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Deadlines & Consequences.

As a mother of school age children, I’m constantly explaining deadlines and consequences to my kids (sometimes with moderate success).  My reason for a deadline and consequence is to help set their expectation as to what may happen and when if they choose a particular course of action.  Wait for it — you have 30 minutes to clean up this room or there will be no Minecraft the rest of the day.  In reviewing a real estate purchase contract today for a client, I realized that this simple lesson equates to an important tool in professional practice.

We are all familiar with standardized real estate purchase contracts, filling in the all too familiar purchase price, address, inspection timeline and earnest money blanks.  In these sections, the deadlines and consequences are built in.  For example, a buyer has 15 days to complete an inspection, and if the buyer is not satisfied with condition of the property, must terminate the purchase agreement.  The deadline and consequences are clear, the buyer has 15 days to inspect and terminate.  Both the buyer and seller have an expectation of what is to occur and when.  What happens if you add in an additional requirement or contingency to the purchase contract?  Tip: For each obligation, make sure you include deadline and a consequence.

In the current market we are seeing more appraisal contingencies added to purchase contracts.  Any problems with the following contingency? “Purchase Contract contingent on property appraising at or above the purchase price.”  What happens if the appraisal comes back low? Does the buyer have a right to terminate and if so, how long does the buyer have? Can the buyer renegotiate the purchase price? Does the seller have a right to terminate? What if the buyer wants to bring extra funds to closing? Unfortunately, the contingency as drafted leads to more questions than answers.

Consider this.

“Purchase Contract contingent on property appraising at or above the purchase price.  If the appraisal is below the purchase price, the buyer may (i) terminate the purchase contract by delivering written notice to seller or seller’s agent, or (ii) notify the seller or seller’s agent in writing of the appraisal amount and renegotiate the purchase price.  If the parties are unable reach an agreement on a new purchase price, the buyer may terminate the purchase contract by delivering written notice to the seller or the seller’s agent.  In any event, if the buyer fails to terminate within 15 days of closing, this contingency shall be deemed waived.”

I know what you’re immediate reaction will be; it’s too long.  I agree.  But length aside, if the appraisal comes back low the sample addresses clearly what is to happen and when it is to happen.  If the buyer wants to bring extra funds to closing, the buyer does nothing.  However, the buyer also retains the right to terminate and the buyer and seller retain the right to renegotiate.  All said, the buyer’s rights are limited in time, benefiting both parties.

What about a request to remedy?  I worked on a case not long ago where a dispute arose between the buyer and seller about the quality of the remedy repairs and the pre-closing inspection.  The sellers argued they completed the remedy repairs in a workmanlike manner.  The buyer felt the buyer could terminate after the pre-closing walkthrough.  Ultimately the closing failed and the parties ended up in litigation.  When negotiating a remedy, consider a reduction in the purchase price to cover the cost to repair.  Such benefits the buyer and the seller and avoids risk of squabbles over repairs. If you do negotiate a remedy, include a deadline for completing the repairs.  Your buyer may want the repairs to be conducted by a licensed professional and have the seller provide receipts. Your buyer may also want to reserve the right to inspect the repairs.  Keep in mind for each obligation there should be a deadline and consequence.  What happens if the repairs are not completed timely?

Your clients are relying on your experience in the industry to make them aware of what can go wrong resulting in a failed transaction.  It will always benefit a client to have an expectation of what is to occur and when, much as it (if we’re lucky) benefits kids to know what happens if they don’t get that room picked up! Remember, deadlines and consequences.

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