Introduction. Now that the market is s-l-o-w-l-y returning to a semblance of normalcy, perhaps it’s time to go back and revisit some real estate basics. For the last several years, with the market dominated by short sales and bank-owned REO sales, many practices that were considered ‘SOP’, fell by the wayside. For example, even though the statewide OREF Sale Agreement form was chock full of seller representations, when an offer was made to a bank in an REO sale, the bank would ‘counter’ with an addendum that effectively scrubbed all the seller reps out of the document. Buyers were on their own when it came to protection. Similarly, although most contingencies retained some semblance of meaning in short sales, the condition of the property was presented on almost a take-it-or-leave-it basis in short sales, since most banks declined to spring for most repairs unless they were of such a magnitude as to require the concession.[1]
Now that we’re seeing more ‘equity sales’ – i.e. those in which the homeowners actually have equity[2] – it’s time to re-visit some basic provisions in the standard OREF Residential Sale Agreement. Two of these are ‘contingencies’ and ‘representations’, since they frequently are the basis for many seller-buyer disputes.
For example, in a disputed sale-fail, there can be an argument as to whether the buyer did or did not actually obtain financing. If the buyer did not obtain satisfactory financing [assuming he/she did not otherwise cause the failure to close] then the chances are good that the earnest money must be refunded. However, if it appears that sufficient financing was obtained, but the buyer simply did not like say, the interest rate,[3] then the deposit may be deemed to have been forfeited.
Representations also can also play a role in disputes. For example, say that the sale failed at the last minute because the buyer was relying upon a year-end bonus for the downpayment. However, the source of these funds was never disclosed to the seller. All the OREF Sale Agreements contain an affirmative representation that, unless otherwise disclosed, the buyer is not relying upon any contingent sources of funds. In other words, the buyer has sufficient funds now, to close, subject only to bank financing for $X, or X% of the sale price.
Here are the standard – and important – definitions of these terms for real estate brokers to remember when their clients enter into real estate transactions:
Contingencies. Generally, a contingency is an event that must occur in order for the transaction to become binding (e.g. loan approval, condition of title, inspection report, sale of existing home, etc.). Except where stated otherwise, most contingencies in a Sale Agreement are for the benefit of the buyer, and if properly exercised, they permit the buyer to get out of the transaction and obtain a full refund of their earnest money deposit. In order to get out of the transaction using a contingency in the OREF Sale Agreement form, the buyer must expressly say so, usually within a fixed period of time. The failure to timely declare that a contingency has failed [e.g. an unsatisfactory professional inspection report] can result in a waiver of the right to use that event as a reason to get out of the transaction.
Representations. Generally, a representation is a written or oral statement made by one party to the other side which, under certain circumstances, may be relied upon. The OREF Sale Agreement contains printed buyer representations to the seller and printed seller representations to the buyer. It is important to note that the OREF Sale Agreements – as most sale contracts – provide that there are no oral representations in the transaction, and for a representation to be enforceable against the maker, it must be in writing and either contained in the Sale Agreement, addenda or, in certain instances, the Seller’s Property Disclosure form.[4] Unless otherwise provided, representations in the Sale Agreement are only based upon what the maker of that representation actually knew at the time. The printed representations in the Sale Agreement or in the Seller’s Property Disclosure Statement should not be regarded as a guarantee or warranty that a particular condition or state of affairs exists or does not exist. Buyers should independently verify all important facts relating to legal and physical condition of a property before purchase. Brokers are not qualified experts in property condition, zoning, legal issues, title, land use, mold, moisture, etc., and should notbe relied upon in lieu of obtaining an opinion from a professional, qualified in the specific area of concern.
[1] For example, if the home did not have a working furnace, or had a large leak in the roof, the bank would likely allow the cost of replacement or repair to be deducted from the seller’s gross sale proceeds, since the home could not be short sold to anyone, unless that was done.
[2] Note: I am not suggesting that with the uptick in prices a significant number of home values have climbed out of the negative equity hole. [Although some in the press have implied otherwise, I believe that it is based more upon wishful thinking combined with the need for a ‘story,’ than on real statistics.] Rather, I suspect that as we round the corner on the past five years’ of declining values, (a) more sellers are willing to re-enter the marketplace, and (b) buyers are becoming more confident that values will increase, rather than decrease, after closing.
[3] This example underscores why, when defining the financing the buyer is to obtain, the broker should expressly describe the de minimis terms: E.g. “Subject to Buyer obtaining conventional financing of 80% LTV, at not more than X% rate amortized over a 30 year term. “
[4] I say, “…in certain instances,” because the representations in the Seller’s Property Disclosure Statement, like the OREF Sale Agreement, are “best knowledge” representations. This means that they could be incorrect, but when made, the seller, in good faith, believed them to be true. E.g. if the seller said there were no moisture problems in the home, especially in the basement, but did not know of the existence of water ponding in the crawlspace, this is likely not actionable by the buyer, who had the opportunity to have the area checked by their own professional inspector.
