|
| |
| |
This is not a simple world we live in today. Thanks to electronic mail, facsimiles, and the Internet, everything moves at hyperspeed. And with the constant threat of litigation, transactions are documented using more and more paper. In real estate, it was not that many years ago when the only document that needed to be signed before closing was a one-page earnest money agreement. Now, in the interest of full disclosure, and due to risk management concerns and increased governmental regulation, even the "simple" residential real estate transaction raises a complex maze of issues, including agency disclosure, property disclosure/disclaimer, lead based paint, underground storage tanks and the ever present risk of lawsuits.
In light of this minefield of problems, can you imagine individuals trying to sell their home without the assistance of a professional? At least if one were trying to perform their own root canal, they would know in an instant if they were hurting themselves. Trying to sell one’s own home can be more insidious, since the damage is not always recognized until it is too late.
Property Disclosure or Property Disclaimer?
With no prior experience or assistance, how can a seller be expected to understand this law? The consequences of noncompliance can be significant. For example, a seller who fails to give their buyer either disclosure or disclaimer may not know that the buyer can terminate the transaction at any time—with no reason—prior to closing. And how can the FSBO know if their property is exempt from the disclosure/disclaimer law today? FSBOs can’t possibly be expected to know the answer. The risk of being wrong, i.e. failing to give disclosure or disclaimer when one is required by law to do so, means the buyer has the right to revoke the transaction anytime prior to closing and obtain a complete refund of all deposits paid to the seller or escrow.
Seller or Buyer’s Market?
In order to establish the price of the home, and how much room should be left for negotiation with buyers, a seller must know what is happening in the marketplace. Looking at the classified section of the newspaper is of little help, since ads do not portray actual selling prices. And relying upon comparable sales in the surrounding area is only effective if one knows how to interpret the information. For example, even though a home sold for $10,000 more than similar homes in the area, this information is relevant only if one knows how long it remained on the market, and what amenities that home contained on the inside. Without touring the home, or speaking with Realtorsâ who have, the FSBO is at a loss to know whether they can obtain a similar offer of purchase. The longer the FSBO’s home remains on the market at an unrealistic price and with few offers, the greater the chance that it will become stigmatized as one that nobody wants to buy.
Perhaps more financially devastating is the FSBO who sells their home for less than the going price because they have misjudged the market. This is a frequent error by FSBOs who have not adequately evaluated the market or have relied upon incomplete information.
Lead Based Paint
How can a FSBO possibly know whether they must give a lead based paint disclosure form? And what is the consequence of failing to do so? As all Realtorsâ know, this is a federal law that applies if the home was constructed prior to 1978. The buyer must be given the federally required disclosure documents, including an informational pamphlet, before the buyer is to become legally bound under the agreement of sale. The failure to comply with this federal law could not only result in the buyer avoiding the transaction, but the imposition of a sizeable fine, as well.
Earnest Money Deposits
How can a FSBO possibly know what is an appropriate amount of earnest money to accept? Is $1,000, $2,000, $5,000 or $10,000 reasonable? Is a promissory note appropriate? Without knowing whether it is a buyers’ or sellers’ market, or how fast properties are moving, a determination of what is reasonable is nothing more than a wild guess. It’s hard to play poker if you don’t know when to "hold ‘em" or when to "fold ‘em."
Equally important questions the FSBO must face are: When should the earnest money be paid: Who should it be paid to? Can it be made "non-refundable," and what does this really mean? What if the promissory note is not redeemed on time or the buyer’s check bounces? What if the deposit is insufficient to cover the seller’s actual damages caused by the buyer’s nonperformance? These are all questions that most sellers should want to know. How can the FSBO know the answers to these important questions without the assistance of a professional?
Is The Buyer Really Qualified?
This is one of the most important questions to answer before agreeing to sell one’s home. What many uniformed sellers fail to realize is that anyone can make an offer. If the terms of the offer are carefully crafted, a buyer can avoid having to actually come up with any earnest money deposit for a substantial period of time—and sometimes, not until closing. One needs only to watch the late-night television infomercials to know that training people how to "buy property with no money down" is a cottage industry. But how can the FSBO distinguish a financially qualified buyer from one that is trying to tie up the property with little or no money down?
Unusual Contingencies
Frequently, buyers who might not otherwise qualify for a conventional home loan or who have a special or unique purchasing requirements focus on FSBOs, knowing that they are not represented by an experienced Realtorâ . In such cases, these buyers may submit offers that include conditions or contingencies that vary from the "industry-standard" or would be regarded as too risky by most informed sellers. Such provisions might include: excessive periods of time for removal of inspection or financing contingencies; a promissory note that does not have to be redeemed at a fixed period of time, but rather is tied to the removal of other contingencies; an unreasonably long period of time before closing; terms that permit the buyer to actually take money out of closing; complicated provisions calling for the seller to carry back some or all of the downpayment; provisions requiring the seller to subordinate to the buyer’s financing; or the use of lease-options, early possession clauses, and other techniques that a FSBO may not recognize as financially risky. Without some guidance from a Realtorâ, the FSBO is at risk of placing their entire transaction in jeopardy. Most good Realtorsâ can recognize in an instant those offers that are bona fide and those that are not. The FSBO can only draw upon their own limited experience and nickel’s worth of unsolicited advice from their friends and relatives.
Abandoned Underground Storage Tanks
Many older homes contain them. Occasionally, the homeowner is unaware that they have an abandoned tank in the ground, because the home was heated by gas for as long as they owned it. Is the FSBO at risk if the sell the home and fail to disclose the existence of the tank? They can be if they gave the seller property disclosure. If the home is sold and the tank is later discovered to have leaked, the buyer could make a claim against the FSBO. The greater the cost of remediating the problem, the higher the likelihood that the buyer will seek financial contribution from the FSBO seller.
What if the FSBO knows of the abandoned tank, but does nothing prior to sale? Does he or she know that Oregon law now requires that the seller must provide the buyer with evidence that the tank has been cleaned out? Do they know the penalty for non-compliance?
What can a good Realtor â bring to the table? An experienced agent will know to ask the right questions before the home is even placed on the market. If there is a tank, a discussion should be held with the seller about the possible need for testing and decommissioning. And if there is some question as to whether there actually is a tank located on the property, the seller can be referred to a company who will do the necessary inspection to make a final determination.
The Earnest Money Agreement
For the FSBO, reading the standard form Sale Agreement for the first time—which Realtorsâ have been using for years--can be a daunting experience. How can the FSBO know what provisions contained in the buyer’s offer are "standard" versus those that would be considered unusual or risky? For example, most good Realtorsâ know what time frames are reasonable to grant for the satisfaction and removal of contingencies. Most important, they know how to pre-qualify the buyer by asking many important questions, such as: whether the sale of that home will need to be a contingency in this purchase; whether the buyer could qualify for a conventional loan, and if so, how much; whether they could obtain a bridge loan if they were unable to sell their home in time to close on this one; and where will they obtain the downpayment—is it contingent upon any other source, such as a gift, a loan, a bonus, or disbursement from a retirement plan?
The standard Sale Agreement form contains many sections that Realtorsâ understand should be specially explained to the seller. What if the buyer wants a $1,000 credit for repairs? What if the buyer wants the repairs completed as a result of the professional inspection? Who should authorized the repairs, and who should verify that the work was properly done? How long does the buyer have to approve or reject an inspection? What if the buyer fails to reject the inspection report in time? What if there is another buyer who wants to write a backup offer? What is a 72-hour contingency and how does it work? What if there is a dispute—what happens to the earnest money? Do disputes that go to Small Claims Court first have to be mediated? How long will it take if the matter has to be arbitrated? Is there a right to a jury trial rather than arbitration? Can the arbitration ruling be appealed?
Conclusion
A good Realtorâ adds value to most transactions. For the seller, this value is not only measured in terms of a higher selling price or better terms, but also in the peace of mind in knowing that the multiplicity of today’s laws and regulations have been met. For the FSBO today, ignorance is not bliss—it is an invitation to disaster.
Phillip C. Querin is a partner with the law firm of Davis Wright Tremaine, where he chairs the Real Estate Practice Group for their Portland, Oregon office. Phil is legal counsel to the Portland Metropolitan Association of Realtors.
 |
 | |
Copyright Carnahan & Davis | ||
