Recently, I canceled an escrow to purchase a home here in Orange County, California. After three brutal weeks of working through countless contingencies, the conditional sales price I had agreed upon with the seller no longer made good sense to me.
The result was a good deal gone wrong. But imagine if there was a way to prevent these disagreements from ending sales. I think we can stop these discrepancies with a little phrase I like to call pre-diligence — but first, let’s examine the problem.
Agents market properties without the benefit of all of the facts.
I’m not talking about comparable sales. I mean those things that could eventually derail a deal contingent upon many different variables — all practically unknown at the time the buyer makes an offer and the conditional sale is agreed upon by the parties involved.
In reality, buyers should have all the knowledge that comes later in the transaction — you know, those same dynamics that conditional transactions are contingent upon, such as:
- Bank appraisals
- Home inspections
- Pest control report
- Preliminary title report
- Copy of the declaration of covenants, conditions and restrictions
- Natural hazards disclosure report (in California)
Think about it. People make the most informed decisions when they have all the data. The buyer should have the benefit of the information from the above reports before making an offer on a property — not over the following weeks when the closing date approaches.
If the information supplied in these reports is known before negotiating a conditional sales price, the most volatile “conditional” parts of the sale are greatly diminished. There is also less likelihood that the transaction will be canceled at a later date.
OK, before you launch a rant about how the seller won’t pay for such reports upfront or how buyers will want their own reports — hear me out.
Think of this as the provision of informational guidelines, not certainties.
In my recent transaction, the conditional sales price of the property was renegotiated twice after the escrow was opened. Or, at least, we attempted to renegotiate. Why attempted? Because in the minds of the seller, I had agreed upon a sales price and not a conditional sales price.
By the time I had access to all of the data and information I needed to make a sound decision about contingencies, the seller’s agent made me look like the bad guy. All of this, including the seller’s feelings about me, made for an increased level of “negotiation toxicity.”
That word conditional is the critical one, but the misperception of what “sold conditionally” truly means can quickly become a shocking reality. The conditional price on the property I had in escrow was renegotiated once for the value discrepancy discovered by the bank appraisal and once due to several issues with disclosed natural hazards. Ultimately, my inability to accept the latter caused the cancellation of the escrow and killed the deal.
This unfortunate situation was unnecessary. And now I know why the cancellation rate for transactions can be as high as 15 to 20 percent for some very reputable brokerage firms. It is not all about failed loan approvals. It is all about the order in which critical data and information is released in the transaction.
If I had access to the reports and information listed above prior to making my original offer, there is a good chance that I could have worked through these issues. At the very least, I would have been able to eliminate the property as a potential purchase.
But learning such pertinent details two or three weeks into the transaction had a disastrous consequence for both me and the seller.
An offer submitted with the benefit of critical, actionable data is a much more substantial offer.
I have decided to call this actionable information “pre-diligence.” Not due diligence, but rather the data that reveals the kinds of things one needs to know before (pre) making an offer.
I have sold real estate for five years and can recall similar situations happening with my transactions. Back then, I was told that was the way things were done and not to change the order of things.
Now, I think that’s unfortunate.
If I had it to do all over, I would have explained to my sellers why providing this information upfront would significantly reduce the chance of a failed transaction. And how the expense of securing these reports was well worth the investment in comparison to the cost of a canceled escrow weeks into the transaction.
For the seller and you, investing a maximum of $1,200 to secure this data upfront is very cheap insurance against a canceled or continually renegotiated conditional sale.
To give credit where credit is due: I know some agents and brokers who practice making some these facts available to buyers upfront now. Not every now and then — always. They order full bank appraisals, not just a comparative market analysis (CMA), before they list a property, and they provide natural hazard disclosure (NHD) reports to any buyers making offers on any one of their listings.
And from what I hear, the result of doing this is eliminating a lot of transactional stress and is working effectively.
The bottom line here is all about improving the consumer experience. The stress I went through in short time frames to analyze and make decisions was not pleasant for any party involved in the transaction. The resulting animosity is avoidable by disclosing the facts related to the property’s value and condition upfront.
Pre-diligence could save your next transaction from being a cancellation statistic. And wouldn’t it be great to find a “cure” for the all-too-common conditional sale?
I think so.
Kenneth Jenny is an expert in the residential real estate brokerage industry and real estate marketing.