Common surprises in real estate negotiation

When contingencies are involved, expect the unexpected

Purchase offers usually aren’t accepted as written. Commonly, buyers and sellers engage in the equivalent of a tennis match, counteroffering back and forth until they meet a mutually agreeable purchase contract. At this point, you might be inclined to think the negotiation phase of the transaction is over.

That may have been the case decades ago. But the home sale process has become more complicated over the years. Today, it might be more appropriate to say that the negotiations are over when the transaction closes. That is, if there aren’t any after-closing issues, like a leaky roof that wasn’t disclosed that could require more negotiation.

After a purchase contract is signed — including all the addenda and counteroffers — it is said to be ratified. A ratified contract is binding on both parties and usually can’t be unilaterally changed by one party without agreement from the other party. Any modification to a ratified purchase contract needs to be in writing. Verbal agreements to sell real estate are not binding.

Most purchase contracts include contingencies that provide buyers a time period to comply with certain parts of the transaction. The most common contingencies are for inspections and investigations, loan approval, appraisal of the property, and the sale of another property.

Usually, if the buyers use their best efforts to satisfy these contingencies but are unable to do so, they can withdraw from the contract without penalty and have their good faith deposit returned to them.

You should fully understand any purchase offer you sign as well as the impact of the buyers removing or not removing contingencies before you sign the contract. Not all contingencies contain the same language.

For example, some inspection contingencies give the sellers the right to remedy a defect; others allow the buyers to withdraw from the contract for any reason at the end of the inspection contingency period. Any questions should be directed to a real estate attorney.

HOUSE HUNTING TIP: Even though the ratified contract is legally binding on both the buyer and seller, circumstances can change during the transaction that may result in renegotiation. The most common occurs when the buyers’ inspection contingency is due. If buyers’ inspections reveal new information about the property, the buyers may agree to remove the inspection contingency but only if the sellers repair defects or contribute financially to repairs.

This puts the contract in limbo and requires good faith negotiation to salvage the transaction. Otherwise, the buyers and sellers agree in writing to cancel the contract. The sellers put their home back on the market and the buyers look for another home to buy.

Not all buyers renegotiate the contract when the inspection contingency is due. If the sellers have provided presale inspection reports and thorough disclosures before the buyers made an offer, it’s less likely that the buyers will make further requests from the sellers.

Another trigger for further negotiations can occur when an appraisal ordered by the buyers’ lender values the property at a price that’s lower than the purchase contract price. The effect of this is that the buyers’ lender will lend less than it said it would before the appraisal was done.

The buyers could ask for another appraisal, withdraw from the contract or try to negotiate a solution with the sellers. This might mean that the buyers agree to put more cash down, or they could ask the sellers to lower the purchase price, or a combination of the two. The goal is to reach a price that will work with the lower loan amount.

Buyers who feel they overpaid for the property may be more inclined to request a reduction to the appraised value and hold firm at that price.

THE CLOSING: If the sellers won’t agree, the transaction will fail.

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide."

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