Category: Real estate contracts

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.

WB-14 Condominium Offer to Purchase

Providing condo documents and disclosures is the obligation of the seller. Receiving them and rescinding the Offer are the buyer’s rights. We as licensees are expected to protect those obligations and rights.

Real estate licensees are required to complete forms approved by the Real Estate Examining Board of the Department of Safety and Professional Services in a manner that accomplishes the intent of the parties (Wis. Admin. Code REEB 16.06(8)) and will ordinarily be expected to complete the form in a manner that results in an enforceable contract.   WI Real Estate Law, 2014 Edition, Contract Interpretation and Remedies 10-1.

Condominium law has it’s own Chapter in Wisconsin law. After quick review of Chapter 703 Condominiums there is no doubt that public policy favors the protection of buyers over sellers in Condominium sale transactions. The buyer’s right to rescind without any reason stated is assured. The obligation of the seller to provide an extensive list of existing and contemplated rules is clearly stated, and yet the list of those items is not clear. To make matters worse, the list is a mine field of confusion. (See page 4 0f 9 of the WB-14 lines 204-246.)

Licensees may make modifications to the procedure and items required for delivery, but we do so at some peril.To be safe, consider making NO changes to the procedure. Adding additional items from the list of additional items lines 235 to 246 can be done without touching the procedures of delivery and right to rescind.  The Offer to Purchase even includes a suggestion for how to add items without upsetting the process. This is what is suggested:

Using lines 174-188 or 514-519 of the WB-14, the licensee can add additional condo docs for the seller to provide. Something as simple as this will work: Condominium Disclosure Materials, lines 204 to 234 added to the list of items (a)  through (h) lines 208-218, seller shall also provide: Condo financial statements for the previous 2 years. The minutes of the previous 2 years of unit owner’s meetings. The minutes of the condo board meetings during the 12 months prior to acceptance of this Offer. AND SO ON AND SO ON….

PRACTICE CAUTION: The contract is clear. The seller has the obligation to provide what the parties agreed would be provided. If any documents don’t exist, a  seller might  be wise to not accept the offer. A  prudent listing agent, using section 703.33 for a check list will obtain all that is available and know at the time marketing begins, what items are not available. Disclosure of unavailable documents seems like a good idea.

By the terms of the contract, the buyer and seller agree to give NOTICE and make REQUESTS. The proper forms for a licensee to use for this communication are Notice Forms, and Amendments. There is no agreement in the WB-14 for the buyer agent and seller agent to converse by email, text, phone calls or any other method. If buyer fails to make a request for missing documents, the contingency could be deemed satisfied. If Seller fails to provide documents they agreed to provide, the buyer could rescind the offer. Licensees who help the buyer and seller operate within  the terms of the contract are meeting the expectations of their license. Those who take it upon themselves to call, send emails, texts may think they are being “friendly”. How placing the the buyer and seller at risk is friendly I don’t understand. The buyer and seller agreed that the “friendly” way involves buyer and seller signed Notices and Amendments.

 

Secondary Offers

Owners who accept offers contingent on the closing of a buyer’s real estate (commonly called a sale of home contingency) typically have a provision in that offer allowing them to accept “Secondary Offers”. The secondary offer attractive to a seller is one that is reasonably similar to the offer they have and more certain to close.

A buyer who makes a secondary offer is wise to give the seller at least a few days to untangle themselves from the primary accepted offer. By agreeing to “sit tight”, promising to not withdraw their offer for  a set number of days, the secondary buyer gives the seller the time they need to force their buyer to make a decision to commit or step aside. We won’t know the number of days the seller needs to wrap things up with the first buyer, but we can assume it is at least 3 days. The more time the seller is given the more attractive the second offer becomes.

A well prepared secondary buyer will provide a know questions left unanswered pre-approval letter  or proof of funds available to close. The more risk the buyer assumes, the more likely the seller is to find the offer attractive enough to attempt to let the first buyer go and get into business with buyer two.

There is no certainty in becoming primary by having an accepted secondary offer. While somebody may suggest the seller is able to move a secondary buyer to primary, be cautious. The primary buyer does have some leverage to maintain their position. Secondary buyers who are made primary, should require proof that the seller is free and clear from buyer 1. A cancellation and mutual release agreement signed by all parties may be sufficient proof. A licensee who participates in moving a secondary buyer to primary position without a cancellation and mutual release from the first buyer is in a perilous position.