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

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.

 

 

 

 

 

 

Closing of Buyer’s Property Contingency…getting from here to there

Still known as the “Subject to Home Sale” contingency, owners in a Seller’s-Market are unlikely to accept an offer where the buyer has to sell real estate before being committed to close.  You’re still going to see these offers so let’s see how to protect the Seller from being trapped and the Buyer from being homeless.

Seller’s Perspective:

First issue to resolve is to know if the buyer has an accepted offer on the real estate named in the contingency. “…contingent on the closing of the sale…” may imply the buyer has an accepted offer on their property, but that could be incorrect. The contingency is designed to allow for any status of sale, including where a buyer has not placed their property for sale. By the way, there is nothing that says this offer is contingent on sale of “buyer’s home”. Any property the buyer owns can be named in this contingency.

Second issue: Closing of buyer’s property is typically written to run to the date of closing. This keeps the buyer flexible to walk away right up to the time of closing if their sale doesn’t close. To balance this risk, the contingency allows the Seller to deliver a Notice to remove this contingency provided the seller accepts a secondary offer. Buyer’s who need the protection of this contingency run a high risk of being homeless unless they have protection in this Offer or the one they accepted with their buyer.

Buyer’s Perspective:

As long as the seller can serve notice to me to commit or step aside, I have a risk of being bumped from the home I want to buy, and still committed to the buyer who wants my house. To keep me safe, I want to negotiate some protection with you the seller of the house I want to buy. Here’s a suggestion:

When the Buyer accepts an offer on (address of property) which is not contingent on the sale or closing of any other real estate, buyer shall notify Seller in writing. From the time of delivery of said written notice, the provision of this Offer providing seller the right to deliver Notice of Accepted Secondary Offer to buyer shall be suspended.

Now that’s all fine for the buyer, but what about the seller? If the buyer’s offer becomes void, the seller should be able to exercise the Notice provision, right? We need some language to reinstate the Notice/bump right for the seller.

Buyer shall keep seller reasonably informed of the status of the offer on their property. The right of Seller to issue Notice of accepted Secondary Offer shall be instated immediately if buyer or buyer’s buyer breaches their contract or this accepted Offer.

I don’t represent this language to be perfect. Certainly an attorney could craft something more definitive. Use my idea to help you think through the steps and precautions your clients want.

 

 

 

Appraisal Contingency…A dangerous poison pill

Seller beware. Wisconsin’s Offer to purchase (WB-11) includes an escape clause for the Buyer. The Appraisal contingency on page 5 of 9 of the Offer to purchase allows the Buyer the right to terminate the contract if the appraisal indicates an appraised value for even one dollar ($1.00) less than the purchase price. That’s an easy exit and great risk an informed Seller would probably not accept. Savvy listing agents will catch this poison pill before the owner accepts the Offer.

What, you say buyers are unlikely to terminate an offer for an appraised value slightly less than the purchase price? OK. I agree. However, what else is on the table if the Buyer has a right to terminate the Offer? Oh, I don’t know, how about EVERYTHING? Consider this. The appraisal gets to the buyer 30 days from acceptance of the Offer. We’re probably 15 days from closing. The Seller is not in a strong negotiating position at this late date, and all of the other buyers who’s offers the Seller didn’t accept are gone. An inspired Buyer may choose to ask for more than a price concession. The closing date, included items, repairs, credits, new inspections, testings are open for discussion.

In competition, (Seller’s market)Buyer’s and their Buyer Agents are wise to soften the appraisal contingency if it has to be included. Below is a condition Buyer’s can add to their Offers to make their Offer more palatable to the Seller, and it’s a condition thinking-ahead listing agents will discuss with the Seller before an appraisal contingency Offer is accepted.  (Counter-Offer)

Appraisal Contingency page 5 of 9, lines 264 through 269. In the event said appraisal indicates the appraised value is not equal to or greater than the purchase price, Buyer shall deliver to the Seller the appraisal report and an Amendment to change the purchase price to an amount not less than said appraised value. This amendment shall include no other conditions and allow the Seller at least 24 hours from Seller’s actual receipt of the amendment and appraisal to accept. Acceptance of this amendment satisfies the Appraisal Contingency. The Notice of termination provided for in the Appraisal Contingency shall not be sent to Seller by Buyer prior to the expiration of Seller’s deadline for acceptance of the price change amendment.

IMPORTANT: Seller is not obligated to accept the price change amendment, and may deliver a counter proposal to Buyer. In lieu of the price change amendment, Buyer may give Notice to Seller that the Appraisal Contingency is satisfied.

That’s a lot of words. You might have a better idea, but this is more safe for the Seller and still provides the Buyer with the protection the contingency is intended to provide.  It may be necessary to talk to the other agent to make sure they understand this modification.

Side Note: The current WB11 is old. We were still in the recession in 2011 when the form was introduced. Comparable sales were few and far between. Buyers had a distinct advantage (Buyer Market) and they could shift risk to the Seller. The appraisal contingency was almost non negotiable. When the market shifted to a Seller’s Market, this appraisal contingency, already firmly embedded in the contract and common practice started to work against Buyers. Those who did get their Offers accepted with this contingency found themselves in surprisingly strong negotiating position. We can do better than to end up far down the line, away from the crowd of buyers, and all alone with the Seller, standing between a rock and a hard spot.

Seriously Talking About Drinking Water

It took the Flint, Michigan lead contaminated water crisis to dramatically change the conversation from passive to serious in a hurry. The scientific, educational, and public safety communities will provide the research evidence to keep pressure on state and local governments, and utilities to effectively mitigate lead levels in water. The EPA has established action levels for remediation.

Attention is focused on old and deteriorating lead water lines serving communities . Wisconsin identified 5 counties with high risk lead levels and allocated limited funds to those counties replace public and private lead service lines. The other 67 counties are not lead free. They just aren’t in the top 5 as identified so far. In Dane County, the city of Madison has been sharing the cost of replacing lead service to homes since 2001. (By sharing, the City rebates the homeowner $1000.00 of a typical $3,000 bill.) Mount Horeb was in the news this year. A sample of homes in target areas of the Village showed 16% of the homes with higher than safety standard levels of lead in their drinking water.

Estimates for replacing lead lines put the cost at $3,000 to $5,000 per house. Obviously State and Local governments have a significant price to consider as they  write public policy to comply with EPA 15 Parts Per Billion action level directive.

As real estate licensees in the lead-in-the-water discussion, our place is not to be a referee or judge. We will see differing opinions on risk. We will hear debates of the merits of pipe replacement. Expect to hear no-fear opinions from the municipalities and water utilities. Our role is to assist the parties in reaching an agreement THEY are satisfied with, and their satisfaction of the risk of lead poisoning can not include our opinions of the evidence or the science.

Homes built prior to the 1940’s are the ones most likely to have lead pipes coming into the house from the street. It’s not always easy to see the lead pipe, but inspectors may have clues to look for. A water test for lead won’t show the a lead pipe exists, but it might provide some evidence that the water is relatively safe.

As a plan of action, consider a test by a licensed plumber done in compliance with EPA rules. Homeowners may avoid delays, surprises, and difficult negotiating positions by testing for lead in the water before offering the house for sale. Maybe we will see more home buyers requesting water tests for these older homes. Assisting the parties in knowing the rules of proper testing will always be safe and prudent practice.

 

 

 

 

 

The Contingency is the instruction for what to do if this or that happens

When concerns arise in a transaction the licensees have only to look to the contract to see what the Buyer and Seller have already agreed to do to move forward together or by parting ways.

Contingencies are the agreements between the Buyer and Seller of the steps to take as the parties satisfy their obligations under the contract.  Notices and amendments are the methods of communication between the Buyer and Seller when real estate licensees are involved.  Conversations between licensees on behalf of the buyer and seller are NOT acceptable alternative communications to amendments and notices signed by the Buyer and Seller.

The “Title Not Acceptable for Closing” contingency tells licensees exactly what to do on behalf of the buyer and seller.  Let’s walk through the contingency.

TITLE NOT ACCEPTABLE FOR CLOSING: If title is not acceptable for closing, Buyer shall notify Seller in writing of objection to title by the time set for closing. In such event, Seller shall have a reasonable time, but not exceeding 15 days, to remove the objections, and the time for closing shall be extended as necessary for this purpose. In the event that Seller is unable to remove said objections, Buyer shall have 5 days from receipt of notice thereof, to deliver written notice waiving the objections, and the time for closing shall be extended accordingly. If Buyer does not waive the objections, this Offer shall be null and void. Providing title evidence acceptable for closing does not extinguish Seller’s obligations to give merchantable title to Buyer.

Notice how simple the directions are. 1) Buyer sends a written Notice. (2) Seller either removes the problem condition of the title or sends a written Notice to Buyer. (3) When Buyer receives that Notice from Seller, buyer decides to waive the objection and of course does that with a NOTICE to Seller. (4) If Buyer does not waive the objection prior to the closing, the Offer is Null and void. Certainly in these days between Notices, the parties can negotiate by amendments.

Licensees are prudent to draft notices exactly as the contingencies specify.

Broker Liability for Misrepresentation

Cases and Lessons from Wisconsin Courts provided by the WRA in the October 2016 issue of The Wisconsin Real Estate Magazine could keep you out of harms way.  Intentional fraud is one way to be found liable but deception is not required to be liable.  Being negligent  or failing the expectation of strict responsibility (A licensee is expected to know better or the law was specific in my obligation and I failed to be responsible) will put us on the wrong side of liability just as well.

If it hasn’t happened yet, it will happen where an owner balks at disclosing and asks you for your advice on disclosure.  Case Study #1 in the feature article makes it clear and simple—Disclosure is the way to go.  Case Study #2 we see too much of. As-is is no protection for seller or brokers. There  is no way to wash hands of liability for saying take it as is when an adverse fact is known.

The WRA legal division has a finger on the pulse of Wisconsin real estate law issues. Take time to read their Cases and adopt their advice. Maybe share the Case Studies with your clients.  You will never regret disclosure.

Earnest Hemingway on Writing Counter Offers and Contingencies

My aim is to put down on paper what I see and what I feel in the best and simplest way. Earnest Hemingway on writing

Real estate Counter Offers are ideal forms for saying a lot without writing much. In fact, if we have a well drafted Offer to Purchase, the less we write on a Counter Offer, the better the chance of being understood and steering clear of creating a contradiction or a whole new issue.

Here’s a simple method of saying the most while writing the least.

You have an Offer where the drafter used  Additional Provisions on page 3 of the Offer to insert this condition:  “This Offer is contingent upon Seller crediting buyer $3,000.00 at closing to be applied toward buyer’s mortgage loan costs and prepaid expenses.” You presented the Offer and the seller’s only objection is this $3,000 credit. Seller is willing to agree to the rest of the terms, provided the buyer will accept a $1,000 credit instead of $3,000.    Pick up a WB 44 Counter Offer. Notice on line 6 the first condition is already written in. It reads All terms and conditions remain the same as stated in the Offer to Purchase except the following:_________________________________.  

Rather than rewriting the entire contingency and possibly altering the intention, change only what needs to be changed.  In this case $3,000 needs to be changed to $1,000.0.

Line 7 of the Counter offer will look like this:

7 (1) Page 3 of 9. Lines 165 to 172. Additional Provisions. Line 167 change  “$3,000.00” to “$1,000.00”.

I like this method as a recipient of the Counter Offer because the wording tells me where to look. Done right, it’s like having an instructor saying: “OK Meyer, See the Offer in your hands? Good. Now first go to Page 3 of 9. Then go to Lines 165 to 172. This is the Additional Provisions section. Here’s all you gotta do,  change $3,000.00  to $1,000.00.

We are licensed  to write terms that make sense, can be understood, and properly reflect the intentions of the parties. If everything else is acceptable, leave it alone and walk the reader through the form to the changes your client prefers. That should work for anyone who wants to be precise and isn’t paid by the word.

It’s none of their business that you have to learn (how to write). Let them think you were born that way. E. Hemmingway

 

 

The Wisconsin Offer to Purchase

I’m not a lawyer but I know lawyers and I know of a Wisconsin Real Estate Lawyer with a blog. James N. Graham is the lawyer, and while I don’t know him I like what he presented on the “As-Is” sales.  Last night I read the  Court of Appeals of Wisconsin Published Opinion James gave a link to. Yup. I read it just before lights out.  If you wonder how a court might interpret failure to disclose provisions of the Offer, you’ll get some insight from Attorney Graham’s work.

The WRA created a fantastic resource for licensees and the public. See the Explanation of  the State of Wisconsin Residential Offer To Purchase.

While I don’t want to discourage you from getting your law degree, staying up on the real estate law can be done by finding legitimate expert lay person’s explanations. These are two worth looking into.