Transaction Profile

The information provided below is general in nature and thus, may not apply to your situation. Before relying on this information, you should consult with your legal and/or tax professional.

THE LISTING AGREEMENT

Generally, the first contract in any real estate transaction is the Seller's listing agreement with his or her real estate agent. This contract promises a fee, typically a percentage of the sales price, to the real estate agent if the agent can find a Buyer who will meet the Seller's terms.

Agent's Fee. The agents fee is negotiable. Six percent of the sales price has been the norm. But, remember, the fee is negotiable. In some really slow markets agents are willing to reduce their commission to as low as five percent. A fixed fee is also acceptable. You might also want to consider offering a reduced guaranteed fee. With this option, the agent gets paid an amount less than normal, but the fee is earned even if you later decide not to sell. For instance, a six percent commission on a $600,000 property would be $36,000. You offer a guaranteed $24,000 commission. It is less than the agent would have made on the sale, but it's guaranteed. Guaranteeing payment to the agent makes room for a lot of agent compromise. You will not find much agent flexibility with a major real estate house. The agents with their own office make their own decisions whereas the larger offices have rules written in stone.

The Listing Term. The listing term is also negotiable. The agent wants a long term to insure he or she will make a commission. The buyer wants a short term, which can always be extended if the agent performs well. Three to four months is generally a good listing term. Remember, it can always be extended.

Other agreements: If your agent has agreed to do certain things during the listing, such as an open house every three weeks, the listing agreement should recite this agreement. If there is an agreement about sharing marketing costs, that should also be included.

Dual agency: The listing agreement is also the place to include agency agreements. For instance, if you have decided in advance that you do not want your agent also representing the buyer, the listing agreement should prohibit the listing agent from also representing the buyer. It is all up to you. If you decide to allow your listing agent to act as a dual agent representing both buyer and seller, you may want the listing agreement to designate reduced commission to your agent in the event of dual agency.

Exclusivity of Listings: Listings are typically "exclusive," meaning that the agent gets a commission regardless of whether the agent's efforts produced the buyer. For instance, if the seller sells to a relative, the agent gets a commission. If the seller has a potential buyer, he should exclude that person in the listing agreement. The reason for exclusivity is to insure the agent a commission for the work he or she puts into the listing. Personally, I feel that listing agreements are drawn to favor the agent and should provide more flexibility. For instance, if it is clear that the buyer is brought in by the seller and not by the agent's marketing, the agent should not get the entire commission. Half of the commission would be an equitable split.

Multiple Listing Services. Your agent will typically list the property with the local multiple listing service, which then disseminates information about the property to all the other agent members of that multiple listing service. If you feel your property would also have interest in multiple listing services in other areas, ask your agent to also list the property in the non-local service.

Sometimes large real estate offices market a listing within their offices before they put the listing on the multiple listing service. This enables one office to enjoy the full commission if they can produce a buyer before the listing reaches the public domain. This practice of obtaining in-house offers may not be in the seller's best interest since it deprives the listing of full market exposure with the possibility of above-listing offers. Thus, in the Listing Agreement specify that the listing is not be held and is to be placed on the multiple listing service immediately.

THE PURCHASE AGREEMENT

A written offer is made by the buyer on a form typically called a Deposit Receipt and Purchase Offer. The seller may counter the offer or accept. If he or she accepts, the offer becomes their binding contract containing all the parties' rights and obligations. If the seller responds with other terms, a counter offer is presented. Once the parties are in agreement on ALL terms, the contract becomes binding.
Both the buyer and seller should carefully read every term - whether standard, fine print or written in -- and understand each consequence before signing the contract. The standard form contracts used these days, except for CAR's contract, are well-written and easy to understand. The time frames set and obligations of each party are stated in a succinct manner. Reading the contract will give you a complete understanding of all details of the contract.

CONTINGENCIES

Normally the offer has at least two contingencies - the financing contingency and physical inspection contingency. Contingencies give one party the legal right to back out of a contract. During the time that the contingencies are in place, the contract is conditional and the seller cannot bank on the contract closing. During this time, however, the seller cannot accept another offer in primary position even if the price is higher than the conditional offer he has accepted. The seller may accept the new offer in back up position and if the contract in first position cancels, the back up moves into first position. It is, therefore, essential to carefully consider the market and the prospective offer before accepting any offer.
The parties must be very careful about insuring that the contingency deadlines are followed. The buyer must either terminate the contract during the contingency period or release the contingency by the end of the contingency period. Many contracts require the seller to give the buyer a 24-hour notice demanding release of contingencies before the contract lapses and the seller moves on to market the property for sale again.

Financing Contingency: Usually the Buyer needs a loan to purchase the property. If he cannot qualify, the financing contingency is the buyer's escape clause. Since the Seller ties up the property for the financing contingency period, waiting to see if the Buyer qualifies, the qualified buyer presents a pre-approval letter from his lender with his offer or within a very brief time after the offer is accepted. The pre-approval letter confirms that the lender has already qualified the buyer, and all that now needs qualification is the property itself by appraisal. In a seller's market, seller's want to make sure buyers are pre-approved. Make sure the wording of the lender letter is "pre-approved", not "pre-qualified". The latter means nothing. With pre-qualification the lender has not even confirmed the information provided by the buyer.

A typical financing contingency is 30 days. 21 days is considered a short loan approval period, but lenders can often meet this timeframe as long as the lending market is not over extended. The loan contingency should specifically describe the loan the buyer is seeking. In essence, the buyer is saying that if I get the loan I describe, my loan contingency will be considered met. Therefore, the seller should insure that the loan terms described by the buyer conforms to what the market will bear. For instance, buyer's loan contingency reads:

"This contract is contingent upon the buyer obtaining an 80% loan at a 7.5% fixed rate payable over 30 years, buyer to pay no more than one point in fees, within 30 days of acceptance of this contract."

Make sure that the buyer's pre-approval letter matches these terms. Since the buyer is already pre-approved for this loan, there is very little chance the transaction will fail to close because of loan approval. Of course, if the property fails to appraise at the purchase price, the loan will not receive full approval. But, other than that, there are few conditions that prevent full loan approval from being given when the buyer has been pre-approved.

Property Inspection Contingency: During the inspection contingency period, the buyer evaluates the physical condition of the property. During this time, the buyer receives and carefully reviews the seller's disclosures about the property's conditions and its history. The buyer also hires professionals to investigate the property. The typical inspections performed by the buyer are pest control (relates only to pest-related conditions) and home inspection (the condition of the property unrelated to pests). Other inspections the buyer may want to have performed are roof (the home inspection does not include roof inspection), mold, windows, siding, foundation, engineering. The extent of your inspection will naturally depend upon the characteristics of the property itself, the value of the property and your desire to be thorough.
Buyers should be present at their inspections in order to ask questions and make sure the inspector does not find an area to be "inaccessible." For instance, if an area has boxes or furniture in the way, the inspector will not inspect that area, instead listing it as "inaccessible". If you are present, with the seller's permission, areas that are inaccessible should be made accessible. It is often in these "inaccessible" areas where problems exist. There may be areas where some intrusion is required to investigate non-apparent conditions such as pests, mold, water entry, and the like. You and the seller should be on hand to authorize these intrusions.

The inspection contingency should be as short as possible since during this period the buyer may cancel the contract based on any physical condition of the property. Typically, a 14-day inspection period is given. If the buyer can show that he or she needs longer, the contingency may be extended.

Sellers should carefully read the contract provision relating to this contingency. Pest reports often break down defects into two categories - Section 1 defects (actual damage) and Section 2 defects (likely to lead to pest damage). Some contract have the seller agreeing in advance to pay for Section 1 defects. The seller probably wants to wait to see what the inspections say before agreeing to pay for any defects that are later discovered. Thus, if the contract includes this provision, the seller will generally want to remove it.

Contingent on Sale of Buyer's Home or Purchase of Seller's New Home: There is nothing more stressful than selling a home without a new home to move to or buying a home when you haven't sold your home. There are contingencies to cover these situations. Whether these contingencies will be accepted depend on the type of market that is present. In a strong seller's market, a seller will not accept an offer with a contingency that the buyer must first sell his or her home. In a strong buyer's market, the buyer will not allow the seller's contingency that a replacement home must be found before escrow can close.
The problem with this type of contingency is that once the seller accepts a contract, the property becomes less marketable in the multiple listings. It is then shown as a sale pending. Although it does show that it is subject to this type of contingency, the property nevertheless loses interest because of its status as pending. Because of this fact, the seller wants the contingency to be as short and as specific as possible.

The wording of these contingencies in most form contracts is not sufficient to cause the contingency to operate in the best manner to assure sale of the property. Many contracts provide that if the seller receives another offer he or she wants to accept, the buyer is given notice and must release the contingency within 72 hours to stay in contract. This provision is reasonable. The rest of the contingency should be as tight as possible. The contingency should state that within ____ days the buyer/seller must be in contract subject only to loan and inspection contingencies (and not subject to either party buying or selling properties), and removal of contingencies on the other sale to occur within 14 days thereafter for the physical inspection contingency and within 21 days thereafter for the loan contingency. It is only in this manner that the parties can best control their own sale process.

SELLER DISCLOSURES

These lawfully required disclosures are the most important aspect of the transaction for the seller. Sellers are required to disclose conditions "that materially affect the value and desirability of the property." What does that mean? It means disclose everything you know about the property. There is a long list of disclosure forms that are legally required to be given to the buyer by the seller.

The most important is the Transfer Disclosure Statement (TDS) and its supplement. On these forms the seller must disclose all conditions that "affect the value and desirability of the property". This duty is broadly worded to extend beyond the property itself. You should therefore describe conditions known to you that are not within the boundaries of the property. This means neighbors, visiting varmints, and any other situation that would affect a reasonable person who lives at your property. If the disclosure forms do not contain a question relating to the condition at hand, you must describe it anyway. Make sure your written disclosures include everything. Finally, the seller must disclose if anyone died on the property within the last three years.

In a real estate transaction, the seller should always take precautions against being sued by his or her buyer. The seller's only duty to the buyer is to disclose, as described above. If the buyer later decides to look to the seller for liability, the attorney for the buyer meticulously reviews the seller's disclosure statements attempting to match up the condition the buyer is complaining of with the seller's failed or incomplete disclosure. If the condition is something you knew about and if it is not listed in your written disclosures, you are liable. The answer, then, is always to DISCLOSE, DISCLOSE, DISCLOSE.

The problem with seller liability is the statute of limitations. In some situations, the buyer can sue the seller as long as four years after the buyer discovers the condition that was not disclosed. The buyer may not even discover the condition for years and years after escrow closes, and then he has as much as four more years to sue you. Thus, potential liability to the buyer for non-disclosure can lurk for a long time into the future.

There are also further disclosures required by any owner of a common interest property. One form is completed by the owner while the other form is sent to the managing association. The association completes its disclosures and produces association documents including CC&Rs for the seller to transmit to the buyer.

WHAT DOES "AS IS" MEAN?

An "as is" sale means different things to different people. Legally, the seller still has the same duty he or she has in an "as is" sale - to disclose conditions that materially affect the value or desirability of the property. "As is" is actually just a restatement of the law. Unless the property sold is new, the property is always sold "as is". The seller does not warrant any condition of the property; thus, the duty of inspection and evaluation is on the buyer.

Seller BEWARE - there are some standard form contracts that include a provision whereby the seller warrants some conditions of the property. Read the contract carefully and if that provision is included, make sure you have considered it carefully - or remove the provision.

Sometimes what is meant by "as is" is the seller will not credit the buyer for physical conditions the buyer discovers in his or her inspections. This understanding is something that has evolved within the real estate industry, but there is no law adopting this definition. The buyer still has the physical inspection contingency if it is set up in the contract, and if there are conditions the buyer does not approve of or if the buyer seeks a credit from the seller and the seller is unwilling to give it, the buyer may cancel the contract. Because of the differing understandings of "as is", if "as is" becomes part of a sale, the agents and the parties should clearly describe at the start what they mean by "as is".

LIQUIDATED DAMAGES

Liquidating damages means that the parties have agreed to the amount the SELLER will collect from the BUYER if the buyer fails to close after removing his contingencies. If the seller defaults, the liquidated damages provision does not apply. The buyer may sue the seller for damages or specific performance (the property) if the seller defaults. Thus, the liquidated damages provision only applies in the event of buyer default.

When the parties agree to liquidated damages, the Seller may retain the buyer's deposit, typically 3% of the purchase price, and cannot sue for additional amounts for the Buyer's breach of the contract without cause. From the Buyer's perspective, liquidated damages fixes his downside risk. The most he loses is his deposit. From the Seller's perspective it fixes the amount he may recover from his defaulting buyer and thereby simplifies the seller's action against his buyer.

Although the parties have agreed to liquidate (fix) their damages, the seller is not automatically entitled to just scoop up the buyer's escrow deposit. Instead, the seller has to prove in court, or arbitration if the parties so agreed, that the buyer legally defaulted on the purchase.

The Liquidated Damages Clause must be initialled by each party or it does not apply. And, when the buyer makes his or her increased deposit, a liquidated damages ratification must be signed for that deposit to apply toward liquidated damages.

MEDIATION AND ARBITRATION

Provided to replace the overworked court system for a beleaguered public, mediation and arbitration are the two most popular forums for resolving legal disputes outside of the court system.. The standard real estate contract includes provisions for mediation and arbitration. These provisions must be initialed by both buyer and seller to apply to the parties' transaction.

The purpose of mediation and arbitration is quick resolution and minimal expense. Achieving these two goals is reason enough to join the alternative dispute resolution (ADR) club. Time and money are two of our most valued commodities. But equally important is conservation of energy for our valued interests. If freed up, the vast amount of personal energy funneled into litigation can make a far more meaningful contribution to our lives. Thus, ADR serves a threefold purpose: saving time, money, and energy.

Binding arbitration entirely replaces the court system and the appeal hierarchy. Parties agreeing to binding arbitration no longer have access to the court or appellate system.

The Difference Between Mediation and Arbitration

Arbitration has been around for a long time. People know it. Mediation is relatively new. For this reason, these two processes are often confused. The truth is, mediation and arbitration couldn't be more different.

The purpose of both processes is quick resolution and minimal expense. Mediation is a voluntary process; the parties make their own decisions. Binding arbitration is an adversarial process. An arbitrator, usually a lawyer, retired judge or industry expert well versed in the topic of the case, decides who wins and who loses and renders an award. Arbitration is a far better forum than the court system, because it streamlines the legal process. It terminates the dispute, one way or the other, quickly and at a relatively minimal expense. It allows the parties to move on.

The biggest difference between the two processes is that mediation does not result in a decision, order, or judgment imposed on the parties. Even when required by contract, mediation is a settlement process and involves no decision making, other than the parties' decision to settle or not. Mediation is a no-fault, voluntary process that leaves the parties in charge of their case. Therefore the mediation process does not place blame; it is a means to settlement. Arbitration, on the other hand, is combat. It yields a decision by the arbitrator against one party in the form of an award.

When You Mediate, You Determine the Outcome

Often, parties confusing mediation with arbitration arrive at the mediation session ready to do battle, when they should be prepared to work toward settlement. This combative attitude impedes the mediation process, which must be approached with conciliation and resolve to succeed.

With mediation, the participants create and abide by their own settlement. It is true that the mediator facilitates, encourages, and directs the process. But no one makes decisions for the parties as a judge, jury, or arbitrator would. Instead, with the mediator's assistance the parties cooperatively and voluntarily determine their own outcome. They walk away from a mediation session knowing they have made their own decisions and resolved their matter in a conscious, intelligent manner. They are doubly satisfied. And usually mediation occurs early on, before the money and energy drain of the legal process has left its mark.

The Road After Mediation-Arbitration

Another distinction lies in the options available after mediation-arbitration. With mediation, if the case doesn't settle you still have litigation ahead of you - either in the court system or by binding arbitration if you have a binding arbitration agreement. Mediation does not replace any procedure; it just adds a valuable settlement step before litigation.

Arbitration, on the other hand, is an adversarial, mandatory process that puts the arbitrator in charge of the dispute. The parties give the arbitrator exclusive power to determine the winner and loser. The judge and jury of the court system is replaced with the arbitrator who makes a decision against one party and in favor of the other. The arbitrator's decision carries the same weight as a decision rendered in the court system. Thus, arbitration is combat in every sense. Each party is there to be determined winner or loser in legally enforceable black and white.

When the parties depart from the arbitration hearing, they leave with a judgment or receive it within a month. It is the ultimate and only decision. They are bound by it. When the mediation participants leave the mediation, hopefully they have signed a settlement agreement setting forth the terms they agreed to. Otherwise, they leave without a settlement, and with all their legal rights to proceed. One way or the other, their legal process is concluded or they are a step closer to conclusion.

The information provided above is general in nature and thus, may not apply to your situation. Before relying on this information, you should consult with your legal and/or tax professional.