Tag: contingencies

I don’t want to buy if or unless…the extreme cost of contingencies.

Stop right here. Let’s rethink this. Opportunities to reconsider a promise are necessary for uncommitted people. Every contingency in a residential offer to purchase says,  I don’t want to buy your house if this or that happens or doesn’t happen. Does it seem reasonable that home sellers will expect more money to exchange for more opportunities for a buyer to decide not to buy?  

Twenty pages to say MAYBE

The offer to purchase from a ready, willing and committed person could read, I will buy your house on this date, for this amount of money, which I will bring to (this place of closing). To complete the sale, you will transfer the property by a warranty deed and provide insurance of a clear title. 

A Wisconsin Residential Offer to Purchase includes at least 17 statements of I’m not going to buy your house if, or unless _________.  A typical four-page addendum of optional contingencies has 20 additional exit opportunities. Compared to the two-sentence promise of commitment, the contingency laden offer typically drafted by real estate professionals is one giant Maybe, maybe not. There is nothing safe in a maybe. 

The Price of Maybe

Security is valuable to home sellers. When a person writing an offer doesn’t know how to structure the offer to show the buyer’s abilities and commitment to close, all they have left to appeal to the seller is money. And the money they use belongs to their client. When homebuyers overpay, they’re spending equity they haven’t made yet. When real estate firms put more effort into customizing purchase agreements and less energy to capture leads, their buyer clients will reap the rewards. Until then, you’re going to pay for the right to walk away in cash or rejection.

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.

Use Days to Change Days, Dates to Change Dates.

Always use number of days to change numbers of days, dates to change dates when amending or countering an Offer to Purchase.

Months of meetings turn into years before form committees birth a document and name it WB-11 Residential Offer to Purchase. Eight years is old for a WB-11 considering how much change happens after birth. Expect to see a new WB-11 introduced to our world in 2019. To say every word that makes it into a form is scrutinized might be an exaggeration, every word in the document matters when a problem arises.

The WRA attorneys stress the importance of precision when drafting contracts and still common deficiencies show up when things go wrong as they sometimes do. We can do better. This suggestion is simple to implement and you will want to use it when you understand the difference.

Always use number of days to change numbers of days, dates to change dates when amending or countering an Offer to Purchase.

The Financing Commitment, Appraisal, Inspection, Closing of Property, and Secondary Offer contingencies use “X” number of days to establish deadlines. When the deadline is approaching and it’s clear the chore that needs to be done is not going to be done prior to the deadline, changing the deadline by “X” days keeps the contingency making logical sense.

As an example let’s say the Inspection contingency on an Offer accepted January 10th was to be deemed satisfied unless Buyer, within 10 days of acceptance, delivers to Seller a written Notice of defects. Today is January 14th and it’s clear the Buyer now needs more than 10 days to satisfy this contingency because the inspector can’t get there sooner than January 21. We know 10 days ends on January 20th. The Buyer needs to request more time to have the inspection, review the findings, and Notify the Seller if there are defects to which the Buyer objects. Buyer would like to have 5 days after the inspection for the deadline. The request goes from Buyer to Seller via an amendment. (Nope, we are not going to ask the listing agent if it Okay.) Your amendment will be concise and keep the term of the contingency exactly as agreed when you write your amendment like this:

Inspection Contingency. Lines 410-433. Line 421, change “10 days” to “15 days”.    

Say no more or less and the buyer and seller and all the agents know the only change to the Inspection Contingency is that number on line 421. Ten days is now 15 days. The Buyer has 15 days from the date of acceptance to send a Notice of Defects to the Seller.

We put too much extra into the job of amending offers when we change from number or days on the WB-11 to dates and the amendment. And for that extra work we have a potential disagreement. For example we see something like this often: The inspection contingency is extended to January 25th.

What’s the problem you ask. The deadline date is January 25th by changing the days to days and by changing the discussion of days for a deadline to a date. Or is it? Maybe not. By changing the number 10 to number 15 the Buyer has through the 15th day (1/25) to deliver the Notice. (Within ___ number of days is defined in the Offer) By changing the conversation to include a date the deadline is arguably midnight January 24th. Seller argues the “to” in “to January 25th” as the moment January 25th starts and January 24th ends. The Buyer delivers Notice on the morning of January 25th and the Seller responds by saying the contingency expired the moment the second hand passed 11:59 am January 24th. Until. You disagree? Who decides?

Can we make it more complicated? Sure. Was it the buyer’s intent to extend the “Inspection” or the deadline for delivering notice of defects? There is no Inspection deadline in the Offer as written. There is a deadline for delivering a Notice of Defects, but that’s not what the amendment referred to and if the original language is still in the Offer, the deadline passed with the date of January 20th.

These disagreements are not unusual. Every word in a contract means something to an attorney. Opposing attorneys may disagree on the meaning, and it’s expensive (but fascinating) to watch them argue it out in front of a judge. To avoid the expensive courtroom drama, to keep the transaction from falling apart someone may have to contribute some money to the cause. If I’m the one who created the confusion by something I wrote, making it right might be at my expense.

Your House. Your Offer. Expect More.

All contingencies are negotiable. There are no standard contingencies. There are contingencies commonly included in Offers. Whether or not your ability to close the sale will be subject to any contingency is choice you have a say in.

Expect your real estate professional, attorney or licensee, to discuss each contingency and what it means to you with you. Accept nothing as standard. Before you commit to relinquishing control to any buyer, you have the opportunity to think about the risk the contingency shifts to your side. Just because it’s in the Offer does not mean it’s important to the buyer. Sometimes contingencies get into Offers for no better reason than because they’re there. Expect more.

Unprepared, uncommitted home buyers load up on contingencies.

What’s the radon level in the building where you live today? What about at your office where you spend at least a third of your every day? About 20 hours of every 24 are spent in these two places, and not once has the typical home buyer tested these environments for radon gas. And yet, the typical home buyer includes a radon test in their Offer to Purchase. Radon gas is everywhere. Every house has radon gas. The EPA has established no safe level of exposure to radon gas. After remediation the radon gas level still will not be zero.

Consider this: There is no contingency that you will get financing. There is a contingency to get a commitment letter, but that could be gotten before you leave home to shop for houses. What’s a defect? A typical home has “defects” as defined in the Offer. The typical concession after an inspection, in even the most expensive homes, amounts to pennies relative to the purchase price. And still almost every offer includes a contingency to inspect and find no defects. Neighborhood restrictions are typical. If they might prohibit something you want to do, you could discover this before you spend any time looking for a home in that neighborhood. And yet, there it is included in Offers to Purchase.

Why are these contingencies loaded into Offers? They’re there for the benefit of the buyer, and by benefit I mean exit door. A contingency allows a buyer time to decide if they want to buy, and time to continue or restart negotiations. A contingency is advantage buyer. For every condition a contingency has been created, a resolution prior to making the Offer is possible. The resolution is always knowledge and understanding. A prepared home buyer is the buyer all owners want to be in business with. Being prepared is easy when you know what to prepare for.

This spring you may buy a house. If you’re prepared your chances of owning your first choice home will increase dramatically. Between now and then, get yourself fully pre-approved for financing, study up on radon gas, how a real test is conducted, and the cost of remediation. Get the facts on lead paint. Learn the cost of repairs you know you can’t afford. Review your contract strategy with your attorney.

The typical home buyer will wait until they have an accepted Offer to do their due diligence. The typical buyer loads their Offer with contingencies, and contingencies tell owners “This person isn’t prepared”. Given a choice, owners will accept offers from people who are most prepared and show their preparedness by loading their Offer with assurances, not contingencies.

It depends upon what the meaning of “is” is.

Skilled magicians and lawyers are alike in their ability to amaze and baffle.  Both can take one thing that is clearly one thing, and before our eyes make it be another thing.  I could watch a magician for an hour, but a lawyer will keep me mesmerized until sunset.  With a flip of a word, a comma out of place, an interpretation of a definition of a word, lawyers turn believers into doubters with remarkable ease.

“There is nothing going on between us..” Bill Clinton had not lied under oath he contended, after facts of his relationship with an intern had become known.  “It depends upon what the meaning of “is” is.” from the perspective of the President, an accomplished attorney well versed in the art of twisting  words to alternative logical conclusions.  

Contracts used in real estate transactions are created with heavy input from lawyers.  If a lawyer wrote a sentence, there is a good chance every word has relevance. It may depend on the meaning of the word, and as long as the meaning is questionable, the outcome is disputable. 

Licensees draft contracts to an extent. Well we fill in blanks, check boxes, and within limits we free hand write some conditions the parties will rely on.  When getting an offer accepted or moving on to the next step is most important, care for proper sentence structure, punctuation, and definition of terms are at risk of being overlooked. Our license law requires we write what the client directs us to write. If we are surmising the intent of what the client wants, we’ve come up short. Getting it right is expected of us.

And when we get it wrong, all is well, until it isn’t.  Regardless of how kind, eager, committed, friendly, related, a person is to the licensee, when the source of conflict in a real estate transaction is traced to the licensee, there’s a better than good chance we’re going to lose.  As long as we are willing to spell out a person’s concerns, plans, expectations we are exposed to being challenged.   I actually like that challenge. Not everyone does and I understand.   There is no reason to fear consequences when you develop your contract drafting skills. With all of the free University education on-line, becoming trained by the same people who teach lawyers is possible. We don’t have to become lawyers to think from the perspective of a lawyer. Just be a learner. It’s worth the effort, but you won’t know it until there is a problem and it has nothing to do with your role.  Here  is a link to one resource for access to 1,300 universities. Take your pick, Oxford, Harvard, MIT. Oh, you don’t need to be a contract geek to get better at drafting, you only need to want to learn. 

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.