The Offer to Purchase is often disregarded as a speed bump on the road to a Purchase and Sale Agreement. In Part 1 of our three part series, we focused on the Buyer’s considerations. This week, in Part 2 of our three part series, we are going to consider the Offer from the perspective of the Seller. Though undoubtedly important, sophisticated Sellers must consider more than simply the offered price.
Two Initial Points to Consider:
- The aid of an experienced real estate professional, whether an attorney or an agent, is the best means of protecting your interests. In addition to helping you to understand the terms of an offer, a seasoned professional will also help you to respond appropriately.
- Sellers routinely negotiate the terms proposed by a Buyer. This means more than rejecting a proposed purchase price. Careful, exhaustive negotiation at this stage helps to make for smooth negotiation of the P&S.
The Two Most Important Contingencies Sellers Should Consider:
- Suitable Housing: So you’ve received an offer on your current house before you’ve found a home to purchase; simply put, this contingency makes the Seller’s obligations under the P&S conditional on the Seller finding a suitable property to purchase or rent. Prudent Sellers may elect to add this contingency to avoid the sticky situation of being forced to sell without a place to live. Without such a clause, inconvenience alone will not excuse the Seller’s non-performance under the contract.
- “Kickout Clause”: Many Buyers plan to use the proceeds from the sale of their current home to purchase the Seller’s house. Many of those Buyers will elect to protect their deposits by conditioning the Buyer’s performance on the sale of their current home. Sellers should consider proposing what’s known as a “kickout clause,” whereby the Seller is permitted to continue listing the house for sale. In the event a Seller receives a bona fide offer (that is a real, non-sham offer), the Buyer is given some amount of time, usually 48 or 72 hours–though we prefer a certain number of business days to avoid ugly deadlines like Saturday at midnight–to either waive the home sale contingency or exercise their rights under the contingency to terminate the P&S. In the event the P&S is terminated, the Seller may now sell the property to the new Buyer. This helps minimize the risk of a Seller having their house off the market for a deal that will never be consummated.
Thoughts on Common Contingencies Proposed by Buyers:
- Inspection Contingency: Sellers should consider setting some threshold dollar amount to this inspection. Out of fairness, a Buyer likely should not be permitted to “walk away” because of some minor defect with the home. For example, no Seller will be willing to take the home off the market for any amount of time if the Buyer is willing to walk because of a loose toilet flange. A common, fair amount to set as triggering the Buyer’s right to terminate under this contingency is $1,000.00.
- Appraisal Contingency: This is a popular contingency that protects buyers from a “bad deal”; however, Sellers should consider what will happen if the appraisal comes back low. Prudent Sellers will specify that in the event of a low appraisal, the Buyer agrees to reduce any closing cost credit to bring the purchase price in line with the appraised value. Further, Sellers should consider setting this contingency to expire on the same date as the mortgage contingency.
- Flood Zone Contingency: This is currently a “hot” area of real estate practice. Buyers are reluctant to purchase properties that are in federally designated flood zones which would require flood insurance. With horror stories of enormous premiums, Buyers often attempt to condition their performance on the lender’s flood zone determination. Technically speaking, a property can be within a “flood zone” without requiring insurance. An experienced attorney will advise their clients to adjust the language of any proposed contingency to make performance conditional on a flood zone determination that would require purchasing insurance, not simply whether the property is in a “flood zone.”
- Mortgage Contingency: For those Buyers without sufficient cash to purchase a home outright, most will apply for a mortgage loan or loans. Buyers often condition their performance under the contract upon obtaining a “clean commitment,” that is a commitment by the lender to lend without any conditions that the Borrower cannot easily satisfy. Sellers should strongly consider the amount that is sought to be financed in comparison to the purchase price. Lenders are more likely to approve a loan where the Buyer is bringing a large proportion of the purchase price in cash. Further, sophisticated Sellers will know the difference between pre-approval, pre-qualification, and pre-underwriting to effectively gauge the likelihood of the Buyer successfully obtaining the desired financing–for a brief discussion of these differences, click the link to read: 5 Tips to Thrive in a Thawing Real Estate Market (Part 2 of 2).
Stiles Law, with offices located in Boston and Marshfield, Massachusetts, is a firm concentrating in real estate conveyancing and mortgage lending services, representing buyers, sellers, borrowers, banks, mortgage companies, investors, builders and developers in all of their real estate and mortgage transactions. Stiles Law serves all areas of eastern Massachusetts–the North Shore, Boston, and Cape Cod, in addition to the entire South Shore, including: Plymouth, Kingston, Duxbury, Hanover, Pembroke, Marshfield, Scituate, Norwell, Cohasset, Hull, Hingham, Weymouth, Braintree, and Quincy.
Copyright © 2014 Stiles Law, All rights reserved. Stiles Law is a Massachusetts licensed law firm and all content is based on Massachusetts law. The information presented above is meant to be used for general informational purposes and it should not be construed as legal advice or legal opinion on any specific facts. No child labor laws were breached during the creation of this Blog and Bob Bonkley was compensated for his likeness and appearance in the same.