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Watch Out for Sale Contingencies When Selling a Property
By David Camiel
It seems that one can not go more than a day or two without reading or
seeing a media report about the tightening real estate market. Whether
it's retreating values or diminishing numbers of transactions, it is clear
that the boom times may be approaching their end.
With a drop in the sheer number of buyers - and an unprecedented display
of patience by those buyers who have jumped into the market - foreclosure
investors who intend to sell properties must choose their involvement (and
their buyers) wisely. The same fundamental principles that have always
applied are even more crucial today: Make projections conservatively and
don't accept just any offer that comes along.
Make Projections Conservatively
Consider the statistics. Recent numbers indicate that we are approaching
15-year highs for both quantity of listings and length of time on the
market. In this type of environment, the competition to find a suitable
buyer is brutal, and comes from both other investors and individuals
selling their primary residences.
* Next 37 17 investors only!
More than ever before, investors must consider their tolerance for the
market, both in terms of the properties they choose and the carrying costs
they can afford. Today, it is not unusual for properties to be on the
market in excess of 120 days, and inaccurate projections or underestimates
of carrying costs can lead to losing propositions. Be reasonable, but
cautious, in running the numbers on a foreclosure investment.
Consider Offers Carefully
Finding a suitable buyer and reaching agreement on price may in fact
represent the biggest hurdle to getting your next deal done, but bear this
in mind. Even when a seemingly acceptable buyer comes along, it is
important that you as the seller do not accept an offer without regard for
its content.
Market conditions and the shift from "seller's market" to "buyer's market"
in recent months have led to an increase in the number of contingencies
contained in buyers' offers. That's fine and to be expected. Even
though most buyers will satisfy most contingencies most of the time,
sellers should weigh that likelihood before accepting the offer. There is
nothing more disheartening to a seller than a buyer who has allowed him or
herself a legitimate out, leaving the seller with nothing to show for it
other than lost marketing time.
To that end, I have outlined below some common contingencies that can be
found in offers to purchase and purchase and sales agreements.
Scrutinized properly, their exclusion or careful drafting can give one
party an added edge in the contract process.
- Inspection Contingency. Generally, these are contained in the offer and
expire prior to execution of the purchase and sales agreement. It is
typical for inspections to occur within seven to ten days of the offer to
purchase.
While there are few limitations that a seller can put on this type of
contingency, a key point here is to require a short window of opportunity
for the completion of said inspection. The sooner it is done, the sooner
you can get the buyer to commit or move on. Do not let this contingency
survive into the purchase and sales agreement.
- Radon Contingency. A radon inspection is typically done in conjunction
with the home inspection. There are occasions when the results are not
returned prior to execution of the purchase and sales agreement and the
contingency carries over to the purchase and sales agreement.
A carefully drafted radon contingency, however, will allow for a seller to
remediate the levels of radon if found to be high, without giving the
buyer the freedom to terminate the agreement simply due to the initially
high number. In other words, the agreement should be written so that if
high radon levels are discovered but remediated, the requirements of the
agreement are satisfied and the deal goes forward.
- Mortgage Contingency. This clause exists in most offers and typically
allows a buyer 14 to 21 days from execution of the purchase and sales
agreement to secure financing. (Behind us are the days when multiple
offers would inspire buyers to leave out a mortgage contingency entirely.)
As the seller, make sure to require the buyer to include a specific loan
amount in the contingency. As with inspection contingencies, the shorter
the length of the contingency, the better it is for the seller.
Certainly, sellers can give themselves some level of comfort by requiring
a "pre-approval" letter from the buyer. Be forewarned however, that in no
way does a pre-approved buyer guarantee the sale. Most pre-approvals are
conditioned on appraisal of the property, for which lenders have wide
discretion. Likewise, "Pre-Qualification" letters should give even less
of a sense of security for sellers, as in most cases these do not consist
of any verification of information provided by buyers.
- Sale of Home Contingency. The recent surge of these types of
contingencies can be directly attributed to the tougher real estate
market. Rest assured, we will continue to see these contingencies, as
long as buyers are determined to sell their existing property before
purchasing a new one.
From a sellers' perspective, the contingency should lapse upon the buyer
entering into a contract to sell their house, not upon a successful
closing of the buyers' sale. Furthermore, sellers would be wise to
include in the contingency a clause which states that if another buyer
makes an offer not contingent upon the sale of their home, that the seller
can terminate the first agreement. At the very least, the clause should
force the first buyers to drop their sale of home contingency or face
losing the house.
In summary, changing market realities require changing investment
strategies. Until the pendulum swings back the other way (as it
inevitably will), sellers need to pay particularly close attention to the
details of any transaction. While you may not get all that you ask for in
negotiating contingencies, make sure you understand what these are and how
they work before signing on the dotted line.
David Camiel is a partner in the law firm of
Gilmartin, Magence, Camiel and
Ross LLP
and has been a real estate practitioner in
Massachusetts since 1994. He was in mortgage banking for 10 years prior to
becoming an attorney, and serves as lender's counsel to over 75 lending
institutions. His trademark has become his zealous representation of
buyers, sellers, investors, brokers and mortgage officers. Attorney Camiel
is an agent of First American Title Insurance and can be reached at his
office in Newton, Massachusetts at 617-964-4300 or at dcamiel@gmcrlaw.com
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