Four tips to protect yourself in a competitive real estate transaction

A National Association of Realtors “30 Under 30” agent who co-operates the luxury housing market in Del Mar / San Diego Anderson coastal group.

In today’s hypercompetitive marketplace, sellers are in charge, buyers do whatever it takes to win in multiple offer scenarios, and therefore escrow deals are particularly emotional. When buyers are offering hundreds of thousands of dollars above the asking price of a home, it’s no surprise they can reconsider their strategy in escrow.

With this in mind, many sellers have noticed that the usual “stickiness” of a deal has shifted as buyers feel the buyer’s remorse after winning on multiple offers. Sometimes homes come back on the market after hitting some speed bumps, when a buyer feels they are overpaying, or finds major problems during inspections, or the appraisal is insufficient. With all of these factors, we’ve seen a significant increase in transactions that require the expertise of a real estate attorney to facilitate mediation.

The good news for both buyers and sellers is that the sales contract has always included protection for both parties in the language. These depend on your specific state, but for almost all areas these are mainly presented in the form of an emergency deadline or clause.

1. Buyers, use downtime as a safety net.

There are three major contingency periods built into California contracts – inspection, evaluation, and loan – all of which must be removed for successful completion. Failure to perform certain elements means that the contract is broken and the parties can walk away.

Now I see buyers shorten or give up their contingencies, which can be a great tool to help make their offer stand out. But it could also put buyers at risk if problems arise and should only be part of the strategy if they are okay with the risk. If buyers aren’t comfortable removing or shortening their downtime, I recommend lowering the price point where increasing your down payment or being able to buy with cash is another way for you to stay competitive.

Contingencies can also pose a risk to sellers, which is why so many ask for reduced or waived deadlines. Unlike other states, California doesn’t automatically remove contingencies when the contract date is up. Buyers must submit an official form stating which specific contingencies they want to remove and if a buyer has doubts or gets cold feet they can use those contingencies to cancel or stop the deal.

2. Seller, secure a formal replacement offer.

I recommend all sellers consider a formal replacement listing, especially if they’ve received multiple listings for their home. A backup offer is a second fully executed offer that is on standby and allows the seller and his agent to put pressure on the current buyers. If the current buyers fail to meet the terms of the contract, the seller can cancel with no real consequences, as the replacement offer allows them to immediately switch to the secondary buyers without ever going back on the market.

3. Use a notification to perform.

If either party hesitates while on escrow, their agent can submit a form called “Notice to Perform”. This allows the issuing party to terminate the contract if certain conditions are not met within a certain period of time after shipment (48 hours in California). Sellers typically use this tool when a buyer has failed to send their first deposit or does not remove an eventuality in a timely manner, and buyers can send one if they don’t have what they need from the sellers to perform. For example, if a seller denies access to the home for inspection or evaluation, a buyer may consider sending a solicitation letter. If this still doesn’t work, it may be time to seek additional help from a real estate attorney.

4. Get legal advice.

Your real estate agent is there to help you negotiate the terms of the contract, but when it comes to non-compliance it may be time to call in a legal professional. Most contracts will have a section on mediation or arbitration. Usually this is a neutral third party who will help resolve the conflict without taking this issue to court, which makes it faster and cheaper than filing a lawsuit.

There are several other safeguards built into a real estate contract, such as the Penalty Clause in the California Sales Agreement, which protects buyers who get out of business after eliminating all contingencies by giving the seller only up to 3% of the purchase price in the event of damage. But this is where a strong real estate agent can help you. I usually run a quotation workshop for all of my clients to walk them through each level of the contract so they have the knowledge to move forward in the best interests.

While today’s real estate market benefits sellers, history has shown us that no market trend lasts forever. It is imperative that both buyers and sellers stay strategic, think long term about their risk tolerance and focus on negotiating the most important things. Consulting with a real estate professional is more important than ever to determine if today’s market meets your needs and goals, and what steps you should take to stay protected and thrive.

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