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Presentation of the Offer
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If you are using an agent, you will probably hear first by telephone that a written offer has come in on your property. Because offers must be presented immediately, you might even be notified while you are out of town and need to get yourself to a nearby fax machine to receive it. Most homeowners react by asking immediately how much the buyers are prepared to pay. The agent, however, has learned to field such questions. Revealing the purchase price over the telephone, without discussing accompanying matters, is considered a poor practice. You will probably be asked to set a time for face-to-face presentation of the offer. Some brokers ask a secretary to set up the appointment, heading off your direct request for information. You will be asked to name a time when all owners of the property can be present.
When you have listed your house with one member of a multiple listing system and the offer is secured by another office, local custom governs the procedure. The offer may be turned over to your listing agent for presentation. In other areas, the selling office may contact you directly. Or your listing agent may be notified and asked to set up the appointment for the selling broker. In any event, you may request that your original agent attend the meeting for presentation of the offer. The buyers will probably not be present.
Bear in mind that your agent, although duty-bound to find you the best deal, is naturally eager to sell the house through his or her own office and thus retain the whole commission. When an offer comes in, ask whether any other offers are in preparation elsewhere or rumored to be in the offing. If several offers come in within a day or two, it is best to consider all of them at the same time. The one first signed by would-be buyers does not have precedence. As long as you have not acted on any offer, you are free to consider all of them and to respond to whichever one you choose. You need not accept the one with the highest price, if another looks more attractive.
If you are selling on your own, it’s best to ask for time to consider a written offer in privacy. A day or two is not unreasonable, and will give you time to consult a fee-for-services broker or your attorney and formulate a response.
Price You may have done some research on the probability of receiving your full asking price. Except in the hottest of real estate markets, brokers believe one transaction in ten goes through at the full list price; the proportion may well be different in your area. Among factors that may limit the price offered are the cost of comparable properties now on the market, the buyers’ knowledge of recent similar sales, and—often most important—the buyers’ ability to pay. Bear in mind that although you and the buyers can agree on any price, there may be hazards ahead if they cannot carry a proposed mortgage loan, or if the lender makes an unfavorable appraisal of your home’s value.
Terms The buyers will detail the terms on which they plan to buy the property. Before you take your house off the market on their behalf, you’ll want some assurance that the transaction is likely to conclude successfully. If you receive an all-cash offer, ask the broker, attorney, or buyers themselves about their ability to come up with that amount of money, and the source of the funds. Although this might appear to be none of your business, you will be making a decision based upon their ability to fulfill their obligations. If the buyers want to take over your present mortgage, your mortgage holder can advise you of any complications. Ask for an explanation of contingent liability. A buyer’s new loan on the property may find you being asked to pay points to a lending institution. This subject is discussed at length in Chapter 10. You may be asked to carry the loan (hold the mortgage yourself). Before agreeing to such an arrangement, read carefully the section on purchase-money mortgages in Chapter 10. You can make your response conditional: “We accept the offer, subject to verification of employment and income and a satisfactory credit report within 10 days. . .”
Contingencies Often the buyers will make their offer subject to certain conditions of the sale, referred to as contingencies. This means that they promise to buy the property, but only if:
They are able to secure an FHA mortgage loan in the amount of $180,000 with interest at a certain percent.
Their present home is sold.
The employer with which they came into town to interview hires them by a certain date.
A spouse approves the house.
There is a satisfactory home inspector’s report.
Other contingencies (the purchase of a house can be contingent on just about anything) can be written into an offer. To protect yourself, each contingency should be accompanied by a time limit. The inspector’s report can usually be obtained within three days; so might the spouse’s approval. You will not run much of a risk if you accept and take your house off the market for a few days.
The stipulation that financing must be obtained is understandable. In fact, most real estate contracts are contingent upon financing approval if not written for cash. You can request that the buyers promise prompt application to a lending institution and even require written approval within a certain number of days, because lenders can procure quicker answers these days than ever before. The contract may even stipulate that they will apply to three lending institutions, if necessary, and under the guidance of your agent. Again, make sure everything is in writing within the contract itself.
When the contingency is for the sale of the buyers’ present property, judgment is called for on your part. Some sellers simply refuse all contingent offers of this type. Others find them reasonable, because the buyers will need the money from their sale to buy your house.
When you accept a contingent offer, you are trading worry about the sale of your own property for worry about the sale of someone else’s, over which you have no control. You have a right to investigate how likely the other house is to sell and whether it is being listed at a reasonable price. You can even insert into your contract provisions about this matter.
The terms of an offer—whether it is a clean, all-cash deal or one that involves accepting a contingency—often affect the sales price eventually agreed upon. If you are going to wait for the sale of the buyers’ house, you have some justification for sticking to a higher price in return for the uncertainty.
In any event, make sure that any offer contingent upon the sale of the buyers’ present property includes an escape clause, sometimes called a kick-out. This provision allows you to continue showing your home. If you receive another offer that you want to accept, you notify the first buyers that they must remove their contingency within a few days or withdraw. Either they agree to buy your home by the specified date come what may, or they must void the contract and drop out of the picture, allowing you to negotiate with your new purchaser.
Local custom suggests the exact terms of the escape clause. You might allow a period of one month in which the buyers can be secure in their contract; after that, if their own home hasn’t sold, they could be bumped by another offer. Usually you promise the first buyers a period up to five business days in which to make their decision if an escape clause is invoked, but in some areas it can be as short as what is called a “72-hour first right of refusal.”
Personal Property
The purchase contract should detail all of the gray-area items mentioned at the time of listing: play equipment, custom-sized area rugs, garage storage cabinets, workshop benches, and, in general, all fixtures that you will leave with the property. In addition, you may agree to include items of personal property such as kitchen appliances, washer and dryer, or matching drapery. The contract should also mention those items you will remove. Oral agreement is not a sufficient guarantee against misunderstandings later.
Earnest Money
Your buyers will be asked to put a deposit into the hands of the broker or an attorney to prove that their intentions are serious and to serve as a source of damages should they back out for no good reason. You can expect to see their safeguards written into the contract. It may state that their deposit will be returned if the lender’s appraisal comes in below the purchase price, if you renege for no good reason, or if they fail to receive their mortgage commitment, for example. You can request a similar provision: that their deposit is in jeopardy if they do not act in good faith.
The deposit is not a legal requirement for the contract. If the cash for their purchase is coming from the sale of their present home, the buyers may be unable to deposit earnest money or may be reluctant to do so. You should not accept an offer, however, unless it is accompanied by some sort of deposit. The money signifies that the buyers mean business.
Local custom varies, and the buyers may have been told that 6 percent or even 10 percent is standard. They may well come up with less.
Pay attention to the form of the deposit. The buyers may be out-of-towners who do not keep large sums in a checking account; have they promised to make the check good as soon as they get back home? A promissory note is of little value in this matter, and a cash deposit of $500 is often more useful than a note for $5,000. Deposits may also be increased later, with the initial amount accompanying the offer, and one or two more similar amounts deposited during a specified time frame, or as the bigger contingencies are removed. The broker is legally liable to you for any representation about the earnest money, because you are basing your decisions upon what you are told.
Buyers may be understandably reluctant to hand a deposit directly to a seller. Where agents are involved, the money is usually kept in the broker’s escrow account. If there is no agent, suggest that the money be held by your attorney, or failing that, by the buyers’ attorney or an escrow company.
If your home was built before 1978, the EPA requires that before the contract can become binding, the buyer of your property be given 10 days in which to conduct an inspection for lead paint hazards. If the buyer agrees, however, that time can be shortened or eliminated. If lead paint hazards are found, you cannot be required to remedy the situation, but the buyer need not go through with the purchase. An addendum outlining the requirement and acknowledging the prospective buyer’s receipt of a lead paint information booklet should be part of the purchase contract.
FIGURE 9.2 Responsibility for Costs
Buyer Seller
Survey
Points
Title insurance
est inspection
Recording fees
Transfer fees
Escrow or closing fees
Title search
Bank’s attorney
Broker’s commission
Other Provisions
The purchase contract will contain details on those items that must be apportioned between you and the buyer at closing: water bills, property taxes, and the like. It stipulates the type of deed you must deliver, which party bears responsibility for loss resulting from fire before the time of closing, the procedure if a cloud on the title is found, and many other matters intended to head off disagreements as the transaction progresses. Figure 9.2 lists these and other costs for which the contract should specify which party will be responsible.
A closing date will be specified. Unless the legal clause “time is of the essence” is included, the closing date mentioned is merely a target and might come and go with the contract still continuing in effect. It is especially crucial to specify a hard, fast closing date if you need the proceeds of this home to purchase another by a certain date. It is reasonable, however, to leave a cushion between closing and buyer occupancy, stated in terms such as “closing plus two days” to coordinate moves. If agreed to, this means that you may stay up to two extra days, paying a nominal daily rent before having to move out.
In most areas, possession of the property is usually given on the date of settlement. It rarely becomes necessary to let the buyers move in ahead of time or for you to remain after closing. If the buyer moves in as a tenant, you should take certain precautions, which are discussed in Chapter 11. Try to avoid such an arrangement. If you plan to stay on after closing, you may be asked to pay a daily rent and even to deposit a sum into escrow to ensure that you will eventually move out as agreed. Like all other arrangements, these should be written into the original sales contract.
To safeguard yourself, you may wish to include certain limitations in the contract. Perhaps you will make repairs, if they are required by a lending institution, only up to a certain dollar amount. You may want to limit the number of points you pay. If appliances are included in the sale, you will want to transfer them “as is” where state law permits.
Figure 9.3 lists some, but not all, of the protections you need from a written contract. |
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