THE DEVIL (OR THE FINANCIAL "ANGEL") IS IN THE DETAILS By David A. Chodack In today's hotter than hot "Seller's Market" two main problems seem to keep cropping up in real estate question and answer columns. How to handle multiple offers and "back-up" offers and what to do about inspections and any problems they uncover. Both of these issues are closely related, as Buyers worry about what to offer in multiple offer situations and how to avoid scaring off Sellers with demands for inspections and possible repairs. Sellers dream of avoiding pesky, intrusive inspections and possible costly repairs without being sued and/or dissolving existing sales agreements, so that they can be free to accept more favorable "back-up" offers which have come in after the initial offer was accepted and signed. All three of these issues can be avoided or neutralized, with just a little foresight and some creative and detailed contract writing. The Standard California Association of Realtors and State of California Real Estate Purchase Agreement and the state laws regulating real estate transactions, are designed to be neutral and favor neither Buyers nor Sellers. Yes, the state mandates all those inspections and disclosures to make sure Buyers are protected and understand what they are buying, defects and all. Yes, the state says that the Buyer must get his deposit back unless the Seller can prove actual financial loss as a result of the Buyer reneging on the contract, but the state does not care whether the Buyer gets the property at "Fair Market Value" (Whatever that is) or over pays, or underpays. The state does not care if the "Back-up" Offer is actually better than the offer the Seller accepted as the "Primary Offer" and, once the Buyer is aware of any defects, the state bows out of the picture, taking no sides on what is to be done about those defects, or who - if anyone -- winds up paying to correct them. If a Buyer knows that the roof is leaking and the foundation is bad and the wiring is so old that it could wind up burning the house down, but chooses to buy the house anyway, in "as is" condition, without demanding that the Seller make the necessary repairs, then that is his/her choice. If the Buyer offered too little for the property and the Seller did not realize this until after he or she signed the Buyer's offer, the state could care less. This is between the Buyer and the Seller and too often, their lawyers, to work out. Therefore, the solutions to all these possible problems should be worked out in advance and written right into the Purchase contract. For example, You have a house selling for $250,000, but the Buyers know there are likely to be other offers. Most likely, the house will wind up selling for more than $250,000, but how much more? The traditional solution to this quandary is to advise the Buyers to make the best offer they can possibly afford and hope for the best. But what if they offer $275,000, only to find out that someone else bid $280,000? Or, what if they get the house. But find out that the next closest offer was for only $260,000? Either way, they will probably be unhappy. The simple solution? An "Escalator" clause in their offer, stating that it starts out at say, $240,000, but automatically becomes $500 higher than any competing offers, up to a maximum of, say $280,000. This way, if the next closest bid is only $260,000, they wind up paying $260,500, instead of $275,000 for the house. If someone else bids $280,000 or more, then they know they gave it their best shot and just resign themselves to finding another house. They are not likely to make many friends among the other prospective Buyers - or their agents - by doing this, but it's perfectly legal and it has an advantage for the Seller too, because the Seller gets $500 more than he/she would have by accepting the best of the traditional fixed-price offers. Then we get to the next problem. One of the losing bidders thinks it over, decides that he/she really wants the house badly and comes back with a "back-up" offer of $285,000, just in case the first offer falls through. Obviously, the Seller would rather accept this new offer and make an extra $5,000, but now he/she is stuck? Right? Not if he or she was smart and wrote the proper contingencies into the contract in the first place. If a prospective Buyer wants to option a piece of property - to have the right, but not the obligation to purchase it at some time in the future, he usually pays the owner an "option fee" for this privilege. But too many Sellers let prospective Buyers option their properties for free, accepting offers which contain contingencies allowing the Buyer to cancel the contract almost at will, while the Seller is locked in to it. It doesn't have to be this way. Especially in a hot, Seller's market, smart Sellers can put their own contingencies into the contract, allowing them to cancel it if they so desire. For example, instead of simply accepting an offer, a Seller can insert a clause stating that he/she reserves the right to consider and accept other offers right up until the time the Buyer has removed all contingencies, if not right up to the close of escrow. If another acceptable offer comes in, the original Buyer would then have a certain number of days or even hours to remove all contingencies and match the new offer, or the original contract would automatically be void and the Seller would be free to accept the newer and better offer. Sure, this will anger a lot of prospective Buyers and even scare some of them off, but in a Seller's market, it's also a way of weeding out the serious - or even desperate -- Buyers from the less serious ones and so is limiting the amount the Seller will pay for repairs and improvements. The law only says that the Seller must inform the Buyer of any defects and permit the Buyer to perform any inspections the Buyer wishes to satisfy him/herself as to the condition of the property. The law does not specify who must pay for any needed repairs. This is completely negotiable between Buyer and Seller and it is also where many problems arise between the time the contract is signed and the time the property closes escrow - if ever. Stating clearly exactly who is to be responsible for any defects uncovered by the inspections and how much they are obligated to spend, eliminates problems later. For example, the Buyer's offer might state the Seller is responsible for all repairs up to say, $10,000, The Buyer might agree to take responsibility for any repairs over $10,000 - up to a maximum of $15,000 or $20,000 - and any necessary repairs over that amount would be negotiable --or cause to cancel the contract. Of course, the Seller would probably want to reverse this - making the Buyer responsible for the first $10,000 in repairs - or take no responsibility for repairs at all and inform the Buyer that the property is being sold strictly "as is" and fix-it-yourself. As long as everyone - Buyer, Seller, any real estate agents or lenders involved - understands what's going on and agrees to it, then the deal should work. It's when people are unclear about what they expect and what they will do in certain situations, that deals blow up and fall apart. Hindsight may make us all rich and beautiful, but when it comes to writing real estate contracts, a little bit of foresight makes things a lot easier and keeps deals together when the going gets tough. David A. Chodack is the Managing Director of Contract Wizard.Com, located at www.contractwizard..net and he can be reached by e-mail at : contractwizard@ earthlink.net. 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