Four Tips To Protect Yourself In A Competitive Real Estate Transaction
A National Association of Realtors “30 Under 30” agent, serving the Del Mar/San Diego luxury residential market with Anderson Coastal Group.
In today’s hyper-competitive marketplace, sellers are calling the shots, buyers are doing anything they can to win in multiple-offer scenarios and, as a result, escrows are particularly emotional. When buyers offer hundreds of thousands of dollars over a home’s asking price, it’s not surprising that they may second guess their strategy once in escrow.
In that same vein, many sellers have been noticing that the usual “stickiness” of a deal has been shifting with buyers experiencing buyer’s remorse after winning among multiple offers. Sometimes homes are coming back on the market after hitting some speed bumps if a buyer feels they are overpaying or finds large issues during inspections, or the appraisal falls short. With all these factors at play, we have seen a significant increase in the number of transactions needing the expertise of a real estate attorney to facilitate mediation.
The good news for both buyers and sellers is that the purchase agreement always has protections for both parties baked into the language. Those will depend on your specific state, but for almost all areas, the main way these are presented is in the form of a contingency period or clause.
1. Buyers, use contingency periods as a safety net.
Built into California contracts are three major contingency periods — inspection, appraisal and loan — and they must all be removed for a successful closing. Failure to meet certain elements means the contract is broken and the parties can walk away.
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Now, I’m seeing buyers shortening or waiving their contingencies entirely, which can be a great tool to make their offer stand out. But it could also leave buyers at risk if issues arise and should only be part of the strategy if they are comfortable with the risk. If buyers aren’t comfortable removing or shortening their contingency periods, I recommend moving down in price point where increasing your down payment or being able to purchase with all cash can create another way for you to remain competitive.
Contingencies can also be a risk for sellers, which is a reason why so many are asking for shortened or waived periods. Unlike other states, in California, contingencies aren’t just removed automatically when the contractual date passes. Buyers must send an official form specifying which specific contingency they are ready to remove, and if a buyer second guesses or gets cold feet, they can use those contingency periods to cancel or stall the deal.
2. Sellers, secure a formal backup offer.
I recommend all sellers consider securing a formal backup offer, especially if they received multiple offers on their home. A backup offer is a second fully executed offer waiting on standby, and it allows the seller and their agent to keep pressure on the current buyers. If the current buyers aren’t performing to the terms of the contract, the seller can cancel with no real consequences since the backup offer allows them to immediately switch to the secondary buyers without ever going back on the market.
3. Utilize a notice to perform.
If either party is dragging their feet during escrow, their agent can send a form called a “notice to perform.” This allows the issuing party to cancel the contract if certain conditions aren’t met within a certain time frame of sending (48 hours in California). Sellers typically utilize this tool when a buyer hasn’t wired their initial deposit or isn’t removing a contingency on time, and buyers may send one if they don’t have what they need from the sellers to perform. For example, if a seller refuses to provide access to the home for inspections or an appraisal, a buyer may consider sending a notice to perform. If this still doesn’t work, then it may be time to bring in some additional help from a real estate attorney.
4. Seek legal consultation.
Your real estate agent is there to help you negotiate the terms of the deal, but when it comes to non-performance, that’s when it might be time to involve a legal expert. In most contracts, there will be a section on mediation or arbitration. This typically involves a neutral third party who helps resolve the conflict without bringing this issue to court, making it faster and cheaper than a lawsuit.
There are several other protections baked into a real estate contract, like the liquidated damages clause in the California purchase agreement that protects buyers who back out of the deal after removing all of their contingencies by only allowing the seller to receive up to 3% of the purchase price in damages. But that’s where a strong real estate agent can guide you. I typically conduct an offer workshop for all my clients to walk them through each layer of the contract so they have the knowledge to move forward with their best interests in mind.
While today’s real estate market is benefiting sellers, history has shown us that no market trend lasts forever. It’s imperative that both buyers and sellers remain strategic, think long-term about their risk tolerance and focus on negotiating what’s most important. Aligning with a real estate expert has become more important than ever to help determine if today’s market is aligned with your needs and goals and what steps you should take to remain protected and set yourself up for success.
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