MULTIPLE OFFERS – A REMINDER

As we discussed last week, we are seeing a lot of multiple offers throughout the Company. With that fact in mind, I have begun getting calls about our agents’ handling of these transactions. Specifically, I have gotten a number of calls from outside brokers who claim that their client’s offer for our listing did not get properly presented to the seller. Invariably, in every case where this call comes in, a buyer represented by our listing agent ultimately got the property. In these transactions, the unsuccessful offerors obviously think that something was amiss in the process and that their offer did not get a fair shake. Given the increase in these complaints, I wanted to remind you of our policy in this regard.

Specifically, if you represent the seller of a property with multiple offers, and you also represent one of the potential buyers, you have to get your manager involved in the process. You need their help because this situation presents a clear conflict of interest for you. After all, you have a fiduciary duty to the seller to advise them about the subject offers, and to give that advice with ONLY their interests in mind. Unfortunately, you also represent one particular buyer and therefore have to look out for their interests. As importantly, with a potential dual agency, you also have your own interest to consider, since you would make extra money if your buyer gets the house. Of course, that interest may conflict with the seller’s, since it is possible that your buyer does not make the best offer for the property. As a result, in order to eliminate both this actual conflict and the appearance of impropriety, you need to remove yourself from the offer process. Get your manager involved and let them “represent” the seller until an offer is actually accepted. When this happens, all offers would be forwarded to your manager, who will then present them to the seller and answer his/her questions about each. Any advice regarding which offer is “stronger” or “weaker” will come from the manager. That way, you are not tempted to steer the seller to your buyer, and the advice being given is not impacted by the conflicts you face. After an offer is accepted, your manager steps away and you handle the rest of the deal on behalf of the seller, even if your buyer gets the property.

By removing you from the offer process, this policy eliminates both of our problems: the potential conflict between the interests of the seller, your buyer and yourself and the appearance to other buyers and agents that you are improperly influencing the seller’s choice. So please remember this policy and involve your manager in multiple offers when appropriate. It will save us all a lot of problems down the road.

As always, if you have any questions, please contact your manager so they can (1) clarify this policy for you or (2) contact the legal department as needed.

MULTIPLE OFFERS: BE CAREFUL WHAT YOU RECOMMEND

As you know, given the lack of inventory in most of our markets, many of our buyers have found themselves in multiple offer situations when they find a house they like. I have heard many stories about buyers losing out on 5-6 properties before they can get an offer accepted, and they are only successful when they write their offer in particular, pro-seller ways. For example, I have seen contracts where the buyer’s contingency period is reduced to 3 days, or the contingencies are waived altogether. I have seen a buyer who needs a loan, write an offer with no loan contingency, and I have seen buyers offer to release their $50,000 deposit upon acceptance. While I understand the reason for each of these suggestions, and how they might make your buyer more attractive to a seller, they obviously carry significant risks that we have to be sure to cover appropriately.

Specifically, whenever you discuss these types of clauses with a buyer, you have to explain not only the benefits of including them in your offer, but also the risks. For example, if you discuss the possibility of waiving the loan contingency, you also have to explain what that means. You have to tell your buyer that, if they removed their other contingencies and don’t get a loan, they will not have a cancellation right and will lose their deposit if they do not go forward. If you discuss the possibility of releasing money early, you have to warn them that, even if they cancel the deal appropriately, getting money back from the seller will be extremely difficult. And, if you discuss waiving all contingencies in the offer for a very popular property, you need to go through each normal cancellation right, explain what it normally protects, and make the buyer understand what they might be stuck with. For example, if I waive my inspection, the property may have numerous problems that cost me significant money to fix. If I waive my title contingency, there may be an easement that I have to accept against my wishes. And, if I waive the HOA contingency, there may be something in the CC&Rs that I don’t want to accept but have to f I don’t want to breach the agreement. In short, you need to make sure your buyer understands that, even though these proposals may make them more likely to get the house, they may include downsides which make the house different than they think and not what they want.

In the course of drafting these offers, one thing you should remember is the breadth of the investigation contingency in the RPA’s paragraph 10. As you know, that clause allows the buyer to investigate “any matter” relating to the property. In fact, the Buyer’s Inspection Advisory recommends that the buyer investigate almost everything you can think of, including the buyer’s “personal preference.” As a result, if you keep the investigation contingency, which lets you get out of the deal for almost any reason, you are protecting yourself against problems which arise by waiving other contingencies. For example, if I waive my loan contingency and cannot get a loan, you can always come up with some “matter” affecting the property that causes your cancellation. In other words, you can use your investigation contingency as protection against the waiver of others. So, while I would never recommend that my client waive their contingencies (suggest that they shorten them instead), always recommend keeping the investigation so they have as much protection as is possible.

As always, please call us with any questions you may have.

THE DEMAND TO CLOSE ESCROW – HOW SHOULD IT BE USED

I am getting a lot of calls recently about how to cancel an escrow where one of the parties fails to close on time. In most cases, the buyer’s loan is running late and, as a result, the seller wants out. They have lost their patience with the present buyer and want to move on to buyer no. 2. The question, of course, relates to the best way to accomplish this goal. And, as you undoubtedly know, that way now includes the Demand to Close Escrow (CAR From DCE). So, how does the DCE work and how should you use it?
The first thing to remember is that a Notice to Perform (NBP) is NOT the appropriate document for a deal where one party wants to cancel because the other has not closed on time. From a lawyer’s perspective, the reason for this is easy: the contract does not provide for using an NBP in this circumstance. As you know, the use of an NBP is set forth in paragraph 14C(1) and (2) of the Purchase Agreement. In those clauses, the seller is given the right to cancel, “after first delivering to Buyer…” an NBP, if the buyer does not remove contingencies on time or does not perform the following contractual obligations: make their deposit, make their deposit with good funds, deliver a preapproval letter, provide their verification of funds or return the statutory disclosures. Notice that closing escrow on time is not included in this list. As a result, when looking at what the NBP was created for, we do not see a failure to close.

Additionally, both paragraphs 14C(1) and (2) provide that, after giving an NBP and upon cancellation, the seller shall “authorize the return of Buyer’s deposit.” Obviously, in the case of a late close of escrow, the seller may not want to do that. After all, the buyer’s failure to close on time may be a breach. So, by using the NBP in this case, you may be unintentionally forfeiting your seller’s right to keep the buyer’s deposit.

On the other hand, the DCE is specifically provided for the late close situation. Paragraph 14E of the RPA states that “[b]efore Seller or Buyer may cancel this Agreement for failure of the other party to close escrow pursuant to this Agreement, Seller or Buyer must first give the other a demand to close escrow.” In other words, the contract specifically says to give a DCE in our circumstance. The DCE itself is consistent with what we are looking for, demanding that the escrow be closed “within 3 (or _____) Days After receipt of this…” DCE. It further provides that when given by the seller, she may (1) cancel the agreement; (2) sue for damages; or (3) sue for specific performance. The buyer may sue for damages or specific performance.

One question that has arisen in relation to the DCE is whether the number of days the Demand must include can be changed. After all, as you can see above, there is a blank that theoretically can be changed to some number other than 3. On the other hand, paragraph 14E, the only clause in the Purchase Agreement that even mentions the DCE, says nothing about how long the Demand must be. So, can you put any number in the blank? While the contract gives not direct answer, the best advice we can give you is no. The case law says that since close of escrow rarely happens when scheduled, demands to cancel cannot come out of the blue and be too short. That is why the 3 day period was chosen. As a result, the shortest period you should use is 3 days. If you want the demand period to be longer, you can use the blank for that. But don’t make it shorter. You will risk making your demand ineffective.

As always, please let us know if you have any questions.

REVISITING THE WPA – AVOIDING OLD PROBLEMS

As you know, the Wood Destroying Pest Inspection and Allocation of Cost Addendum (CAR Form WPA) has been part of our world for a number of years. Despite that fact, and the fact that it is used in the vast majority of our transactions, we continue to see numerous issues arise from its use. As a result, we thought it a good idea to remind you of the common WPA issues and, more importantly, how to avoid them.
1.     The first issue we see revolves around what termite company the seller wants to use to do the section 1 work. As you know, it is not uncommon for the seller to choose a company to do the termite report that the buyer is unhappy with. In such a case, the question becomes whether the seller can choose whoever they want, or whether the buyer has some input. The answer to that question starts in the WPA itself. In paragraph 2A of the form, the parties agree who is going to pay for a “Wood Pest Report prepared by ___________.” Notice that the term Wood Pest Report is capitalized. That means it is a defined term and whenever it is used in the document, it refers to the Report prepared by the company in the blank. Of course, in 2C, where we typically say that the seller will pay for section 1 work, the WPA says the work they will do is that “described in the Wood Pest Report…” As a result, when the seller agrees to do section 1 work, they are obligated to do the work called for in the specified company’s Report. Now, in most cases, agents fill in the above blank with the term “seller’s choice.” While that is legally sufficient, understand that what it really means, since the seller is making the choice, is the cheapest report. So, the way you fill out the blank is very important. If you want the seller to use a particular company, you need to put its name in the blank.

On the other hand, as the buyer’s agent you should remember that, even if the seller can decide who will do the section 1 work per the WPA, you can still ask for someone else as part of your investigation contingency. The RPA specifically defines your investigation contingency to include pest control issues. So, while the seller is not obligated to use your inspector or do extra work, you can ask and threaten cancellation. As a result, if a company is specifically named in 2A of the WPA, the seller is obligated to do the work that company identifies. With regard to any other company, or any additional work, you can only negotiate their involvement as part of your contingencies.

2.     Next, on the seller’s side, our main issue is when the section 1 work is more expensive than they expected. After all, as we said above, when the seller agrees to do section 1 work, they are obligated to do whatever the specific Report says. So, how do we protect our seller? First, you can get the Report up front and insert the companies name as the controlling termite company in either the WPA or a counter offer. That way, you have the report, you know what section 1 will cost, and are only obligated to do that work. The other way to protect your seller is to counter the offer with the following language: “Seller to pay for section 1 pest control work up to a maximum of $x. All costs above that amount to be dealt with pursuant to paragraph 14.” In other words, the seller will pay for the identified amount, but any extra cost will be negotiated as part of the contingencies. By doing either of these things, the seller knows what they are obligated to pay and anything else is negotiable. You are not having them write a blank check.

So, while this is basic advice, it is very important. Please make sure all WPAs you draft deal with these issues so your client is properly represented and you don’t get hit by a claim when they become unhappy.