Buyers Guide
What Buyers Should Look For in Buying a HOme
Part of the process of negotiating real estate deals (and, indeed, contracts of every type) concerns the issue of "notice." In very broad terms, "notice" means there are some things you should be told, some things you should know, and some things which should not be withheld.
THREE IMPORTANT IDEAS FOR REAL ESTATE NEGOTIATORS
All contracts, at least in theory, should contain the same elements and features. Although the basics are the same, different areas of commerce require different approaches to the contracting process. In real estate, there are three special areas buyers and sellers should watch when negotiating a deal:
1) the idea of merger, 2) the idea of satisfaction, and 3) the idea of notice .
The Idea of Merger
- It's not unusual for buyers and sellers in a real estate transaction to pass several offers back and forth before a final agreement is reached. And while each side may have made promises, demands, and concessions during the bargaining process, only the understandings written into the final contract will be binding.
- The problem with realty contracts, however, is that while they may be binding, they're only binding until closing. At settlement the sales contract is "merged" into the deed, the document that actually transfers title and truly establishes the rights and responsibilities of each party.
- Once the sales contract is merged, it no longer exists in the eyes of the courts. And since it no longer exists, buyers and sellers can't go back and rehash the deal unless they both elect to do so. In real terms, the merger doctrine raises several important points.
- Second, oral promises at settlement are worthless. If the landscaping isn't done but the builder says, "Don't worry about it. I'll take care of the problem next week when my foreman gets back from vacation," a buyer has no enforceable way to get the work finished.
- There are times when buyers or sellers do not want the sales agreement, or portions of the sales agreement, merged into the deed. Instead, they may want something to "survive" settlement.
- A seller, for instance, might want a statement in the contract to survive if it told the buyer that a portion of the property used by the seller actually belonged to the local government. If this statement "survived" the merger, it would discourage the buyer from coming back years later and claiming that the seller had misled him about the size of the property.
- The merger doctrine represents one very good reason why a careful contract review is required prior to the final acceptance of a written agreement. If there are oral commitments that have not been incorporated into the written agreement, then it makes sense to delay signing until every important promise has been outlined in writing. And if something written into a contract isn't completed by settlement, beware of losing your rights and benefits once the agreement is merged into the deed and lost forever.
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The Idea of Merger
- To most people the word "satisfaction" means simply that one is pleasantly content. But in contract negotiations generally -- and in real estate bargaining in particular -- the term "satisfaction" represents a perfectly valid negotiating tactic that can give a buyer or seller an effective veto over the entire contracting process.
- To understand how "satisfaction" works, one must first understand that this is an example of an ordinary word used in a specialized manner. In contract jargon it conveys not only its general meaning but also a sense and context that goes beyond everyday usage.
- One specialized definition of the term "satisfaction" means "performing," doing the things that are supposed to make a deal succeed. For example, if a buyer is supposed to get a loan and promptly makes an application for financing, supplies needed information, and works with a lender to get the needed loan, that person is said to be "performing." If the buyer does not apply for financing, however, it could be said that a provision of the contract has not been satisfied and therefore the agreement has been breached.
- A second special usage of "satisfaction" in contract lingo refers to personal acceptance. For example, an offer may be made subject to "a structural inspection satisfactory to buyer." This means the contract will be final only when the buyer says the inspection is satisfactory.
- But what standards are imposed on the purchaser? What standards can be imposed? When the issue of satisfaction is raised, who other than the buyer in this case can say what "satisfaction" means? As long as the evaluation seems within the realm of logic and good sense -- what a "reasonable man" might conclude -- courts generally will not interfere.
- How a "reasonable man" might think is a matter that courts and attorneys would debate eternally if allowed. For example, suppose the inspection report for the above buyer came back with a notation from the inspector that "this property is the best home I have ever seen. There is no work required, nothing needs to be replaced." Surely with such a glowing recommendation, a "reasonable man" would have to say the report was "satisfactory." Maybe not, particularly if the purchaser was looking for a home to fix up, a property in something less than top condition that could be bought for less money and then improved with "sweat equity."
- Buyers and sellers should use great care when entering into agreements which require "satisfaction."
- Be aware that many savvy negotiators use satisfaction clauses to effectively create an option. A buyer, for instance, may purchase a property subject to his attorney's satisfaction with the contract papers. The buyer has perhaps ten days to complete the review and in that time he goes out and seeks a second purchaser for the property. If he can't find a buyer who will pay a higher price, he instructs his attorney to declare the papers "unsatisfactory." Now the deal is off and the real loser is the seller who has given up valuable marketing time.
- If you're a seller, beware of contracts where dissatisfaction can lead to penalties or excess costs.
- If you're a buyer, make sure your deposit will be returned if you are dissatisfied.
- If a report or examination must be satisfactory to the other party, be certain all reporting and examining is done within a certain time frame -- say, three to ten days. Otherwise, the opportunity to claim dissatisfaction should end.
- The opportunity to claim dissatisfaction should also end if one party fails to act. For example, if a sale depends on a structural inspection satisfactory to the buyer but the purchaser never orders an inspection within the allotted time frame, then the buyer's right to an inspection should end without penalty or liability to the seller.
- Avoid "satisfaction" clauses when they can lead to unnecessary disputes and conflicts. A contract that requires a seller to replace an old clothes washer with a model that is satisfactory to the buyer may lead to continuing strife. The buyer may expect a brand-new mechanical marvel with gold handles while the seller may be thinking in terms of a washboard. In this case it would be much easier simply to name a specific brand and model in the contract so everyone knows what is expected.
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The Idea of Notice
- Part of the process of negotiating real estate deals (and, indeed, contracts of every type) concerns the issue of "notice." In very broad terms, "notice" means there are some things you should be told, some things you should know, and some things which should not be withheld.
- Suppose, for example, McGrue, a seller, markets his home to a buyer, Mr. Talbott. McGrue has a $20,000 mortgage on the property, money he borrowed from his father, and a debt he has not disclosed to Talbott or recorded in local land records. But even though $18,000 is still owed to McGrue's father at the time of settlement and the property has been used to secure the loan, Talbott is not responsible for repaying the debt. Why? Because he had no way of knowing that there was a debt; he had no "notice" from McGrue.
- If, however, McGrue's loan was a matter of public record or McGrue or his father told Talbott of the debt, then it is possible that Talbott might be responsible for the loan if the property was sold to him subject to all liens and debts.
- Publication of the debt in local land records is called "actual notice." But what happens if Talbott never looked at the public records? In such instances there is an "implied" or "constructive" notice. Constructive notice is notice that the law will impose on a seller or buyer because the legislature or courts have decided that individuals should have some level of responsibility. Looking at public land records is a responsibility for buyers, even if nobody says so.
- Another form of constructive notice concerns items that are plainly visible or clear. If the basement of the McGrue house is full of mildew and there are damp spots on the floor, Talbott should immediately assume there is a leakage problem or, at least, should ask if such a problem exists. If he doesn't ask, McGrue might claim constructive notice -- all the signs of leakage were there, but Talbott ignored them.
- Sellers, in turn, may not conceal conditions, defects, or situations that may materially affect the use, value, or habitability of the property. Sellers must respond completely and adequately to buyer questions. If, for example, McGrue covers the basement wet spots with old cartons, he could be liable for fraud. In such situations, it is possible that the contract could be rescinded, and McGrue would have to return Talbott's deposit. In addition, Talbott might be entitled to recover expenses from McGrue.
- A major problem here concerns the term "material." Not everyone will agree that one problem or another is important, so it makes sense to disclose potential issues and thus prevent or limit future claims.
- Another form of "notice" concerns the issue of communication between buyers and sellers.
- To the extent possible, communication between buyer and seller should be in writing to avoid misunderstandings and discrepancies. Where it is inappropriate or unreasonable to provide written information, notes detailing conversations should be kept for future reference. Show when and where conversations took place, who participated, and the topics discussed.
- It is also important to read the contract to see how, if at all, notices are to be handled. Suppose, for example, an offer is made subject to a structural inspection satisfactory to the purchaser. The buyer has ten days to notify the seller if he is unhappy. But how must he notify the seller? Can he just call the seller or the seller's agent? Can he write? If he mails a letter but the letter is delayed in the mail, what happens then? (A suggestion: If a notice is hand-delivered, get a receipt showing the hour, date, and place the letter was received and who received it.)
- To resolve these issues, some contracts use standardized language to show how notices will be handled, language such as the following:
- "Notices required to be given to Seller or Buyer under this contract shall be in writing and effective as of the date on which such notice is delivered to the party or the party's agent. If the notice is mailed to the party at the address provided herein, it shall be mailed, certified mail, postage prepaid, and it shall be deemed received three (3) days after mailing."
- If this standardized notice provision, or a similar one, is not in your contract, consider adding it. It is very important that notices be in writing whenever possible, and it should be clear how the notice shall be sent and when the notice shall be regarded as received. Notice provisions may become very important if contract terms change, promises are unfulfilled, or disputes arise.
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Source: Sucessful Real Estate Negotiation (HarperCollins, ISBN: #0-06-273264-1),
http://www.ace-clipart.com/
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