Editor’s note: This is the third in a four-part series. Read Part 1 and Part 2.

When buyers and sellers become caught up in a red-hot seller’s market, both the agents and the principals may make poor choices that can put everyone in the transaction at risk when something goes wrong.

Educate your clients

When you first start working with a buyer, prepare him for the fact that there may be multiple offers on the house he wants to buy. To drive this point home, go to the MLS and locate as many recent past sales as possible where the ultimate purchase price was significantly higher than the asking price. Show this data to your buyer because it allows him to cope more effectively if he finds himself in a multiple-offer situation.

Also, educate your buyers regarding how quickly they may have to respond when there is a good property in their price range. In other words, they must be available to look at new listings on a moment’s notice and to write an offer on the spot. If they wait, there’s a good chance the property will be sold.

Another way to give your buyers a competitive edge is to go paperless. This means you don’t have to resort to the old-fashioned approach of writing an offer on the hood of your car. Furthermore, if one or more of the owners are not at the property, you can still transmit your offer and obtain their digital signature using a system such as DocuSign.

Waiving inspections is dumb for everyone

You just listed a house two days ago and you now have 10 offers. The buyers and the agents have pulled out all the stops — they want the property. In fact, they were willing to waive not only the loan contingency, but the inspection and geological contingencies as well.

If you’re representing the buyers, you may be tempted to do this, especially if your buyers really want the property. Nevertheless, without an inspection, your buyers could be walking into a situation where there is a radon problem or some other serious issue. Since they probably don’t have any recourse against the seller, it’s quite possible they will come back after you for not advising them that this could happen.

To avoid this scenario, weigh the advantages of winning the house vs. the risks of having something seriously wrong with the property. In the heat of the moment, the buyers may claim that they don’t care. When the buyers find out they have to spend $30,000 on a new roof, however, they are probably going to be extremely angry — sometimes angry enough to sue.

In most cases, it’s better for the buyers to lose the property than it is for them to be stuck with a major problem. If the buyers choose to proceed, make sure you have a "hold harmless" clause in the contract that is drafted by an attorney. Here’s an example:

"Buyers have elected to waive the physical and geological inspections on 123 Main Street against the advice of their brokers and agree to hold the brokers harmless for any problems related to the condition of the subject property."

Given the scenario above, this is a poor idea for sellers as well. If you’re representing the seller, suggest that they make a counteroffer that requires the buyers to conduct their inspections within a specified period of time. If the buyers fail to do this, again use a clause like the one above to protect the sellers and the agents. Again, an attorney must draft any hold harmless or indemnification provisions in a contract.

Be wary of cash offers

In overheated markets, buyers often remove the loan contingency to make their offers look as if they’re paying all cash. In many cases, especially in the higher price ranges, the buyer has the money on account with a brokerage or in a retirement fund. There is no issue with a lender or an appraisal. The buyer is simply borrowing against his own cash.

On the other hand, many buyers are going for a loan and feel confident that they will be able to close with no issue. They fail to anticipate that there could be an issue with the appraisal or that an errant lien belonging to someone else could pop up on their credit report after they received their preapproval letter.

To avoid having this become an issue in your transactions, regardless of whether you represent the buyer or the seller, inform any buyer who is paying all cash that he will need a "proof of funds" letter from the financial institution where the money is currently on deposit.

This is an especially difficult issue when it comes to people who are from outside the U.S. because asking about their finances can be considered an insult. The best approach is to advise them that the sellers will want the letter from a reputable financial institution or they will take one of the other offers.

Need more help avoiding the fallout from an overheated market? If so, see Part 4 on Monday.

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