Topics Covered This Quarter:

Common Contract Issues in this Competitive Market, Jacqueline A. Carosa, Esq.

Common Contract Issues in this Competitive Market

This quarter’s newsletter will focus on a few issues that we have seen come up in the current market: Engineer Inspection Waivers, Escalation Clauses, Appraisal Gap Guarantees, and Delayed Negotiations. We see one of more of these issues come up with nearly every contract that comes into the office, and each has the potential of creating problems for agents and clients alike.

Issue: Engineer Inspection Waivers

We understand that it has become almost standard practice in our community to waive inspections as a negotiating tool, but attorneys cringe when we see it. Waiving this right does carry significant risk to the buyer. Be very careful advising your clients about waiving this right as it might border on giving legal advice.

New York State is still a “buyer beware” state. While we have a Property Condition Disclosure Statement (PCDS) in most residential transactions, a buyer cannot rely on it as the sole source of information about a property. A buyer has a responsibility to learn everything he or she can about the condition of the property. The PCDS specifically states that it does not create a warranty of any kind, nor does it take the place of a home inspection: “On the contrary, the disclosure statement strongly urges buyers to have a home inspection performed as well as other professional and environmental tests.” See the approved PCDS Form FAQS. The Disclosure states that it “is not a substitute for any inspections or tests.” Prior to issuing an attorney approval letter, we remind our clients of this and that the statements in the PCDS are made based on the seller’s actual knowledge of the property conditions – not what we think the seller should know, but what the seller actually knows about the property. There are conditions that a seller will not be aware of and might only be revealed during an inspection.

While home warranty plans have been used before the onset of the current market conditions, it might be worthwhile to consider purchasing a home warranty plan now more than ever. Such a plan could protect the buyer and/or seller should an issue arise that requires a repair. The plan is not a substitute for a seller or buyer’s obligations under the law, but could provide some peace of mind should a repair be needed.

It might interest you to know that waiving inspections is not common in all real estate markets. For example, with as hot as the residential market is in Tampa, Florida, waiving the inspection period is nearly unheard of and buyers are often given 10 days to complete inspections.

Issue: Escalation Clauses

Listing agents have an obligation to present all offers to the seller as soon as possible. New York State NYSCMLS Rules, Section 2 – Effective March 1, 2022 (https://www.grar.org/wp-content/uploads/2017/05/2022-03-01-NYS-Alliance-MLS-Rules-for-UNYREIS.pdf). The use of an Escalation Clause can help a seller get more for their home than they otherwise would. Some agents do not like escalation clauses. They can cause more work for the agents, and may be hard to explain to sellers. Some believe that a buyer should come to the table with the “highest and best” offer possible. Nevertheless, if a buyer chooses to use an escalation clause, it effectively promises that the buyer’s offer will exceed the highest current offer by a predetermined sum, which is typically about $1,000.00.

Keep in mind that all offers must be presented to a seller, even if the selling agent does not like the offer. See the exceptions in NYSCMLS Rules, Section 2 – Effective March 1, 2022. If an offer is written, it must be presented unless the seller has waived the obligation to have the offer presented. NYSCMLS Rules – Effective March 1, 2022. Of course, the seller does not need to act on an offer, but it must be presented, and the buyer’s agent can request written confirmation that the offer was submitted to the seller. NYSCMLS Rules, Section 2 – Effective March 1, 2022.

When your buyer’s offer has been accepted and escalation is triggered, be sure to obtain a copy of the redacted offer that triggered the escalation clause. It will need to be reviewed before an attorney approval letter can be issued.

Issue: Appraisal Gap Guarantees

Another negotiation tool we are seeing with some frequency is the appraisal gap guarantee. This guarantees that a buyer will make up any shortfall should the house not appraise. For example, a buyer agrees to pay $100,000.00 for the home, but the appraisal comes in at $95,000.00. With the gap guarantee, the buyer is telling the seller that he/she will come up with the $5,000.00 difference at closing. Proof of funds should be provided.

We had a contract come in with an open-ended gap guarantee. There was no limit on the amount the buyer would cover if the appraisal was short! Be sure to include a limit to the gap your buyer can cover. A buyer with just $10,000.00 available for a gap guarantee will find him/herself unable to close if the guarantee has no limit and the appraisal is more than $10,000.00 short.

Issue: Delayed Negotiations

Some MLS listings state that appointments will be held for a limited period of time and that negotiations will take place on a later date and time of the seller’s choosing. In other words, no offers will be considered until the date set for negotiations. This has become frequent language in MLS listings, and there is a Form that should be completed and filed as an attachment to the listing. NYSCMLS Rules – Effective March 1, 2022.

A date for delayed negotiations can still be scheduled after the property is listed, but the dates need to be added to the comments to the “private” and “public” remarks and the selling agent should contact agents with buyers who have seen or are scheduled to see the property of the scheduled date. NYSCMLS Rules – Effective March 1, 2022.

A change form can be used to extend the dates; however, the Rules state that once the dates are chosen, the showing and negotiation time frames cannot be shortened. NYSCMLS Rules – Effective March 1, 2022.

~ Jacqueline A. Carosa, Esq.

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