Category: contracts

Negotiation strategy is worth paying for. Marketing, not so much.

Home sellers will surely regret accepting a poorly written offer when their buyer exercises their exit opportunities.

“Hey. My house is for sale”  is an effective marketing strategy today. Drawing a crowd is the easiest step in selling your home. Real estate brokers propose fancy marketing plans presented as THE way to attract buyers to your property. Homeowners pay a pretty penny for those plans. When homes sell in less than a few days, those fancy plans never get launched. Is a fancy, pricey program necessary? Maybe not.

In some neighborhoods, the next person who puts their house on the market is the market. Well qualified people are already poised to jump on the next home that pops up on the market.  

Structuring a contract to give a home buyer leverage to walk away is simple. Eight out of ten buyer representatives will draft offers with little thought and many boxes checked. The standard purchase agreement is a fill-in-the-blank form. It’s intended to give the buyer exit opportunities. That’s fine in a buyer’s market. We do not live in a buyer’s market. You do not want to accept an offer that’s less safe for you than you can negotiate.

It takes smart work to craft offers that commit buyers to their promise. Some agents and attorneys know how to prepare a proposal that shows the buyer is committed to closing. If you’re a buyer, you want to have the choice to choose to have an offer that sellers are eager to accept. Home sellers will surely regret accepting a poorly written offer when their buyer exercises their opportunities to force a renegotiation. 

The agent who knows all people are not standard and standard offers are weak will make sure their client knows the consequences of contingencies and has alternative ideas to shore up the most capable buyer’s commitment. 

New WB-11 Residential Offer to Purchase: Changes

More of the answers owners typically want to know are right where they should be–on the first page. Price, Binding Acceptance, and Closing date. The definition of a fixture is front and center on page 1, with some clarification tweaks.

An Offer to purchase is as simple as a written form of a conversation a Buyer may have with a Seller. It makes sense the the Offer document would flow from beginning to end the way the conversation would begin and end. Buyer: “I’ll buy your property for this amount, on this day.” Seller: “OK”.

The new WB-11 isn’t that simple, but it is formatted closer to the natural conversation. Highlights:

More of the answers owners typically want to know are right where they should be–on the first page. Price, Binding Acceptance, and Closing date. The definition of a fixture is front and center on page 1, with some clarification tweaks.

Page 2 has long been boiler plate with definitions and explanations. Now it’s a working page where Earnest Money and the rules of Earnest Money disbursement are together.

Page 3 Conditions Affecting the Property use the entire page. The list should be a closer match to the Condition Report items.

Page 4 now has only the Inspection Contingency and the definition of Inspections and Testing. By itemizing the 3 steps a buyer is authorized to take to inspect it’s expected the process of inspection will be better understood. Seller’s right to cure is unchanged.

Page 5 A radon testing contingency is part of the Offer for the first time ever. Good news for the testing and remediation business, not so good for buyers who will have that contingency included without understanding the three day test is unreliable for determining long term exposure, and the fix is almost the same price as the cure. Buyer agents may want to sharpen their Radon issue knowledge before they fall into the habit of checking the test contingency out of habit and costing their client an accepted offer.

Financing Commitment Contingency As long as we can remember, there has been no Contingency to Obtain Financing in any version of the WB-11. By labeling the contingency what it is, a contingency to be able to obtain a financing commitment, if a buyer wants the Offer to be contingent upon getting the money, they will know they have to create that contingency.

The satisfaction of the Commitment Contingency is modified to allow buyer signed commitment letters to be used to satisfy the contingency OR a Buyer’s written direction to deliver. However, a commitment sent by the lender does not satisfy this contingency. Essentially, this change reverts the practice back to pre 2011 and in line with the changes firms incorporated in the Addenda to allow deliverance to be done without a Notice from Buyer.

Default days and amounts have been added to fix the issues that come with leaving blank lines unfilled.

Page 6 Seller Financing: Wisconsin has a unique provision which made 100% of the Offers subject to a Seller’s right to provide financing if the financing as described was unavailable. This is now an optional condition of the Offer.

Non contingent on Financing Offers are not “cash offers”. The revised condition for the Buyer to provide evidence of funds available allows the buyer to provide verification that funds are available at the time of verification, or some other documentation. This change was driven by a need for buyers to bargain for the ability to make a non financing contingent offer when the funds are not available today, but will be available in the future when the sale of their real estate occurs.

Closing of Buyer’s Property Contingency: The forms committees worked to make this provision’s steps easier to understand and to tighten the Buyer’s ability to waive the contingency. A few options for proof of buyer’s ability to close are provided and the term “Bump Clause” is used to head the steps Buyer and Seller will follow once Seller accepts a secondary offer.

Page 7 There must have been a flood of confusion about who pays home owner association one time fees at time of closing. Why this condition was necessary is a mystery. Association fees have always been seller’s responsibility. I’m not sure why this one time fee is treated differently. Buyer’s who agree to pay this will want to know the fee in advance.

Page 8 Special Assessments/Other Expenses: Have you ever wondered what the term “Levied” meant? Wonder no more, it’s defined now.

What happens if an optional provision is completed but the box is not checked? Well, according to page 8, the provision is not part of the Offer unless the box is checked.

Page 9- 10 Foreign Investment in Real Property Tax Act (FIRPTA): Who knew a buyer is responsible for paying up to 15% of the purchase price to the IRS when purchasing a property from a “Foreign Person”. Page 9 not only includes a WARNING, the WARNING includes a provision to allow the Buyer to terminate the Offer, or withhold the 15% if Seller fails to deliver certification of Seller’s Non-foreign status NO LATER THAN 15 DAYS PRIOR TO CLOSING. Special care is needed to make sure this exit clause is closed on 100% of the transactions we are part of.

Page 10 Additional Provisions: We have a total of six lines to include additional provisions and those six lines are all on page 10.

Optional use date is November 1, 2019. Mandatory use date is January 1, 2020. I can’t think of any good reason to continue to use the old WB-11 after November 1.

Evaluating an Offer on Time, Money, Security,Commitment.

Full price offers capture attention and soften senses to the rest of the terms. The desire to get all of the money, or more, causes a seller to accept insecurity, release control, and commit to people who are not committed to the transaction. Helping a client evaluate the Offer based on all of the factors that matter most at some time in the transaction begins with expectations.

Maybe we spend too much energy on establishing a price when much of that energy could have been spent on aligning our expectations with reality. Reality is subjective (OK to disagree). A person’s goals and tolerance level are never in line with the terms of the current nine page Offer to Purchase in Wisconsin. We use a standard form to match unique expectations and we are surprised when we have conflict. Watch a seller sink from thrilled to a puddle when the full price offer is loaded with if, and, but, maybe, and high standards. As listing agents we have our work cut out in these cases but we can turn this frown upside down with patience and smart thinking.

To find common ground we have to align more than money between the parties. Time, money, security, and commitment aligned are indicators of the road ahead. Time of course is closing date and length of time a person has to wait for the other party to decide. Money is the purchase price and related costs to sell. But what is security and commitment? They are a series of the most important provisions of the Offer at some time or another from acceptance to walking out with a check. Sooner or later in the transaction, the security or commitment of the parties will stress or relieve one side or the other.

Let’s take security first. When you know the Offer to purchase has contingencies (risks, exit doors) easily identified and others laying in the weeds you are on your way. When you can interpret AND explain the purpose, impact, consequence, and maybe even the origin you have a chance to eliminate peril before the parties become entangled. Your client wants an opportunity to pick and choose what sentences of the Offer make them uncomfortable, will cause them to worry about the uncertain outcome (cause of worry). We can give them that chance by understanding what we are seeing, and really reading what we are seeing. (Paragraphs are made of sentences. Seeing one sentence and disregarding the rest is the common cause of problems. Words matter and skimming for what you want to see won’t expose the intentional words and those are the ones we regret not seeing when we see trouble.)

All sentences and all contingencies do not have to be used and in most instances using all contingencies is certain death to the Offer. A surgeon knows which pieces of the body can be taken out to keep us alive and she has the tools to cut and sew so the body works. Risk lives in the contract document. It’s either mine or yours. It’s either risk or not. It impacts time and money. The trick is to look at the risk from the other side of the transaction when you are on this side of the table. The question isn’t always what’s best for me? But instead, what’s more appealing to you. “Ask not what your Offer can do for you, ask what your Offer can do for the other guy”.

Commitment is the tie that binds buyer and seller. The shared belief that you want to accomplish the goal of the Offer by staying inside the boundaries of the agreement is apparent when you see it, and obvious when it’s missing.

Commitment looks like this: Prepared: person knows what they need to know before they start. They are informed and don’t require contingencies which allow them to change directions while the other side is left waiting. A prepared buyer has an underwritten letter of approval from a legitimate lender. She puts something more than typical in as earnest money. He does his research before so he doesn’t add contingencies he doesn’t need. Exit Clauses are doors. Some are two car garage wide. Others are scuttles in the closet ceiling. If a buyer can fit through, it doesn’t matter how wide the opening. An uncomfortable exit is still an exit.

A committed seller knows what they can tolerate, where they are going, when they are going, and understands the relevance of time, money, security, commitment before they see an Offer. A committed buyer does not dress the same way as the typical, risk averse buyer. Customization of their Offer shows who they are in terms of commitment. A person either has reservations, wants opportunity to reverse course, or is certain and driven to stay the course. If the Offer is extended by contingencies for issues which could have been resolved before the Offer was made, you have an indicator. When the earnest money is typical the commitment might be typical. When the terms eliminate the fear that causes stress for the Seller we can see commitment.

The licensee and attorney who take the time discover their client’s true security needs and commitment will customize an offer that speaks clearly to the seller and exceeds their expectations. Happiness and appreciation grow side by side. Expectations kept in check and expectations intentionally met will get your client the love they want. The closing date to an expectation matched client is easy to see. It’s right there. Every person who wants to provide a value in real estate can do that y learning the contracts. The one who does more to learn isn’t always the most experienced person in the process, but they are the most instrumental.

Becoming Smarter is Worth The Effort.

Forms used in real estate transactions are the product of years of fears. What was once a handshake agreement to pay X Dollars for That Land is no less than nine pages, soon to be a dozen, of if this, and that, or this, but not that conditions. If something once happened to somebody, someone wants to insert a provision into the boiler plate form to give everyone some options to try to avert the isolated incident they once saw. The time wasted by people who don’t require someone to think for them so that those who don’t want to learn is astronomical and the outcome is greater harm than good.

We have a choice. Keep it simple and allow buyers and sellers, their attorneys and real estate agents to structure terms to satisfy the expectations of parties of each transaction, or build a monster to address whatever might happen, once happened, or is unlikely to happen. Building the monster might provide options few people would have thought of, however if a person can’t think of the solution on their own, it’s a good chance they won’t understand the solution you provided for them.

Rather than trying to think for those who want the thinking done for them, wouldn’t it be better for the industry to raise the standard of comprehension and ability to draft contracts, or remove contract drafting responsibility from the licensee? Eliminating these pre-written, boiler plate, inflexible provisions might increase the competency of our industry by reducing the participation of those who choose not to learn. As those individuals and their respective firms fall behind those who strive to learn and adjust to new conditions, the market will naturally eliminate the stragglers.

It’s a choice between increasing the competency of the professionals for the benefit of the consumer, or decreasing the need for competency for the benefit of the least competent practitioners to the detriment of the consumer.

Olive Branch Inspection Contingency

Given a choice, without being told of potential consequences, a Buyer Client is 99% likely to include a Buyer Favorable leverage an inspection contingency, over the one on page 9 of the Offer to Purchase.  The people who created the Inspection Contingency in the Offer intentionally tilted the advantage to the Seller. Obviously the Seller has more to risk in negotiations after acceptance. The party with the most on the line should have a reasonable opportunity to cure defects, and  keep a transaction together when unexpected conditions are identified. During the Buyer Market run we had in and after the recession, more Firms began using a Buyer Favorable Inspection Contingency as standard practice. Sellers had no choice but to allow the Buyer to have the leverage which was intended for them.  That happens when the market changes.

Well, the market changed again. Licensees stuck in the new habit of using a company crafted Buyer Leverage Inspection contingency gave no thought to the consequences to their clients and went right on checking the box without discussing the difference between that contingency and the one on page 9 of the Offer.  Sellers and listing agents  were quick to identify the high risk condition of the Buyer Favorable contingency. For no reason other than risk, Sellers will reject Offers which give the inspection advantage to the Buyer.  It’s a shame when  a person loses a house because they weren’t given a chance to make their offer more attractive to the Seller by simply being kinder, gentler, and safe.

Knowing the difference between a Heavy Hand and an Oliver Branch allows the licensee  to  give the client a real opportunity. It’s a magical thing  watching a licensee earn the confidence of clients when they explain choices and think through a choice with clients.

Become a part of the conversation, a part of the thinking process by learning to find the trips  and traps of contingencies.  Some people will always do as they always have because that’s the way they learned it. But those people will never have the results they could have by learning why  something is as it is, and learning how to make the contingencies work for their client.  And by working for their client I don’t mean wrapping them in unnecessary protections.

Business Partner or Friend.

Selling your real estate  is somewhat like seeking a short term business partner.  The same attributes you want  to see in a business partner: courageous, able, prepared, committed, are what you want in buyer partner.  So it makes sense that red flags indicating fear, unprepared, uncertain, marginal ability, and lack luster commitment would cause hesitation. Both people could be very good friends, but only one is likely to be a responsible business partner.

What do the terms of your Offer to Purchase tell the Seller about you? Potential partner or friend?  Customize your offer. The business partner would.

Mass Produced Offer Documents Cost Home Buyers Thousands of Dollars.

You can have any color car you want, as long as you want black. The Model T was built efficiently in mass production assembly line factories,  for anyone who wanted to get from here to there on their own schedule without depending on a horse.  The mass production model groups everyone into the same box. By standardization, the producers have control, and the product is reliably consistent, even if it’s not reliably effective.

The residential offer to purchase documents (including firm crafted addenda) are  inefficient, unreliable, products costing the American home buyers billions of dollars annually.  Real estate values are pushed up and beyond the reach of a large segment of the population because these documents reduce even the most attractive buyer to ordinary. When critical terms of the Offer are equal on paper, the only difference maker in the eyes of a home seller is PRICE.

Smart Realtors know how to customize an Offer for their buyer-clients, to make the document work to their advantage while giving the owner all of the security they desire at a price they are willing to accept. A customized Offer tells the owner everything they want to know about the buyer’s commitment, ability, reliability to make a decision to commit to sell to them.  Oh, sure some people want to know about families, career, where you’re from, what you look like, how much you love their decorating, but they won’t make a commitment to take unreasonable risk because of your personal story.

Customized Offers are the solution to rejection. Customized offers don’t cost you anything. In fact, they are more efficient, more powerful, more fair, more acceptable, and can be the difference in thousands of dollars in the price you pay to own your first choice home. 60 Seconds to a Customized Offer

Pleading Letters Move No One to Acceptance v. Safe Offer Terms

Three people made offers on the same house. Two offers included well written, emotion inducing letters with photographs of the married man and woman, complete with details of their employment, education, professional credentials, and community involvement in causes for good. Both expressed their love for the property and their awareness of the owner’s own remarkable traits.  Each of these offers included double digit items (14 and 17) an owner would counter to make the offer safe enough for the owner to commit to. Two of the three offers were for prices the owner would accept.

One offer was for the most money, and represented less risk than the other two. However, it included two ambiguous contingencies, and one exit clause the buyer could exercise six days prior to closing.  The open exit door and ambiguity were reasons for the seller to question the buyer’s commitment.

Had any of the offers been written with terms proving the buyer’s no-reservation commitment to closing, or at least left no exit doors open, their offer would have been accepted. The letters induced an emotional response. The emotional response did not cause a compelling response  to accept one offer or negotiate with any one person.

Had as much attention been given to writing a customized, seller-safe offer, any one of these couples could have had their offer accepted. And, unfortunately, two of the couples and two of the licensees may think their letters helped their cause.

Buyers are improving their skill in writing fiction. They’re getting professional help on-line.  Be the licensee who improves her skill in customizing, seller-safe offers to match the commitment of the buyer.  The pleading letter is no match for customized offers.

Inspection Contingency

The inspection contingency in the Wisconsin Offer to Purchase is designed to permit a buyer reasonable time and access to the property to complete their due diligence.  A definition of “defect” was added to the agreement to create some objective criteria for a defect.  Objectivity is not a strength of the definition. Defect is still subject to the opinion of the buyer and seller. (Not the licensees. Our opinion is not relevant in the conversation.)

To deter a buyer from objecting to only the defects which are worth losing the property over, the contingency was built with a lever on the Seller’s side.  Here’s a visual of the deterrent: Buyer discovers a few defects he wants cured prior to closing.  The Buyer approaches the Seller with a NOTICE of Defects in his hand. Standing in front of the Seller, on a trap door, the Buyer gives the Notice to the Seller. The Seller receives the Notice and reads:  Buyer objects to the following defects identified in the attached inspection report.  The Seller has the Notice in her left hand, and her right hand is on a lever.  With no explanation required, the Seller who has been Noticed, may pull the lever, opening the trap door, and send the Buyer away.

A less risky approach could be attempted first. A buyer could offer a written amendment to the seller requesting the seller agree to a specified resolution. A repair prior to closing or a price concession are typical.

Beginning with the amendment, a Buyer retains the right to deliver the Notice prior to the deadline for delivering the Notice.  Some issues are worth the risk to some buyers. No one should take the Notice step without weighing the cost of the Seller’s choice.  On the other side, before a Seller terminates an offer because of a Notice of defects, a Seller may want to consider their obligation to future transactions now that they have some information about a condition they did not have prior. Buyers trust that the fact the owner will have to contend with the issue to satisfy the next buyer is enough to motivate the seller to cure the defects and not terminate the Offer.

Just my opinion, but people waiting in secondary positions are likely to accept a condition the first buyer would not, or because they are the fresh face waiting in the wings, Sellers are receptive to giving the next buyer something they would not give the primary buyer.  A human nature thing.

 

Standardized Offers make you look uncommitted in the eyes of home sellers

Video Tom Explaining the Value of Customized Offers

Every buyer who submits an offer on a house this week will not be the same as every other buyer. Someone will have more commitment, more confidence, more willingness to fair play, and a sincere desire to get to closing on time with no trouble.

Unfortunately, that someone is hard to pick out of the crowd of Offers. The Wisconsin Offer to Purchase Agreement, and the addenda that get attached are standardized, buyer friendly, seller risky documents.  The contingency choices appear as a dinner buffet to buyers, and they fill up their offer with all sorts of fatty contingencies that make there offer unhealthy.

We can do better.  Instead of a standardized offer, making you look like the most uncertain buyer in the bunch, we can customize your purchase agreement to appeal to the seller’s number one interest: assurance.  Price gets the attention because offers typically are equal in risk. When risk is eliminated for the seller, and a closing on time, with no worry is more important than a few dollars more.

Before committing to an agent, find out what ideas they have to improve your offer without you paying more money…or writing a letter. When you’re selling, make sure your agent knows how to eliminate the exit clauses and high risk contingencies from your offer.