When is a contract not a contract?
September 24, 2013 12:42 AM Subscribe
If a contract on a house is signed 'subject to finance, building and pest inspection', what does that actually mean? If the buyer wants to pull out of the contract, must they provide proof that they were not approved for finance? And how much needs to be wrong on a building inspection before the contract can be broken?
I guess what I'm trying to ask is, is a contract just to protect the buyer, or does the seller have rights too?
From my recollection, it's only binding when you exchange contracts. When you sign, it's an agreement subject to certain conditions being met. When those conditions aren't met to the criteria for one or both parties the agreement can be walked away from. Definitely not a lawyer, but have gone through a handful of successful and unsuccessful real estate transactions.
posted by singingfish at 1:26 AM on September 24, 2013
posted by singingfish at 1:26 AM on September 24, 2013
A smart buyer phrases their contingencies so that they protect the buyer, yes.
posted by humboldt32 at 1:29 AM on September 24, 2013 [2 favorites]
posted by humboldt32 at 1:29 AM on September 24, 2013 [2 favorites]
As our real estate agent had us understand it last time we were house shopping, the contract doesn't do much for the seller. A house inspection ALWAYS turns up problems. If the buyer and seller can't agree on how to deal with those problems then the deal is off. All the prospective buyer has to do to kill the deal and get their earnest money back is to make unreasonable demands in response to the inspection.
posted by jon1270 at 2:11 AM on September 24, 2013 [3 favorites]
posted by jon1270 at 2:11 AM on September 24, 2013 [3 favorites]
As a general concept, a contract is a meeting of the minds and an exchange of consideration. Paper documents that, and the function of earnest money is to incentive-ize completion of the sale. The contract is not a sale, it is an agreement to transfer, entered into by two parties.
It's a dance. All the paper in the world won't save you from a bad heart on the other side of your transaction. The contract for sale is part of the dance.
Jon1270 is right. Getting out is not hard. Earnest money makes it sticky for both, and it can take a while to get it back. A realtor exposes himself to liability if he returns it without a good measure of agreement on both sides, and anyone can sue anyone for anything, just about.
I've gotten into and out of proposed transactions a lot. Most, I have completed (14 houses last count.) I only got sued once by a seller for specific performance, and they lost that and had to pay my legal expenses and a little penalty. (The reason was that they retained the property when I declined to close and thus could prove no damage to their interests, other than inconvenience. It was still a tad stressful, but they had deed problems involving a right of way that I insisted they clear up and they refused. My earnest money sat for over two years in escrow, but I got it back with interest and legal expenses.) In fact, my real goal was to delay the sale as long as possible and to get them to clear up a right of way problem that affected me, too. I would have bought the property had they cleaned it up, and it would have been a bargain, but i basically controlled the land for two years for free. Win for me all around.
When most real estate transactions happen, a realtor is acting on behalf of the seller, but they goal is to get a willing buyer to close the transaction, and that is a fishing expedition. The buyer has a lot of power in the dance... the power of the checkbook.
posted by FauxScot at 2:39 AM on September 24, 2013
It's a dance. All the paper in the world won't save you from a bad heart on the other side of your transaction. The contract for sale is part of the dance.
Jon1270 is right. Getting out is not hard. Earnest money makes it sticky for both, and it can take a while to get it back. A realtor exposes himself to liability if he returns it without a good measure of agreement on both sides, and anyone can sue anyone for anything, just about.
I've gotten into and out of proposed transactions a lot. Most, I have completed (14 houses last count.) I only got sued once by a seller for specific performance, and they lost that and had to pay my legal expenses and a little penalty. (The reason was that they retained the property when I declined to close and thus could prove no damage to their interests, other than inconvenience. It was still a tad stressful, but they had deed problems involving a right of way that I insisted they clear up and they refused. My earnest money sat for over two years in escrow, but I got it back with interest and legal expenses.) In fact, my real goal was to delay the sale as long as possible and to get them to clear up a right of way problem that affected me, too. I would have bought the property had they cleaned it up, and it would have been a bargain, but i basically controlled the land for two years for free. Win for me all around.
When most real estate transactions happen, a realtor is acting on behalf of the seller, but they goal is to get a willing buyer to close the transaction, and that is a fishing expedition. The buyer has a lot of power in the dance... the power of the checkbook.
posted by FauxScot at 2:39 AM on September 24, 2013
What you're describing are called "conditions precedent" to a contract, i.e., the parties agree to the following provided X, Y, and Z happen first. This is bog standard for real estate contracts.
All the prospective buyer has to do to kill the deal and get their earnest money back is to make unreasonable demands in response to the inspection.
In practice, yes. And for most home sales, that's how that goes a lot of the time. But if it appears that the buyer is acting in bad faith, the seller can probably either force the sale, or at least keep the earnest money. That happens more often in non-residential deals, which can be a heck of a lot more expensive, so the parties tend to be a little more willing to enforce their legal rights, and the numbers involved make that more worth doing anyway.
posted by valkyryn at 3:28 AM on September 24, 2013
All the prospective buyer has to do to kill the deal and get their earnest money back is to make unreasonable demands in response to the inspection.
In practice, yes. And for most home sales, that's how that goes a lot of the time. But if it appears that the buyer is acting in bad faith, the seller can probably either force the sale, or at least keep the earnest money. That happens more often in non-residential deals, which can be a heck of a lot more expensive, so the parties tend to be a little more willing to enforce their legal rights, and the numbers involved make that more worth doing anyway.
posted by valkyryn at 3:28 AM on September 24, 2013
A real estate agent would be better able to answer, but I can observe that these conditions essentially mean
1. If there is not much wrong with the property, we'll go ahead.
2. If there are some more serious things wrong, we'll renegotiate the price in light of the cost of resolution, if you don't take care of them
3. If they are major problems, the deal is off if you don't take care of them.
And yes, the buyer is pretty much in control of which category they fit.
posted by megatherium at 4:38 AM on September 24, 2013 [2 favorites]
1. If there is not much wrong with the property, we'll go ahead.
2. If there are some more serious things wrong, we'll renegotiate the price in light of the cost of resolution, if you don't take care of them
3. If they are major problems, the deal is off if you don't take care of them.
And yes, the buyer is pretty much in control of which category they fit.
posted by megatherium at 4:38 AM on September 24, 2013 [2 favorites]
To add a bit to megatherium's response, the usual cha-cha that occurs between buyer and seller around points 2 & 3:
Here is a list of things that the inspection turned up (leaky faucet, non-GFCI outlet, etc), and we want
- all of these fixed prior to closing or
- $X towards fixing them (at closing) or
- some mixture of the two
Then the seller counters with something else, and so on, until both sides agree. If you can't come to an agreement, the buyer walks.
The buyer definitely has something of an upper hand. About the only thing protecting the seller somewhat is the earnest money, which (nominally) helps cover the fact that the house is sort of off the market while negotiations are underway.
posted by jquinby at 5:24 AM on September 24, 2013
Here is a list of things that the inspection turned up (leaky faucet, non-GFCI outlet, etc), and we want
- all of these fixed prior to closing or
- $X towards fixing them (at closing) or
- some mixture of the two
Then the seller counters with something else, and so on, until both sides agree. If you can't come to an agreement, the buyer walks.
The buyer definitely has something of an upper hand. About the only thing protecting the seller somewhat is the earnest money, which (nominally) helps cover the fact that the house is sort of off the market while negotiations are underway.
posted by jquinby at 5:24 AM on September 24, 2013
Typically the buyer has X days to affirm these conditions, the due dilligence period, and if he breeches the contract AFTER that timeframe, he will forfeit his earnest money.
As for what can be wrong, that's in the eye of the beholder. As others have mentioned the inspection report is a point of negotiation.
So you don't really have your house under contract until after the due dilligence period is over.
The good news is, if the inspection reveals that there are $100,000 worth of repairs that need to be made to the house, the buyer can walk away if they don't like it.
posted by Ruthless Bunny at 5:30 AM on September 24, 2013
As for what can be wrong, that's in the eye of the beholder. As others have mentioned the inspection report is a point of negotiation.
So you don't really have your house under contract until after the due dilligence period is over.
The good news is, if the inspection reveals that there are $100,000 worth of repairs that need to be made to the house, the buyer can walk away if they don't like it.
posted by Ruthless Bunny at 5:30 AM on September 24, 2013
I once signed a contract to buy a building that was contingent on a zoning change. The zoning change fell through and I was able to walk away from the contract without penalty. So it does happen; I'm sure the details vary with the wording of the contract and the laws of the jurisdiction where the property is, which is why we have lawyers for these things.
posted by TedW at 6:27 AM on September 24, 2013
posted by TedW at 6:27 AM on September 24, 2013
The conditions are almost always buyer-focused. They give the buyer a way to get out. For example, on the last few houses I've put offers on, there has always been a condition that stipulates "satsifactory financing". That implies not just that I could get a mortgage, but that I must be able to get a mortgage with terms I want. For example, if I don't feel like buying the house, I can say that I couldn't get a mortgage at 0% interest with no payments for the first year. That is sufficient (but scummy) enough to break the contract.
posted by blue_beetle at 9:24 AM on September 24, 2013
posted by blue_beetle at 9:24 AM on September 24, 2013
John1270 has it.
IAL - I'm assuming this is in the US.
If purchase is "subject to inspection" - or other conditions and buyer's inspector says "House is perfect in every way [they never say this] except 1 outlet cover is missing a screw. 2 seconds and 2 cents to remediate that" This "problem" is a sufficient basis for buyer to say "don't want the house" and the deal is off.
A seller can basically never force a buyer to buy when the buyer backs out during the contingency period.
Also, while the penalty of forfeiting the earnest money would seem to impel the buyer to abide strict time lines, etc. recall that in many deals, at this point in the deal the "earnest money" is just a promissory note - an IOU. So if buyer backs out when the contract doesn't permit it, and seller wants the earnest money, seller must sue to collect the note. Rarely worth it.
posted by BrooksCooper at 9:46 AM on September 24, 2013
IAL - I'm assuming this is in the US.
If purchase is "subject to inspection" - or other conditions and buyer's inspector says "House is perfect in every way [they never say this] except 1 outlet cover is missing a screw. 2 seconds and 2 cents to remediate that" This "problem" is a sufficient basis for buyer to say "don't want the house" and the deal is off.
A seller can basically never force a buyer to buy when the buyer backs out during the contingency period.
Also, while the penalty of forfeiting the earnest money would seem to impel the buyer to abide strict time lines, etc. recall that in many deals, at this point in the deal the "earnest money" is just a promissory note - an IOU. So if buyer backs out when the contract doesn't permit it, and seller wants the earnest money, seller must sue to collect the note. Rarely worth it.
posted by BrooksCooper at 9:46 AM on September 24, 2013
So keep it on the market, show it, and do your best to convince the potential buyer there's interest.
When I bought houses, I required the seller to deal with problems found in the inspection, especially undisclosed problems. The financing part is in case something happens and the bank won't approve the house. When I sold a house, I told the real estate agent that I would only address serious, non-obvious problems. Garage in crappy shape? Duh. Knob & tube wiring in the attic? disclosed. I was willing to walk away from the sale, even though it would have created problems. If the buyer is serious, these things are to protect them. If the buyer is not serious, both real estate agents should be hollered at.
posted by theora55 at 10:41 AM on September 24, 2013
When I bought houses, I required the seller to deal with problems found in the inspection, especially undisclosed problems. The financing part is in case something happens and the bank won't approve the house. When I sold a house, I told the real estate agent that I would only address serious, non-obvious problems. Garage in crappy shape? Duh. Knob & tube wiring in the attic? disclosed. I was willing to walk away from the sale, even though it would have created problems. If the buyer is serious, these things are to protect them. If the buyer is not serious, both real estate agents should be hollered at.
posted by theora55 at 10:41 AM on September 24, 2013
Ruthless Bunny has it right - each of those contingencies has a clock on it. For example, x days to do the inspections and remove the inspection contingency, y days to remove the finance contingency. So, it is really easy for buyers to back out at no cost to them during this stage. As many people described above, there are usually a series of small negotiations at this time. However, after x days the buyer has to remove the contingency or the deal falls through. They usually have a little longer (y days) to remove the financing contingency. Once the buyer removes the contingency, they can't back out without losing their earnest money. (And between x and y, they can only back out without penalty if they can show that the specific financing contingency wasn't met.) So as the seller, your main control is to make the contingency period short enough that you haven't lost much if the deal falls through and the earnest money large enough that you are compensated if it falls through for any reason after the contingency period before close of escrow.
posted by metahawk at 2:01 PM on September 24, 2013
posted by metahawk at 2:01 PM on September 24, 2013
is a contract just to protect the buyer, or does the seller have rights too?
If a seller feels that a contract they are offered is not in their favor, they don't have to accept the offer.
If someone is doing something that is allowed by the contract, this is not the same thing as "breaking a contract".
Your question seems... confused. You might find it helpful to read an actual contract of the sort to which you refer, written up in the standard way such contracts generally would be in your area, that covers these things in specific detail. A contract might be many pages long and go into some detail on the things you have asked about.
If a contract literally does say 'subject to finance, building and pest inspection', with no details as to what that actually means -- well, that's not very specific. Many people find there are advantages to having more specific language in contracts, so that it is clear what it does actually mean. This is one reason why many people choose to have a real estate agent (in states where that is allowed) or a lawyer prepare contracts.
posted by yohko at 4:53 PM on September 24, 2013
If a seller feels that a contract they are offered is not in their favor, they don't have to accept the offer.
If someone is doing something that is allowed by the contract, this is not the same thing as "breaking a contract".
Your question seems... confused. You might find it helpful to read an actual contract of the sort to which you refer, written up in the standard way such contracts generally would be in your area, that covers these things in specific detail. A contract might be many pages long and go into some detail on the things you have asked about.
If a contract literally does say 'subject to finance, building and pest inspection', with no details as to what that actually means -- well, that's not very specific. Many people find there are advantages to having more specific language in contracts, so that it is clear what it does actually mean. This is one reason why many people choose to have a real estate agent (in states where that is allowed) or a lawyer prepare contracts.
posted by yohko at 4:53 PM on September 24, 2013
The financing part is in case something happens and the bank won't approve the house.
It also protects the buyer from the sellers brother-in-law offering to lend the money at 500%. If the finance clause has wording to the effect of 'finance satisfactory to the purchaser", then the purchaser can effectively opt-out at will before the contract goes unconditional.
posted by HiroProtagonist at 8:32 PM on September 24, 2013
It also protects the buyer from the sellers brother-in-law offering to lend the money at 500%. If the finance clause has wording to the effect of 'finance satisfactory to the purchaser", then the purchaser can effectively opt-out at will before the contract goes unconditional.
posted by HiroProtagonist at 8:32 PM on September 24, 2013
This thread is closed to new comments.
posted by dhartung at 12:55 AM on September 24, 2013 [1 favorite]