Posts Tagged ‘purchase and sale agreement provisions’

Desperate Times Call for Desperate Measures–Some “Amplifications” in Your Purchase Agreements which can Save Your Deals

Wednesday, July 7th, 2010

Massachusetts, where I practice real estate law, is not experiencing the suffering as hard as other areas of the country. Perhaps, that can be put a little differently. Massachusetts was one of the first states to get hit by the real estate slowdown. Because of that fact, we may be ahead of some other states in recovering.

The real estate market is still not booming in Massachusetts. There are sales in certain pockets. It is becoming painfully clear that Lenders in Massachusetts are as slow, or slower, than other jurisdictions, appraisals are coming in “all over the place”, and people continue to lose their jobs. With that in mind, I have adapted my purchase and sale agreements, when I am representing the Buyer, as follows:

     1. Closing Date. Massachusetts remains a “time is of the essence state”. The dates in the contract mean something, at least that is what the reported cases say. I put in a provision in my agreement that says, flatly, “The Closing Date may be extended for a period not to exceed 14 calendar days, if, for any reason, Buyer’s Lender is not prepared to close on the Closing Date”. No real need for explanation here. The Lenders are deadly slow in processing, even on purchases. I cannot afford to have some nervous Seller pull the plug on my client if the Lender does not deliver documents and money.

     2. Mortgage Contingency Subject to Appraisal at the Purchase Price. This is becoming more and more important as appraisals, generally delivered the day before the mortgage contingency date, cannot be predicted as to value. I generally will permit the deal to go forward, if the Seller agrees to adjust the purchase price to the amount of the appraisal received by the Lender. This keeps things moving, and many times times Sellers will agree to this provision, as so modified.

    3. The Buyer’s obligations are Subject the one or both Buyers being employed on the Closing Date. This problem just arose for me when I got a timely commitment from the Lender (wonder of wonders) and my client lost her job between the date of the commitment and the Closing Date. In that situation,cooler heads prevailed, and we worked things out based on the husband’s income. People continue to lose their jobs. When they lose their jobs, they generally lose their mortgage. We need to protect our clients against this not terribly remote problem.

I am sure there are more “recession driven provisions” which you are using. Share them with me and the ActiveRain nation. We are all in this situation together, and there could not be a more important time for us to hang together.

The Liquidated Damage Provision in the Sales Agreement–Often misunderstood, more often a trap for the unwary

Friday, July 2nd, 2010

One of my pet peeves as a Massachusetts real estate attorney is the printed language in most standard purchase and sale agreements regarding liquidated damages. To paraphrase the legalese contained in the printed form “if the Buyer defaults, the Seller may keep Buyer’s deposit as liquidated damages unless the Seller within thirty days of such default decides to avail himself,or herself, of other options”

These “other options” would definitely include suit for specific performance of the contract, which in a falling market, could mean a financial disaster for the Buyer. In effect, if the Seller sold the property to another Buyer, the defaulting Buyer would be responsible for damages measured by the price in his or her contract versus the actual sales price realized by the Seller.

The alarming thing about this provision is that in my forty plus years of practicing real estate law, I have never had an attorney for the Seller refuse my request to eliminate the second option.  So,if for some reason, you Buyer’s Agents are forced to “fly solo” because your client will not retain an attorney, I urge you to, at the very least, make sure that you request a change from the printed form.

The changed version reads, that “if the Buyer defaults, the Seller may retain Buyer’s deposit, and such retention shall constitute Seller’s sole remedy against the Buyer” That remedy is a horse of a different color and,of course, much more favorable to the Buyer.

Those of you who are starting to serve as Buyer’s Agents should also be aware that many Sellers are inserting provisions in the purchase and sale agreements to the effect that “since there is no way to truly measure the damages suffered by the Seller, if the Buyer defaults,both parties agree that the retention of the entire deposit constitutes an acceptable remedy for both side.”

I strenuously resist this provision when representing Buyers, unless their deposit is very small. The only Massachusetts Supreme Judicial Court decision which actually address this issue held that five (5%) was a reasonable sum for liquidated damages. Many deposits are in excess of five (5%) per cent. I would rather leave the provision quoted above out of my agreement, and argue that five (5%) per cent is, indeed, plenty of compensation for a Seller, especially if the default occurs in a relatively short period of time. I have a lot more wood to cut if I have agreed the retention of the deposit, no matter of what amount, is a “fair measure” of damages.

It is never pleasant when circumsatances dictate that a Buyer must “walk away”. In circumstances where we are representing Buyers, it is important not to turn this cruel turn of fate into a financial disaster for the Buyer, which usually cannot be easily remedied.

Short Sales and You

Wednesday, June 23rd, 2010

Short sales are a natural outgrowth of the recession we have been living through. People have lost jobs or become ill at the same time as the equity in their homes has been eroding. They have fallen behind in their payment or payments, yet even when they make the intelligent decision to cut their losses and sell, their net proceeds will not permit them to pay the mortgages in full.

Initially, banks and other lenders did not show muc sympathy to people in this kind of quagmire. In the last few years, however, even the most rigid of lenders have realized that “short sales” ,so-called, represent a cheaper alternative than foreclosure in almost all circumstances. Therefore, short sales have achieved a level of acceptance which make them an option every time a homeowner is behind ih his or her mortgage(s).

I have had considerable experience in dealing with short sales, and I would offer the following advice to those of you, who become involved either as selling agents or buyer’s brokers in short sales:

1. Do your Homework. Obtain as much information from, and about, your Seller. You need to know not only about first mortgages, but second and sometimes third mortgages as well. Make the listing agent furnish current statements from the mortgage lenders, if you can. Ask a friendly real estate attorney to do a “current owner” search of the property. I do them all the time from my computer. Normally, they will provide excellent information on what mortgages are outstanding.

2.  Work out the possibilities of Resolution Before You get in too deep. When there are second and third mortgages, the problems escalate rapidly. If these junior positions are not getting something out of the short sale, they may balk.  Make sure the Seller has addressed this issue with the first mortgage holder. A lot of time will be wasted if the junior lienors will not move.

3. Taxes and Other Municipal Liens. In many instances, when the mortgage has not been paid, neither have the taxes and water and sewer. You will be dealing with a Seller who has no money. In certain circumsatnces, you may resolve the mortage liability but the unpaid munipal charges will make the deal not feasible for your Buyer.

4.  Common Area Fees. The same criteria which make munipcipal charges a problem can also be a problem with common area fees for a Condominium Unit purchase as a short sale. The Trustees of a Massachusetts Condominium have the power to foreclose on outstanding common area fees and sell the Unit at auction. Many Condominium Trustees are unaware of this power or unwilling to spend the time and effort to make these sales happen. Despite their sloth, the lien for common area fees still exists. Know the amount of the arrearages, and see what might be done to compromise same, so that future payments can be applied to the future, not past due arrearages.

5. Short Sale Documentation. Nothing short of an executed letter from the lender or lender is acceptable to confirm a short sale agreement. Accept no substitutes!!! Have the closing agent confirm the validity and accuracy of the executed letter before a closing is scheduled.

6. Offer and Purchase and Sale Provisions. A realtor I respect has told me she insists on the following approach, and language, when she is working with a short sale Buyer:

              a. She will put down no more than $100.00, with the Offer to Purchase or Purchase and Sale Agreement.

              b. The balance of the Buyer’s deposit will be due only upon receipt of lender written approval(s), which has/have been verified as duly authorized by the closing agent.

              c.  The period of inspection will commence only after receipt of the approval(s) described above.

              d. The Buyer’s financing contingency date shall be twenty (20) days after receipt of approvals(s). The Buyer’s financing application date shall be three (3) business days after receipt of such approval(s).

If the steps outlined above are taken, realtors can save themselves, and their Buyers, a lot of wasted effort and expense. There is nothing worse than having the belief that a short sale transaction is going through, only to find out that the proper authorizations have not been obtained from all people who have liens on the property, and a sale transaction which many people have worked hard to make happen, will fail. See my blog: www.realtorsresourceblog.com for other areas of interest

Payment at Closing–A suggested “Ounce of Prevention” for Buyer’s Agents

Wednesday, June 23rd, 2010

Buyer’s agency is a relatively recent phenomena in Massachusetts. While it has been my practice to pay the Buyer’s Agent directly at closing, I am informed by Buyer’s Agent clients and friends, that this is not always what transpires. Many times, the Buyer’s Agent must wait for the Listing Agent to “process” the final closing transaction, and then make remittance to the Buyer’s Agent some time in the future. I am aware of one situation where the check delivered two weeks after the closing was returned because of insufficient funds in the Listing Agent’s checking account.

The Buyer’s Agent works for the Buyer, even though payment of the Buyer’s Agency fee is geneerally made by the Seller.There follow several suggestions for Buyer’s Agents which can mitigate the delay, and other problems, associated with the current normal practices:

                 1. Manage the Deposit at the time of Offer. If the amount of Deposit can be limited to no more than the fee which is due to the Listing Agent, the ability of the closing agent to make direct payment to the Buyer’s Agent is greatly enhanced. If the Seller insists on a greater Deposit, have the Deposit split in such a way that no more than the amount to which the Listing Broker is entitled is placed in escrow with the Listing Agent. The remainder of the Deposit may then be placed in escrow with the Buyer’s Agent to insure prompt payment after closing.

                 2. Have the Deposit placed in the Escrow Account of the Seller’s Attorney. Insisting on this condition will take the power away from the Listing Agent to sit on the Deposit. Because having a check drawn on an Escrow Account of an attorney returned for non-payment is an ethical violation which will subject the attorney to disciplinary action by the Massachusetts Board of Bar Overseers, the safety and security of the Deposit is greatly enhanced. The Seller’s attorney may either hand over the Deposit to the closing agent at closing, or make direct payment to the Listing Agent and the Buyer’s Agent at the closing. The treatment of the Deposit should be carefully spelled out in the Offer, and then reinforced in the Purchase and Sale Agreement for the transaction, See Paragraph 3 below.

                3. Take Extra Care to Make Sure that the documentation for the transaction provides for payment at closing. As a Buyer’s Agent, you have an obligation to review the Offer and the Purchase and Sale Agreement and Rider(s) thereto, on behalf of the Buyer. Make sure a provision is included in both documents that specifically directs the closing agent to make payment of the fee due to the Buyer’s Agent,directly to the Buyer’s Agent ,at the closing. If the Seller has executed a document with these instructions, the closing agent has no choice but to adhere to the specific provisions of the Purchase and Sale Agreement.

You, as a Buyer’s Agent, have worked hard on your customer’s behalf to earn your commission. The steps set forth above should assist you not only in obtaining your commission, but. just as importantly, obtaining your commission at the same time as the Listing Agent obtains his or hers. It is time to make the playing field level for Buyer’s Agent and adoption of the measures set forth above should be  step in the right direction. See my blog: www.realtorsresourcblog.com for more suggestions and comments.