PROTECTING YOURSELF FROM THE IMPRUDENT BUYER
"I don't care what it takes. Tell the sellers we'll pay $1,000 more than anybody else for their house and we'll waive all of the contingencies."
Sound familiar? In the hot seller's market that we are currently experiencing in Northern Virginia, it is not uncommon for frustrated homebuyers to throw caution to the wind in order to be the successful bidders for a desirable home. It is also not uncommon for the successful bidders to blame their real estate agent for allowing them to act imprudently by offering too high a price for the property or by waiving contingencies that, with the benefit of 20/20 hindsight, should not have been waived. How do prudent buyer agents protect themselves from imprudent purchaser clients who decide to compromise their transactional protections in order to be the successful bidders for a hot property?
In the highly competitive residential real estate market that exists in Northern Virginia today, it is not uncommon to have 20 or 30 offers submitted for a home. Many hopeful homebuyers find themselves disappointed five, 10 or 15 times before they are successful in obtaining a contract with a seller. More buyer agents and home seekers realize that in order to be competitive with other similarly situated buyer agents and home seekers, they must submit contract offers that push the upward limits of reasonableness in price and they must consider waiving contingencies that, in more normal times, they would never even consider waiving. This situation can present real dangers for buyer agents who fail to counsel their clients as to the risks involved in waiving various contingencies and making offers at amounts that do, or may, substantially exceed the list price and fair market value of the property. Furthermore, even when the prudent buyer agent properly counsels the client against getting caught up in the competitive frenzy, how does the agent protect against the client's inevitable memory lapses when the deal goes sour?
Like most other aspects of the homebuying process, the answer is deceptively simple: Just get a written acknowledgment from the clients that you have given them appropriate cautionary advice concerning the potential consequences of whatever options, rights or protections they are waiving.
There are several important subjects that either should be dealt with in every purchase offer or, if not included in the offer, their absence should be explained in a separate, written acknowledgment that the buyer agent obtains from the client.
Price. Obviously, every purchase offer has to include a price. If the potential purchaser decides to offer a price that is in excess of the list price and/or especially if the purchaser wants to build in some kind of automatic price escalation provision into the offer, get a written acknowledgment from the client that the agent has warned the client that the price which the client is offering to pay may exceed the fair market value of the property and the consequences of that (e.g., the property may not appraise for the price, which may then require the purchaser to substantially increase the down payment in order to obtain financing or suffer a default under the contract).
Financing Contingency. If the client is certain of his or her ability to obtain financing for the property, it may be relatively safe to remove the financing contingency. However, if the financing contingency is removed and the purchaser cannot thereafter obtain financing, the purchaser will probably default under the contract. If the financing contingency is waived, get the purchasers' written acknowledgement that they have been advised of the potential consequences of doing so.
Condition of the Property. There are several different sections of the typical sales contract that deal with different aspects of the physical condition of the property. For example:
The purchaser must decide whether to accept a statutory disclaimer statement from the seller or whether the purchaser will require a disclosure statement. If the purchaser accepts a disclaimer, make sure that he or she acknowledges the receipt of a complete explanation as to the significance of that decision.
Waiving the usual inspection contingency can be disastrous if significant defects are later discovered in the home. Other significant contingencies relating to the condition of the property may be included or waived in the typical contract. See, for example, the standard contingencies for termite inspections, radon testing, lead-based paint and the lender-required repairs contingency. If the client elects not to include these contingencies in the contract, document your cautionary warning and the purchaser's decision.
At this point, it might be worthwhile to note the difference between the acknowledgments that this article recommends obtaining and the numerous disclaimers of real estate agent and broker liability that are found in Section 24 of the standard NVAR Sales Contract form. The disclaimers in Section 24 of the standard form contract state that the agent and broker are not responsible for numerous aspects of the property (e.g., physical condition, restrictions on use, noise pollution, planned land uses in the area). It is doubtful that these disclaimers would protect the buyer agent from liability for failing to inform clients of the consequences of waiving the protections described in this article.
Coinciding Settlements/Sale of Other Property. If the client needs to sell an existing property or requires simultaneous settlements, but decides to waive these provisions in the purchase offer, document the fact that the purchaser made an informed decision after a full discussion of the potential consequences with you, the buyer agent.
Good, Marketable and Insurable Title. So far, I have not seen any purchasers waiving this contingency, but I have no doubt that there have been some home seekers out there desperate enough to do so. Of course, if the clients were sufficiently motivated to do so, they could have the title searched before submitting an offer on the property, but that does not usually happen. Even though the chance of a title defect is relatively small, if your clients happen to be the unfortunate purchasers of a property with a title defect, they are probably going to be looking for somebody to blame for not protecting them from their own foolishness.
In any case involving any of the situations described above, the prudent buyer agent would be well advised to obtain a written acknowledgment from the clients that the agent has fully informed them as to the potential risks involved in waiving these protections in order to be the successful bidder for a property. Using a short, simple, written acknowledgement form can protect you from an enormous amount of aggravation and potential liability.