RealAnswers / Answers for your real estate and general business questions

Is a backup offer legal?

20-Aug-07

Since the earlier post on backup offers, several readers have wondered if backup offers are legal. Since I’m not a judge or jury or even an attorney, I can’t really answer that question, but can provide some information on the status of backup offers as a well established real estate contract contingency. If for some reason you feel that a specific backup offer situation is violating some law, your best bet is to consult a local attorney familiar with your own state’s laws and local practice, not a national website. That said, I would respond to the question with a question of my own: Why wouldn’t a backup offer be legal?

With regard to backup offers specifically, I can’t speak to law because I’m not a lawyer, but I can speak to professional ethics. Not only do backup offers not violate professional ethics, in some circumstances they’re actually ethically required. From the National Association of Realtors Code of Ethics:

REALTORS® shall recommend that sellers/landlords obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract or lease.

[Realtor Code of Ethics Standard of Practice 1-7]

The phrase “contingent on the termination of the pre-existing purchase contract or lease” in layman’s terms is “backup offer” and, in fact, “contingent on the termination of [X offer]” is typical of the wording used in actual backup offers. So, if a seller has accepted a previous offer Realtors required to recommend legal advice if another offer comes in unless it is a backup offer – Realtors are ethically free to recommend accepting a backup offer without consulting an attorney.

In Missouri, while I can’t speak to the legality of a backup offer, I can say that as a real estate licensee I am legally required to present backup offers. This is specifically required by state regulation 20 CSR 2250-8.100 (which has the force of law):

Every licensee shall promptly tender to the seller or seller’s agent every written offer to purchase and shall promptly tender to the buyer or buyer’s agent any counteroffer made
by the seller, including any back-up contracts properly identified
as such… [Emphasis mine]

So, in Missouri, whether the backup offer is legal may be open to question, but the real estate agents obligation to present it is not. With national codes of ethics and at least my own state’s real estate license law requiring agents to present backup offers, as an agent I have to proceed under the assumption that they are valid and must be presented. In practice, backup offers are obviously an accepted real estate contract contingency.

Technorati Tags: backup offers, contingent offers

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What is Option Pending on a for sale home?

19-Aug-07

A reader wanted to know “What is ‘Option Pending’ on a home sale?” Presumably this is something he saw on a for sale sign or in an MLS listing. If there’s an option pending on a home he’s actually contracted to purchase then it’s time to slow down.

For your purposes as a buyer, a home with an option pending is about as useful as a home with a contract pending. An option pending means that the seller has committed to sell the home to a buyer for a certain price with a certain deadline. The difference between an option and a purchase contract is that the buyer isn’t obligated to purchase, but merely has the <em>option to purchase</em> at the buyer’s discretion. There may be any number of reasons for this, but if the option is valid the buyer has done something to make it worth the seller’s while, usually paying a price for the option itself.

As a potential buyer, you may want to keep an eye on this property to see if the option expires and the “Option Pending” is removed. You may want to inquire as to when the option will expire, so you can make an offer at that point.

It is also possible to buy the property subject to the option, but the obligation to sell would merely pass to you as the new owner, so the situations where you’d want to actually do this are very narrow. Since most well written options are notarized and recorded, they can cloud the title to the property if breached, so if you purchased a property with a valid option pending, you would have to honor it. If you are using a the property as collateral on a loan, the pending option would likely prevent getting a loan, so even buying the property subject to the option is only a real possibility for cash buyers.

Technorati Tags: option, pending, real estate, home, sale

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How do i get the earnest money returned?

16-Aug-07

A RealNews reader asked “How do I get the earnest money returned from a Realtor in Missouri?” There are a couple of answers that would apply essentially anywhere, not just in Missouri, and then some specific information for Missouri.

First, to get the earnest money disbursed to you, whether you are the buyer or seller, you have to be entitled to it under the terms of the contract. Review the contract, with legal counsel if necessary, and make sure you held up your end of the bargain and that you’re entitled to receive it. It never ceases to amaze how often a buyer, represented by a buyer’s agent who should know better, will ask for the return of earnest money when the buyer clearly breached the terms of the agreement. And, not surprisingly, seller’s and their agents are equally likely to expect to receive earnest money when a buyer backs out, even though the buyer backs out precisely because the seller has done something in violation of the agreement. So, first step is do your part correctly. Second step is ask for the money to be returned.

In many places, even where it’s not required, the broker will not disburse the earnest money until both parties sign a release. The release may specify that both parties are agreeing the contract is terminated and that the return of the earnest money signifies both parties satisfaction. At the least, the release will likely absolve the broker from any liability to either party for the disposition of the earnest money. Even if it weren’t required, I’d want both parties to agree that I was handling the funds correctly, no matter what they thought of the transaction otherwise.

In Missouri, disputed earnest money is now turned over to the State Treasurer.

Whenever the ownership of any escrow moneys received by a broker pursuant to this section is in dispute by the parties to a real estate sales transaction, the broker shall report and deliver the moneys to the state treasurer within three hundred sixty-five days of the date of the initial projected closing date in compliance with sections 447.500 to 447.595, RSMo. The parties to a real estate sales transaction may agree in writing that the funds are not in dispute and shall notify the broker who is holding the funds.

So, the answer for the reader, who was from Missouri, is quite simple. If both parties don’t want to sign off on the return of the earnest money, you’ll need to wait the required time (up to 365 days), then apply to the State Treasurer for the return of the earnest money.

Before 2003, in Missouri, real estate brokers would disburse the funds according to their best judgment after a short time unless court action was initiated, in which case they would release the funds to the court. Other states may have similar provisions to either the old or new Missouri requirements, but most should allow for the funds to be disbursed if all parties agree in writing.

Technorati Tags: escrow, earnest money

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What is the difference between purchase price, appraised value and loan amount?

10-Aug-07

A reader asked, “What is the difference between purchase price, appraised price and loan amount?” in a real estate transaction.

The purchase price is simply the price agreed between buyer and seller. It’s the amount that the seller will receive once the seller’s closing costs are paid. It’s the amount that the buyer will pay at closing, including any loan. Purchase price is the “top line” in any real estate transaction. In a cash transaction, the purchase price is all there is to worry about – there would be no loan (the loan amount is zero) and with no loan there’s no need for an appraisal.

The second part of the question, appraised price, is actually a bit of a mistake. There’s no such thing as “appraised price”. Instead, there’s an appraised value. Appraised value is the estimate of the value of the property arrived at by a licensed appraiser using standardized valuation methods including analysis of comparable sales, cash flow. Fannie Mae defines the appraised value as “An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property. “ Some of us would argue that the purchase price is the only true measure of value – the price that a willing buyer and a willing seller agree to in an arm’s length transaction – and that appraised value should be called something else. The appraisal is a tool used by the bank to determine a safe amount to loan against the house or at least to keep the loan risk in an acceptable range. Which brings us to…

The loan amount. The loan amount will be a certain percent of the value of the house, depending on the loan type. The “standard” conventional mortgage is an 80% loan-to-value, though this can be as high as 100% with mortgage insurance. This means that for this type of mortgage, the bank will loan $80 for every $100 of “value”. And what is value – it’s the lower of the purchase price or appraised value. So, for example, if a house has a purchase price of $100,000 and an appraised value of $90,000, the maximum loan amount on an 80% loan is $72,000. For a house with a purchase price of $100,000 and an appraised value of $120,000, the maximum loan amount on an 80% loan would be $80,000. It doesn’t matter which number is higher, the bank always considers the lower number as the true “value”.

There are two common reasons that people ask for clarification on these three numbers. One is when a buyer sees that the house appraised for less than purchase price or the seller sees that it appraised for more. The buyer or seller may want to know if they are entitled to pay less or be paid more. Generally, the answer is no. The appraisal is a tool for the bank and the “value” it determines is based on standard formulas. The price you as buyer or seller agreed on is determined by the wants and needs of both parties and that isn’t something the appraiser could necessarily quantify or even something the appraiser should ethically consider if he could. The appraised value does not, unless agreed by both parties, obligate either buyer or seller to adjust the purchase price. In fact, houses usually do sell for an amount different from the appraisers estimate of value.

The second reason this question gets asked is that buyers, especially new investors, often hope that a higher than purchase price appraisal will allow them to borrow more than the purchase price for repairs or to make a smaller down payment. Generally, the higher appraisal won’t allow either of those. Since the loan amount is based on the lower of the appraised value or purchase price, a higher appraisal doesn’t make any difference. The lower number is always the one used to set the maximum loan amount – if the appraisal is higher, the purchase price sets the maximum loan; if the purchase price is higher, the appraisal sets the maximum loan. The bank protects itself with the most conservative value either way. There are, of course, specialized loans that allow borrowers to receive money for repairs and loans that require little or no down payment, but it’s not necessary for a house to appraise above purchase price to use those loans and an above purchase price appraisal won’t be any help with a conventional loan.

Technorati Tags: purchase price, appraisal, appraised value, loan amount, mortgage

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What is a backup contract in real estate?

30-Jul-07

Two different RealNews readers wrote in with similar questions: “What is a real estate backup contract?” and “What does backup mean in real estate?”

In real estate, a backup contract or backup offer is simply a transaction that doesn’t take place unless another transaction, usually called the “primary” transaction, falls through. Generally speaking it’s most common that a buyer will make an offer on a property that is already under contract with another buyer and that offer must be a backup offer. The buyer is obligated to proceed with the sale if the seller notifies the buyer that the backup offer has become the primary offer. The seller is also obligated, but only if the primary contract fails. There may be other terms of the sale, such as financing or inspections, as with any other contract. The buyer may be able to revoke the over until a date specified in the offer, if that is specified as part of the offer, but generally the buyer is obligated and usually with a deposit at stake, while the seller is only obligated if the primary offer fails.

Depending on market conditions and the qualifications of the buyer on the primary contract, there’s a reasonable chance that the primary will fail to close. Here are some scenarios where that might happen:

Buyer’s credit score changes due to a major credit purchase
Buyer loses a job or job buyer was moving for fails to materialize
Buyer simply backs out
Property doesn’t appraise for high enough value
Inspection reveals fault in the property

In the first three circumstances, a qualified buyer can step in and often close even quicker as all title work and other seller’s side matters are already settled. In the last two circumstances, a backup buyer may want the property even though the primary buyer didn’t – perhaps the backup buyer has sufficient down payment to close even with a lower appraisal or is willing to accept the property with the deficiencies shown by the inspection.

On the seller’s side, it’s easy to see why a backup offer is desirable. It essentially doubles the chance of a successful closing. Why would a buyer want to get involved in a backup contract? The answers vary, but they include:

A tight seller’s market
Very specific property requirements
A particularly good deal
A great location

The bottom line on the buyer’s side is that for whatever reason a particular property is so much better than anything else available that the buyer is willing to make an offer and tie up a deposit for 15-45 days to see if the primary offer closes.

Still have other questions about backup contracts? Ask a question!

Technorati Tags: real estate, backup, contract, offer

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28-Jul-07

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