Home Buyers
The contract of sale and contract negotiations
By
Feb 19, 2006, 22:14

There are three areas of commerce in which prices and terms are set by negotiation¡ªantiques, used cars, and real estate. Fixed labels and prices have little meaning. Real estate is the most complex of these areas. Numerous factors come into play: financial, legal, and the individual circumstances of each property.

Face-to-face bargaining rarely works well in real estate. Pride of ownership gels involved. Personalities clash. But middle men with expertise in real-estate negotiations can keep the dickering unemotional. You may consider having your lawyer negotiate for you, as the real-estate agent isn't a middle man but the seller's agent.

A skilled buyer tries to understand the seller's viewpoint. Find out what he is like. Talk to people who have done business with him. The more you know, the better you can bargain. You will try to strike a bargain that will be fair to both sides. All truly successful negotiations end with all parties convinced that they have gained. There is room for him to get a decent price and for you to get a lucrative deal.

In contract negotiations, the seller and buyer agree on the terms of sale A document should embody the exact terms, so that each side understands precisely what he is to give and get. Neither party is compelled to rely on the honesty or memory of the other party. Common sense alone, therefore, would point to the need of putting the agreement in writing. As a matter of law, also, it's necessary that a contract for the purchase of real estate be in writing. Furthermore, the entire contract must be in writing. It cannot be partly in writing and partly verbal. In any litigation involving the contract, the court will reject oral testimony offered to supply omissions in the written document. Hence, great care should be exercised in preparing the contract. Every lawyer knows that virtually no oral representations made before the signing of a written contract are binding. Under the "parole (oral) evidence rule," they aren't even admissible into evidence should the case go to court. It's the law that once the parties reduce an agreement to writing, the document speaks for itself. Don't rely on verbal explanations from the seller or his broker as to what any terms in the contract mean.

When you've signed a contract of sale for real estate, you must assume that you will follow through. You have crossed the Rubicon, you have committed yourself to buying the property. Even if you festoon the contract with escape clauses, your ability to get back your earnest money could be a lengthy and costly process if the seller and broker choose to sue.

The actual sequence of events that occurs in making an offer, acknowledging acceptance, and agreeing to terms varies around the country. But, in many areas, you make a written offer to purchase. This is backed by some cash, referred to as "earnest money." Getting the seller's signature on your offer will constitute a binding agreement. It binds both parties to a price and assures the buyer's option to negotiate a binding contract before anyone else. The seller may not use your offer as leverage to get a better price from someone else. Your offer should always require that the seller accept or refuse it within a specific lime period, usually one or two days.

If your offer is accepted, it becomes the receipt for the deposit that accompanied it. If buyer and seller fail to come to terms during the subsequent negotiations, this money may become an object of dispute. Your primary concern, therefore, is to protect your money and get a valid, binding commitment from the seller. The seller will try to get as big a deposit as he can with an agreement of sale favoring the seller all the way. If the buyer defaults, the seller can keep the deposit, even though it may be several thousands of dollars. (The broker may also get part of the defaulted escrow.) Thus, it's important for the buyer to keep his deposit as small as the seller will let him and to make the deposit in a way that will give him the best chance of getting it back if trouble should arise. As a rule, the buyer should make a deposit no higher than can be adjudicated in a small-claims court, usually under $3,000. If the seller wants a larger deposit, put the remainder in an escrow account with your lawyer. The earnest money must be in a non-interest-bearing account, unless both the buyer and seller agree to do otherwise. This agreement must be in writing. The buyer will receive the interest. For expensive acquisitions that involve a long closing period, this kind of an account is desirable.

It's general practice for brokers to wrap up a deal quickly without any "interference" from the seller or buyer's attorney. Accordingly, they often use simple on-page purchase and sale agreement forms. These agreements have dozens of names: a binder, offer and acceptance, agreement to buy and sell, or preliminary sales contract. Such forms are acceptable if your attorney inserts clauses to protect you and if he checks the small print. Never let a broker or the seller's lawyer get you to sign a contract that your own lawyer hasn't drafted or reviewed.

The agreement to purchase must cover price, earnest money, the kind of deed, dates for closing and occupancy, items to be left with the property when the seller moves, title exceptions, the survey of the building and lot, taxes, and insurance. A real-estate contract is generally held to be all-inclusive. Only in special circumstances will a court consider other evidence that isn't actually recorded in the contract. So, as you proceed from the binder to the negotiations over the terms of the final agreement, you must insist that everything of importance be written into the contract. Your attorney will make sure that no important consideration is overlooked and that the seller performs his obligations.

A contract is formed the moment acceptance is communicated back to you. Until that moment, you are free to revoke your offer. Once your offer is rejected by !he seller, the offer is dead. He cannot revive it and accept it later. Most contracts that aren't completed fail because the buyer cannot find acceptable financing, or the seller is unable 10 deliver an acceptably marketable title. The smart seller will reserve the right to finance the purchase himself, according to the terms the buyer stated in the contract that he would need. Without this, the buyer could ruin the deal by not trying seriously to qualify for a loan. In most contracts, the financing clause favors the buyer. He usually states the precise terms and conditions he will need to be able to purchase. These terms include the total amount to be mortgaged, the interest rate to be charged, and the term over which the loan will be repaid. The seller will try to limit your time to search for a loan commitment. Try for at least 30 days. This will give you adequate time to compare mortgage loan offers.

You should submit an offer and deposit check to the broker only with the following precautions:
1. Your check should be made out to the broker, not to the seller.
2. The broker should hold the check in escrow until he gets an acceptance from the seller and your attorney has had the chance to draw up a purchase and sale agreement satisfactory to you.
3. On the back of the check, you should write the following: "To be used only as a deposit on an offer to purchase property at ... (address)."

Many contracts provide that if the escrow is forfeited, the agent gets half of it. However, the broker has many incentives not to cheat you out of this money if the deal falls through. Not only has he a reputation to maintain, but he is tied to the area where he does business.