Time is of the Essence
When we enter into a real estate contract, there are certain contingencies or 'if clauses' built into it. Picture each contingency as a window that comes with a deadline date for when that window closes. As each window closes, the contract becomes more solid. Lately, these dates have not been taken seriously. The reasons for this are many. Agents are too generous in creating them or negotiating them in the first place. Buyers, like all of us, put off the inspection when they know they have plenty of time. Attorneys, who don't really make a large fee per transaction, don't want to spend any time with a file until they have all of the info from the inspection and other issues. And finally, lenders don't want to order the appraisal until the attorney/inspection review is closed and they know the buyer is moving forward. As a result of all of these factors, dates are missed, deadlines are extended and contracts are on shaky grounds for an extremely long time.
The impact to sellers
Why should anyone care? If you're a seller, you should be very concerned. You might be taking on a ton of risk while the buyer's agent, attorney and lender are protecting the buyer from any risk at all. And risk is financial. Here's an example.
Harry, the seller of a two-flat, signs a contract with Joe the buyer on May 10th. Joe wants the building vacant and free of leases when they close on June 30th. Harry agrees, and believes that in seven business days he will have the inspection and attorney-review windows closed. He assumes the appraisal will be done within two weeks, and Harry will have comfort in knowing that the property appraised at the contract price, even if he has to wait another two weeks for the mortgage approval.
So Harry offers his tenants $4,000 to break their lease and move out by the 30th of June. He tells them he will confirm that in writing on May 29th, assuming by that date he will only be waiting for the official 'clear to close' from the lender. Meanwhile, Joe has a busy schedule and finally gets his inspection done on the last day of his inspection period. The inspector recommends a further inspection by a structural engineer. On the last day for attorney modifications, Joe's attorney sends a letter to Harry's attorney requesting an extension for the inspection and attorney-review periods until all issues are resolved.
In short, Harry agrees to the open-ended extension. After another week of inspections and estimates, the issues are still unresolved, and Harry makes the risky decision to give the tenants the written promise of $4,000 to move out. Yet another week later, the buyer's attorney sends over a request for a $3,000 credit for brick work on the building. It's now about 20 days before closing, and what else can the seller do? So Harry agrees to give another few thousand dollars to the buyers.
Now, and only now, is the appraisal finally ordered by the lender (they didn't want the buyer to be stuck paying for a $350 appraisal if they didn't buy the building). So hanging Harry further out on a limb, this could still all fall apart if the property isn't appraised at the contract price. And Harry could be out the $4,000 he promised to his tenants, while being left with a vacant building in a tough real estate market and challenging economic times.
Keeping your deadlines
Time is very much of the essence for Harry and every seller. So sellers, beware. Keep your contingency deadlines tight so if extensions are needed, there's room without putting you in a bad spot. And talk to your agent or attorney about possibly adding a condition to the contract that requires the appraisal to be completed by a certain date. Finally, be involved and available to work out any issues during the inspection and attorney review period. Your active participation will help get all those windows closed most swiftly for a strong, secure contract.
Ellen Webber is a Realtor with Koenig & Strey GMAC Real Estate, Chicago.
Comments
Ellen - this is a great article. I didn't realize the dates were getting so liberal. I have been having issues with the mortgage contingency getting pushed back multiple times. In fact, 5 extensions on a deal I closed back in July, but our hands were tied (I represented the seller) and had to agree to the extensions in order to get the home closed. What do you recommend doing in that case where you are at the mercy of the lenders and all of their requirements these days and these never-ending extensions?
Jen, As the listing agent, it all has to be proactive on the front end. You need to keep the deadlines tight on the contract -- the inspection and atty review . Then you simply need to be annoying in enforcing the deadlines. Tell the other agent or buyers your clients will not tolerate dragging out contingencies for weeks on end. Make the buyers and their agent know they have to have all of the inspection(s) done and issues on the table by the expiration of the atty review period. Also, tell them they will need to proceed with ordering the appraisal. The delay in ordering the appraisal is usually the cause of the mortgage approval delay. So make a call directly to the lender and explain to them on the front end there will be no extension and push them to move forward with the appraisal and other loan docs.
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