Category: Real estate contracts

Fees, Costs, Expenses and Concessions are Paid 100% From Equity, Not from Sales Price

Real Estate sales fees are paid 100% from your equity; not from the sales price. Guard your equity.

Your equity is the bank account used to pay fees and costs to sell. As a percentage of your sale price the fee looks relatively small. The sales price is not where your expenses are paid from. That’s just a number used to calculate certain fees. The only real number is your GROSS EQUITY.

If your only fee was commission and the commission paid to a broker is 6.0% as Zillow suggests, and your Gross Equity is $150,000, your 6% is a nearly triple 16.0%. Here’s the thing, the commission is only one of the fees, expenses, and costs. The greatest threat to you equity is errors made in representation, flaws made in contracts, deficiencies in negotiations.

Instead of focusing on the asking price, or the sales price, keep your eye on your equity. Guard it. Make everyone who wants it earn it, like you did.

Beat or Be Beaten

The difference between an offer from a person committed to own, and those that are intended only to get the opportunity to change a mind later, is crystal clear.

We have a choice. Right up until we commit, the outcome of our attempt to buy a house is in the hands of the home buyer. The moment after a person selects the house they want to own they set out to make owning a reality, or a possibility. The probability of the seller’s decision to accept the Offer rises and falls with each precaution against acceptance included and added to the Offer.

Commitment is written all over your Offer. What you are committed to is up to you. We think owning is the overriding intention, but is it? Or, is the first intention to protect our opportunity to change our mind? More often than not, the terms included or added to the Offer say our intention is the latter. Every opportunity to change direction tells the Seller everything they need to know about your intention. At the moment we have the outcome in our hands, why do we begin to back away? Because our intention is not to own. Our intention is to get the opportunity to look closer; to control the situation by becoming the first person out of everyone to decide if we want to own the property.

When buyers compete to own a property, the difference between the Offer of a person committed to owning the property and everyone else is crystal clear. When your Offer is crafted with intent to own your Offer looks like you dare anyone to try to beat you. When the intent is to secure an opportunity to own, you place yourself in the pool of others you at best only hope to beat. Commitment can not be hidden behind contingencies. Each contingency is transparent. They are giant Ifs, buts, maybes.

The Offer to purchase is designed to hedge the buyer’s commitment. Every page of the document comes complete with at least a dozen escape clauses. More often than not, most of these escape hatches and bet hedgers are preferred by buyers. People who think they’re making an offer that shows they dare anyone to try to beat their Offer, would be stunned to discover the fears and cautions inserted in their Offer on their behalf by their Realtor, attorney, or the forms committee belong to someone who is not them.

When your intent is to own, not just secure a chance to change your mind, before committing to representation, or allowing a seller’s agent to craft your Offer, find out what the person knows about the Offer. Discover if they have any ideas to make it clear that you are not their to compete, but you intend to have your Offer accepted, and leave all others trying to compete with you. If you don’t ask, your offer is going to make you look like most other buyers: cautious and uncommitted.

Conceding the opportunity to be the Seller’s first choice should be made with full knowledge of the consequences of each of the ifs, buts, maybes. If rejection isn’t your thing, align yourself with someone skilled in showing your level of intent and commitment in the Offer the draft for you. They’re out there. But you gotta find them.

Inspection Contingency. Advantage Buyer or Seller?

Intention is everything in negotiations. We lose buyers and buyers lose houses for good reasons, and sometimes for reasons that have everything to do with failing to focus on intent.

The inspection contingency is intentional. There was a time not so long ago when there was no mention of a contingency to inspect a property in the WB Offer, and rarely found on company created addenda. Once the concept found its way onto the conversation of potential contingencies for the state approved form the work of making the contingency work began. First question for the committee might have been, “Who is this for?” and the second probably was, “How will it be abused?”.

The opportunity to inspect is first a benefit to the buyer. In essence the inspection slows the process, gives the buyer the chance to get an informed opinion of the condition of the property with some limited ability to renegotiate or possibly part ways. As advantageous as this is to Buyers it’s high risk for the Seller. Inspections will identify some issues and given the chance to ask for something in concessions people tend to ask, and asking takes time. The standard offer inspection contingency gives the seller the leverage to end the conversation if they are pressed by the buyer to make concessions. That’s a necessary authority to keep everyone honest, and allow sellers the opportunity to move on when demands are unacceptable.

Of course we’re all smart and can see how the opportunity to end the conversation is powerful in the hands of the Seller. So we did what is expected of a Buyer Agent: we tweaked the contingency to flip the leverage to the buyer to the detriment of the seller. The person on the receiving end who does not comprehend the difference in the wording will discover the difference when it’s too late.

Time waiting for the contingency to be satisfied is pressure on the Seller. Pressure is stress. In negotiations the person feeling the stress is the one who knows they are at a disadvantage. Whomever has the leverage in the inspection contingency has the advantage in creating or eliminating stress.

Knowing exactly what process the inspection contingency creates is one area where any licensee can be a difference maker in negotiations. When you know who has the lever and what has to happen to get to contingency satisfaction, your client will have the information to make smart choices.

The words matter. The intent of the words is to give one side or the other leverage. Leverage is power, control, and stress inducing. Be intentional. Know the intent.

In Writing

Memory might be the least dependable faculty of the human brain. Facts, or statements presented as facts, are presented non-stop from wake up to sleep without hesitation. Humans run on facts. We can’t get enough. And we can’t remember most what we hear. When what we hear is a statement from another person, that statement is only as accurate tomorrow as the recall of the person who made it, and the recall of the person who heard it. Given that humans are human, perspectives change, needs change, words have more than one meaning, the real estate licensee who “verbally negotiates” is playing with fire.

“I will remove and install new windows in the second floor bedrooms.” Easy to remember and verify? Should be. In 30 days from now after new information on the cost of windows, labor, and with a second opinion about the condition of half of the windows one person (person paying) might recall the promise as, “I will remove the defective windows in the second floor bedrooms and replace them with new windows.” With the second opinion concluding there are only 4 of 8 defective windows, the recall of the one who made the promise no longer matches the recall of the person who accepted the promise. Who’s going to decide the difference? Who’s going to pay for the resolution?

Verbally negotiating and subsequently recording the agreement as we remember it will always end in the resolution to the disagreement being in writing with the person who pays to settle signing the agreement and a check.

Is taking the time to keep buyer and seller negotiations in writing via approved contract forms, amendments, counter offers, and notices worth the reward? I hope so. The cost of settling disagreements is greater than the money.

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.

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.

 

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.

Letters to the Seller. What’s the intent?

Google will give you 1,040,000 results for “Dear Seller Letter”. From upstart real estate agents to the biggest players in the field, including Realtor.com, love letters to sellers are promoted as the key to success for buyers negotiating in Seller Markets.   A lot is being written about something that has nothing of real evidence to prove its value. There is no scientific evidence to support the notion that the love letter makes a difference. Oh, there are incidents where people believe it made a difference, even THE difference. But those incidents do not qualify as a scientific study.  On the other hand, substantial evidence supports the fact that people who submit offers with the most favorable price and/or terms for the Seller, provide the most definite assurance that they are capable of closing on time, and are committed to honoring the terms of the contract, are highly likely to have their offer accepted.

In spite of the lack of evidence, advice from people in the real estate industry encouraging buyers to write Dear Seller letters continues to pour in.  I scanned a dozen web site stories and saw  versions of this  suggestion often encouraged:  “…always include a photo…” of your family.  Apparently the “family” photo makes your Offer stand out. It shows the Seller who you are. It shows the seller you might have something in common. It tells the Seller you will be good stewards of the home they love.

Could those reasons be faint cover for communicating another message? What is the intent of these letters?  If the intent is to persuade the Seller to look favorably upon the Offer because of the appearance of the buyer, arguably a line has been crossed.  The Wisconsin law says a licensee is subject to disciplinary action “…if it is found that the licensee treated any person unequally solely because of sex, race, color, handicap, national origin, ancestry, marital status, lawful source of income, or status a a victim off domestic abuse, sexual assault or stalking.”   

There is a better way to make a Buyer’s Offer stand out, and we are all capable. The licensee who improves their ability to craft Offers to purchase with terms more favorable to the Seller, while providing the protection the individual buyer desires, is safe and worth their fee and then some. It takes more work. It requires thinking. You will be challenged. And it’s what we are licensed to do.

Are we more than drifting toward Fair Housing violation accusations? Is it time for  a national dialogue on the practice? I think we are, and it’s time to talk. What do you think?

 

 

It’s About the Net to Seller, Not the Price

There are always  gimmicks. Buyer markets gave us the Appraisal Contingency – Escape Clause, and the Buyer-Gets-the Last-Word Inspection Contingency. Seller markets spawned the Escalation Clause.  Insecurity morphed the Escalation Clause into a watered down, useless jumble of nonsense. (I’ll beat any offer price as long as I get to see the offer, and then I get to deduct a laundry list of expenses from the price, and maybe I will agree to amend our price, but I don’t have to pay this amount if the appraisal doesn’t match our price, and then….)

All of the gimmicks look like good ideas until you, ah well, look at them. People who hire smart real estate brokers as Buyer Agents get their Offers accepted by steering clear of the gimmicks. The savvy Realtor® out thinks the competition by seeing  knowing the objective of the Seller is really the Net to Seller, not the Price Offered. I believe the Wisconsin Offer to Purchase (Residential, the Condo Offer, and Vacant Lane Offer) are boiler plate forms where costs paid by Seller are pre-determined. To increase the Seller’s Net without increasing the price, financially capable Buyers will take on the Seller’s typical expenses (some may be tax deductible—see your accountant), and save themselves thousands of dollars in interest and higher property tax bills over the years of owning the home.

This weekend when you write your offer try this: Think like you are in cooperation with the Seller, not in competition. The Offer has at least 8 areas you can modify to improve the love your offer receives from the Seller…and none of them require sappy letters and photos of your kids. If you haven’t committed to a Realtor® yet, before you do, ask them what ideas they have to help you get your offer accepted. Commit to the professionals who know how to make the Offer work for you AND the Seller.