has a right to insist the buyer buy, and the buyer has a right to insist that the seller sell, on these specific terms.

Usually, there are things discovered about the property while in escrow. It just isn't cost effective for prospective buyers to perform an inspection prior to obtaining a contract, and sellers should be mindful of the fact that subsequent discovery can void the purchase contract with an inspection contingency. On the other hand, I can't imagine a buyer insane enough not to build an inspection contingency into the contract. No matter how great a deal they may think they're getting at first, the whole contract is subject to a revaluation if the inspection uncovers major defects. I'd prefer to negotiate repairs or compensation rather than flush the transaction, whether I'm a buyer's agent or listing agent, but if the other side isn't going to be reasonable, sometimes it's necessary to walk. Note, however, that the opportunity to walk away happens because the contingency in the contract has not been satisfied, not due to the basic contract. No unsatisfied contingency means the contract is still in force and the other side can force you to live up to it. If the sellers have developed remorse and aren't reasonable about satisfying the inspection contingency but the buyer still wants to proceed, the buyers can force the sellers to perform by being willing to accept the original contract, as written.

The buyer usually has protection from the various contingencies in the contract - loan, appraisal, inspection, disclosures. But these have a specific limited duration, the sellers (via their agent) can insist the contingencies be removed in a timely fashion, and once they are gone, that buyer is as naked as the seller. Indeed, one of the marks of a good listing agent is being on the ball about contingency removals. Usually, it's the deposit rather than specific performance that the seller goes after because the reason the buyer wants out is it turns out they can't qualify for the necessary loan. Suing for specific performance in such instances is like demanding that men gestate and birth fifty percent of all babies. It's a physical impossibility that isn't going to happen. Sorry ladies, and sellers also. But the deposit money, and any other money in escrow, can be at risk.

Nor is that the limit of the seller's recourse. I'm not a lawyer, so talk to one, but damages certainly seem possible. Many lender owned addenda demand them if certain conditions are met.

The ultimate risk of a poorly written purchase offer, however, is that it leaves the buyer with a property that isn't worth what they paid for it.

It happens, particularly with large deposits. Buyers get into situations where they have a choice of buying or losing that cash deposit they worked so hard for. Even when the latter is clearly the least bad situation, many people, understanding the value of the cash they worked to save rather more clearly than the value of the payments they haven't made yet, will choose to consummate the transaction. They end up with an unmarketable property where they are obligated to make the payments on the loan, property taxes, and insurance. Since most folks are extremely happy to get a 2 percent deposit, this obligates you to 50 times that much by paying attention to immediate cash rather than the overall situation. Plus interest on the loan and property taxes. Ouch. Not a situation you want to be in.

There is a reason for each of the standard contingencies in a sale contract, and you can ask for others in the initial negotiations if you have a specific reason to be concerned. I just closed one where we negotiated an engineering report contingency because I had real concerns about the stability of the property (It was fine. But better my client spends $600 up front than spends half a million dollars for a property that's in danger of falling over). Standard contingencies can also be waived, creating a stronger, more definite offer. I'd be very careful about waiving them, and I always make certain the client understands the implications in writing. There are valid reasons to waive each and every one of the standard contingencies, but it is always a risk, and it can bite. The way I explain it is that it will bite, if you do enough of them - only nobody knows how many "enough" is.

If a buyer is giving up something that the standard contract gives them, there should always be something they're getting in return. If the seller isn't willing to do that, we're obviously making an offer on the wrong property. The same applies the other way around to sellers. One more way agents with good market knowledge serve their clients interests. "Yes, that model match sold for $X last month. But that seller gave the buyer 6% for loan costs, paid all the closing costs, and a twenty percent carryback as well. My client has a twenty percent down payment, doesn't need anything for loan costs, and is offering to pay half of all closing costs. When was the last time you saw all of that?" Every single one of those concessions the other buyer got means money in that other seller's pocket - money that should mean corresponding money my buyer doesn't have to pay in the form of purchase price.

Purchase price translates into property taxes for the buyer, and can mean exceeding statutory exclusions for the seller (i.e. they end up owing income tax, or at least having to pay an accountant to prove that they don't). The bottom line is that because the seller is getting things of value that the other seller didn't, they should be willing to give up something in the way of purchase price. If they're not, we're talking to the wrong seller and they're talking to the wrong prospective buyer. We want someone who's willing to see reason, he wants that prospective buyer who needs all that extra money from them to make the transaction happen (maybe). In most cases, I think such a seller is barking mad, but that's their prerogative. It's a free country. They're entitled to walk away from an offer from a more qualified buyer that's more likely to actually go through.

Another thing that a poorly written offer can do is "poison the well." The other side gets so angry about the offer (usually the price part of the offer) that when the prospective buyer comes back with something better, they aren't interested. Happens. Sometimes it's justified, sometimes it isn't. If you're not emotionally attached to the property, no big deal. If it's the one you've got your heart set upon, prepare to make major amends in the form of concessions in order to bring them to the table. Hair shirts and heartfelt apologies are not likely to work. You've set a warning flag in the owner's mind or the listing agent's, and they're going to want something extra to deal with you because they're expecting a repeat of the behavior.

A poorly written offer can also leave you stuck doing something you don't want to, or can't. Suppose you need a contingency for sale of your own property, but neglected to include one in your offer. Bad news. Now you're looking at the transaction falling out, with consequences for the deposit, or renegotiation, and that seller is going to want a goodie of their own for giving you what you need. Renegotiation is also subject to issues from deterioration of mutual trust, as the other side starts wondering precisely how much of the contract you intend to live up to. It should be expected that the inspections are going to raise some negotiation issues, even in "as is" sales. That's life with asymmetrical information - which is basically every real estate transaction. But try to avoid anything else as a reason to renegotiate.

This is by no means an exhaustive list of the dangers. With real estate, the answer to the question "What can go wrong?" is usually, "The mind boggles."* Purchase offers are probably the most noteworthy example of that principle. A poorly written, or poorly considered purchase offer can mean you're stuck with a situation you can't carry through on, and it can cost you anything up to the full purchase price of the property, and perhaps more than that.

Caveat Emptor

*Thanks to Robert Lynn Aspirin and Aahz

Original article here

Categories

Delicious Bookmark this on Delicious StumbleUpon Toolbar Stumble It!
Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites) All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.

Leave a comment

Copyright 2005-2014 Dan Melson All Rights Reserved

Search my sites or the web!
 
Web www.searchlightcrusade.net
www.danmelson.com


Buy My Science Fiction Novels!
Dan Melson Author Page

The Man From Empire
Man From Empire Cover

A Guardian From Earth
Guardian From Earth Cover

Empire and Earth
Empire and Earth Cover

Working The Trenches
Working The Trenches Cover

--Blogads--

blog advertising
--Blogads--

blog advertising --Blogads--
**********


C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information

Questions regarding this website:
Contact me!
dm (at) searchlight crusade (dot) net

(Eliminate the spaces and change parentheticals to the symbols, of course)

Essay Requests

Yes, I do topic requests and questions!

If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!

Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
-----------------
Learn something that will save you money?
Want to motivate me to write more articles?
Just want to say "Thank You"?

Aggregators

Add this site to Technorati Favorites
Blogroll Me!
Subscribe with Bloglines



Powered by FeedBlitz


Most Recent Posts
Subscribe to Searchlight Crusade
http://www.wikio.com

About this Entry

This page contains a single entry by Dan Melson published on July 30, 2014 7:00 AM.

The Benefits and Limitations of Assumable Loans was the previous entry in this blog.

A Q&A for First Time Buyer Advice is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.

-----------------
Advertisement
-----------------

My Links