Title Insurance Contingencies Merit Consideration

To get to closing we direct our attention to the inspection, appraisal, and financing contingencies.  Another condition of the Offer receives very little attention and yet it’s a very big hurdle. The Title Insurance contingencies, page 7 of the 9 page WB-11 Residential Offer to Purchase, pose a serious risk to a successful closing.

Provision of Merchantable Title Lines 348-352:  This contingency requires the Seller to provide a Title Insurance Commitment to Buyer or Buyer’s attorney, NOT LESS THAN 5 BUSINESS days before closing. The commitment shall show  evidence that the title is merchantable (Suitable for its purpose) to the standards as stated in lines 326-334.

Here’s where things get risky. Title Not Acceptable for Closing, lines 353-359, allow the buyer to object to title BY THE TIME SET FOR CLOSING.  Once the buyer objects, the closing is extended to allow Seller a reasonable time to clear the objection. The buyer’s obligation is to permit the Seller no more than 15 days to resolve and the closing is extended AS NECESSARY.  (Uncertainty).  If the Seller is unable to remove the objection, the seller must notify Buyer. Once the notice is received, buyer has 5 DAYS to to waive the objection. Unless the buyer takes the affirmative step to deliver written notice and waive the objection, the offer becomes Null and Void.

Without seeing this happen in person, it’s easy to see the problems sellers are facing until this contingency is satisfied.  Which raises the question, Are buyer’s giving notice of satisfaction of the Title Commitment contingency or are we walking into closing with the buyer holding the right to object before the Time Set For Closing?

I have seen an attorney use the Title Unacceptable for Closing contingency used by an attorney to force a seller to release a buyer who objected to Covenants and Restrictions, when there was no contingency to approve Covenants and Restrictions.  The attorney stated the Covenants would be an exception to the title insurance policy and the buyer would find that exception objectionable…hence, we may as well part ways now.  What? Wasn’t “recorded building and use restrictions” an agreed upon exception per lines 326-331?  The lawyer’s argument met no objection from the Seller’s attorney (maybe to simply move on)  and the buyer was released.

Maybe the Title Contingency is an exit clause we should pay more attention to.

Are you in the home business or contract business?

Some Realtors are in the home business. All Wisconsin Real Estate Licensees are in the contract business.  Maybe for most people the home business is more appealing than the contract business, but you may not do the home business long without learning and continuing to learn the contract aspects of the business.

Study Contracts at Harvard From Your Home  Online learning from the finest institutions in the world is an opportunity previous generations could not even imagine. Several years ago universities began experimenting with online learning by offering free courses to the world. They learned how to make on-line learning efficient and appealing.

Lawyers and will be law students are registered for the Contract Law Course at taught by a Harvard professor. I started the course on Friday. It’s a learning experience for me and I love the contract part of the business. I won’t finish with a degree, but I am learning, and that’s what I am after.

Property Damage After Acceptance Prior to Closing

An easy to happen and complex to navigate situation licensees address is property damage after acceptance and prior to closing.  The WB-11 Residential offer to Purchase begins to address this on lines 206-215. In compliance with Wis. Stat 706.12, unless this provision is not part of the Offer, the parties have expressly agreed to who has responsibility (buyer or seller) to repair the damage and under what conditions the contract may be terminated and parties released.

WRA on Damage after Acceptance
When the licensees become aware of damage which occurred after acceptance and prior to closing decisions have to be made regarding disclosure, damage assessment, repairs, closing date, and resolution.  The prudent licensee will be careful to direct their clients to legal counsel to interpret their rights and obligations, and to their insurance companies to determine their coverage. The parties will look to the provisions of the Offer to determine the avenue they will take to move forward or to separate.

Attorneys may advise their clients to maintain their right to remain silent on the new condition, make the necessary repair and proceed to closing.  Because  the buyer may have recession rights when they receive an amendment to the RECR with previously undisclosed conditions, sellers may be advised by their attorney to not amend the RECR or issue a new RECR.  Even though a seller may not have disclosure obligations, the licensees do. A Disclosure of Material Adverse Fact form is available for licensees to disclose conditions they are aware of.

Occupancy May Change Everything

Buyer pre-closing occupancy is a condition which may alter the buyer’s rights and seller’s obligations for repairs, expenses, and resolutions.  Pre-closing occupancy is a seriously risky proposition. The Addendum O (Occupancy Agreement) has been modified to make it easier for licensees and parties to incorporate occupancy provisions into offers.  I wonder if that’s a good idea considering the complexity of the issues involved with occupancy. Anything which contributes to parties avoiding consulting their lawyer is not an advantage to their safety. Just my opinion.

Water Everywhere

It happened here in 2008 and it will happen again. Spring is flood season in Wisconsin. Frozen ground, rain, melting snow, clogged drainage sewers, rising river levels are the perfect storm conditions for property damage after acceptance and prior to closing. It’s never too soon to sharpen your skills in the disclosure of defects and conditions responsibilities.  Heavy rain is the forecast for today through tomorrow.


Is This Really a Price Escalation Offer? Probably not.

Buyer: “Mrs. Seller. You are asking $300,000 for your house. Here is my offer for $300,000.  If you get another offer by 7:00 PM tonight for $300,000 or more, my offer will then be $1,000 more than that other offer, up to $351,000.”   The first price escalation offer may have started just like this. A capable, committed, fearless buyer promising to pay more than any other offer the owner has in hand,  up to a specific amount. That’s a true escalation offer. It’s free of stipulations. No if, and, or but. This buyer is appealing.

The Price Escalation clause common in our market is remarkably diluted of fearless commitments from the buyer with weak if, and, and buts.  If we take the written watered down clause and put it in a conversation it looks like this:

Buyer: “Mrs. Seller. You’re asking $300,000. My offer is $300,000. If you have another offer in hand for $300,000 or more, I’ll increase my offer by $1,000 up to $351,000. BUT you have to show me the other offer as proof. AND I get to scrutinize it to see if that offer has credits, concessions, or seller costs which mine doesn’t have. If after I compare to make  sure we are apples to apples, and I’m satisfied, I will sign an amendment to change the purchase price. Oh, by the way; if the appraisal doesn’t support the price, I can rescind my offer. We’ll see the appraisal in oh, 30 or 35 days from now. About 5 days before closing. ” 

Every real estate licensee and attorney  sees the caveat filled contingency is trouble waiting to happen.  The buyer who needs this kind of protection is not the price escalation buyer you want. This buyer is hopeful that you will be so enthralled by the big number that you will overlook the conditions. The game is on and it’s a gambler’s game. You and the buyer are taking a chance that the appraisal will or will not support the Offer price. A low appraisal is a big win for the buyer. You’re 4 weeks closer to closing and your other buyers are gone as is your leverage.  So, before you accept an offer with a diluted escalation clause you gotta ask yourself: “Do you feel lucky?”

A skilled real estate licensee will know how to modify the Offer to protect you when this contingency shows up in your offer. It’s great to have a strong, committed buyer interested in your property. The buyer capable of a true escalation commitment won’t be afraid. You’ll know her when you see her offer.

Did an Attorney Draft that Offer? Even a first year agent can draft impressive contracts.

A Realtor in his first 12 months of business submitted an offer yesterday and got this response from the listing agent. ” Did her attorney draft this Offer?”  Agent replied, “Nope. Just me.”  Listing agent: “Are you a lawyer?” Agent: “Nope”.

I always ask new licensees to tell me what they fear most about starting their careers. It’s common to hear that what wakes them up at 3 AM with worries is making mistakes, disappointing someone, or just plain looking like they don’t know what they’re doing.  There is a solution to that worry and fear. It’s learning. More than two years ago we started weekly Skill Share sessions designed to raise our knowledge of contracts.  We believe the best way to be relevant in the real estate transaction is to know how to make the contracts work for our clients and to do that we had to know what is and isn’t in the contracts. We had to learn to take addenda from other firms and lawyers apart to discover the hidden trips, and traps. We’ve done that, and more.

Today, our experienced agents and our relatively new agents who make the commitment to attend, participate, learn, and share have insight well beyond the understanding of even the most experienced agents. (Don’t be so sure that experience equals competence. Time is not the difference maker, learning is.)

Imagine being well prepared to fix a bad contingency and prepared to draft terms that work for everyone. You can do it in your first year. Just make the commitment to learn. We’ll give you the insight. That’s our unfair advantage. We care that you’re prepared.

Is an Email a Notice?

Hypothetical Situation:  The terms of the contract include this statement: “Within 24 hours of receipt of the report, Buyer shall deliver a copy of the report and a notice to Seller stating the defects the Buyer objects to, or this contingency shall be considered satisfied.”

At 3:00 PM on October 21st, the buyer receives “the report”.  At 9:00 AM on the 22nd,  the Buyer agent attaches the report to an email and sends to the Listing Agent. The email reads in part:  “The buyer is concerned about the condition of the furnace. They would like ask Seller to have an HVAC contractor service the furnace.”

It is now 4:00  PM on October 22nd.  The Listing Agent informs the Buyer Agent that the Seller considers the contingency satisfied because the 24 hours has lapsed without the Buyer delivering a Notice of Defects per the terms of the Offer.   The Buyer agent believes his email was sufficient to be the notice called for in the Offer.

Is the email a Notice? Maybe. Determining if the buyer delivered notice timely is a question for the courts.  Deciding which forms to use is the responsibility of the licensee. Whether or not an email, text, or phone call is sufficient the licensee could first  determine if an approved form is available. (Wis Stat 452.40(2) and REEB 16 explain our obligation to use approved forms). In this case, a  Notice is available. The term notice is used in the Offer, the agent drafting the Offer is a licensee, and the parties could reasonably expect the licensees to use proper forms. It’s probably reasonable that the listing agent and the seller considered the email a “heads up” that a Notice was coming.  The Notice did not arrive and the agent and Seller concluded the buyer had a change of mind and opted to let the contingency be satisfied.

Could an attorney consider an email from him or her a sufficient notice. Probably. The attorney does not share our obligation to use available forms.

If the reason for sending an email, text, or leaving a voice message has anything to do with saving time, or for convenience, the question of whether or not a Notice is required is probably answered. Yes.

Current Assessment X Current Mill Rate is only one of the choices for property tax prorating

The Offer to purchase provides 5 choices for the buyer and seller to select from to agree on how to prorate the property tax bill for the current year. Except for closings at the end of December, the actual amount the city is collecting from the owner will be unknown at the time of closing.

Each choice on under Closing Prorations is a simple word problem. One or more of the choices may provide a fair and simple way for the buyer and seller to split the bill. In certain situations, one or more of the options may provide a windfall to one party, or may leave the new owner significantly under compensated.  To know which options may be acceptable to both parties, we can plug the known numbers into the formulas.

A: Net General Real Estate Taxes for the Preceding year (or the current year if known):  Assume the current year bill is unknown. The previous year tax bill may be close to the current year bill. Tax bills tend to increase each year, but the increase when divided over the year is probably minor enough that no one cares.

B: Current assessment time current mill rate: This is a bad choice when the community is in reassessment or the property being sold is new construction.  A reassessment will result in property values increasing close to market value. In the fall to keep tax bills from going through the roof, the mill rate will be adjusted down. Close when you know the new assessment but not the current year mill rate and the seller will leave a large chunk of money with the buyer. New construction built in one year and closed  in the following late winter or early spring before the new assessment is known will leave the buyer with a very small credit compared to the actual amount owed for the days of the year prior to closing.

C: Sale price, multiplied by the muni area wide percent of FMV multiplied by current mill rate.  This one is unusually complicated when compared to the next choice.

D: __________________ Create your own method. I think this is safe. Based on the facts of each transaction, the parties may estimate a tax bill. If bill was $10,000 last year, assume the next bill will be $10,100 or $10,300 or some amount. You will most likely be close because tax bills rarely go down. If it’s new construction, you could multiply the sales price by the known mill rate or if the closing happens in the same year that (a) the lot was vacant on Jan 1, and (b) the construction began after Jan 1 and was completed and closed prior to December 31 of the same year, the value of the lot times the mill rate will give you a number that’s close.

E: Buyer and seller agree to reproprate after closing.  Sounds like a great way to be exact, provided the new owner can collect from the seller, or the seller can collect from the new owner if money is owed.   I don’t want to suggest this option and I don’t want to be asked to intercede at Christmas when one party fails to pay up.