May 7, 2015

Lurking Dangers in Purchase and Sale Agreements



MAY 2015

Many who purchase real estate put faith in their broker to correctly complete a form Purchase and Sale Agreement (“PSA”).  Perhaps it is that the buyer does not recognize the importance of the document, or they have come to trust their broker, but many follow along and sign contracts without considering a few important modifications to the forms.


When purchasing real estate, be sure to find a broker who knows that the follow-up work on a real estate deal is just as important as getting the initial offer accepted.  Without the proper follow-up, the deal can fall apart and cost the parties considerable time, as well as their earnest money.  A recent lawsuit was a result of several items that were not completed in a PSA with the necessary specificity needed, and the lack of specificity ultimately led to litigation.  To increase your chances of a smooth deal, pay attention to a few lurking dangers in PSAs, including the financing addendum, the inspection addendum, and the acceptance of the appraisal. 


The “Financing Addendum” allows a buyer to rescind a purchase if they cannot obtain sufficient financing on agreeable terms.  To the untrained eye, checking the box next to “conventional” would be sufficient if the buyer was relying on a traditional mortgage.  Although in many transactions this may be enough, in certain transactions it could be a trap.  Is the buyer a landlord who owns several properties?  If so, then a bank may limit the amount of a conventional mortgage to 60-65% of the value of the property even if it is to be the buyer’s primary residence.  Is the property a high priced property?  Again, a bank may limit the amount of the loan.  Buyers need to protect themselves by knowing before they make an offer what they can finance, and even consider seeking pre-qualification in advance of making an offer.  Besides marking the “conventional” box, the buyer may want to add something like “for at least 75% of the agreed upon price.”  This gives the buyer an additional way out should the financing offered by the bank not be sufficient.


Another place that buyers can be tripped up is found in the “Inspection Addendum.”  Is the number of days to accept or reject the inspection sufficient?  Will the buyer be away and have an issue approving or rejecting the home inspection?  If so, then an adjustment needs to be made.  Remaining silent has the effect of conclusively waiving the inspection as a reason for terminating the PSA. 


A third danger lurking for the unwary is the acceptance of the appraisal.  What does the buyer do if the appraisal comes in below value?  A buyer should not sit on an appraisal, because they might be obligated to buy the property or lose their earnest money.  Instead, the buyer needs to tell the seller the appraisal is not acceptable, provide the seller with a copy of the appraisal, and let the seller appeal the appraisal.  If the appraisal still comes in low, then the buyer needs to timely terminate the agreement.  If needed buyers can engage in renegotiation after termination, but they should not let the deadline to terminate pass. Otherwise, the buyer may, at a minimum, lose their earnest money.


Regardless of the PSA contents, the buyer should have all deadlines and timelines written down and placed on their calendar so they know when they have to act.  This can save an incredible amount of grief, and depending on diligence and specificity, it can save time and money as well.  No matter how much the buyer may love a property, the best way to protect the buyer is to make sure they can walk away.  Otherwise, the buyer may get stuck and/or the broker’s errors and omissions policy may be at risk.

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