07/10/2022
Should a home seller count on a sale closing?
As a real estate broker who provides professional mediation services as part of my practice, I have dealt with a wide array of Colorado real estate issues. This story is an amalgam of a number of disputes that I have mediated, and may provide a cautionary tale for sellers and buyers. Doug Barber 7/10/2022
REALTOR® Bob presented a purchase offer from his buyer Sam. Sam was pre-approved for the loan to buy the property, offered a workable price, provided a reasonable amount of earnest money, is very excited about the idea of owning the property. To evidence his intent at the time to not “nickle and dime” the seller over inspection items once the detailed look at the property is completed, Sam includes a clause in his purchase offer that reads something like this: “Any Inspection Objections will be made only for things that are health and safety related or are major items (heating, plumbing, roof, etc.), and where the repair cost is under $400.”
Seller Susan is happy with the offer, particularly because she does not have a lot of money to make repairs and needs the money she does have for her next house, which she has already located and is excited for. Susan also knows that her house (like most houses) has a lot of “little fixup things” that need to be done. Thus, Sam’s “promise,” as Susan perceives it, not to object to minor stuff that is not a threat to health and safety is a significant inducement to her decision to accept Sam’s offer.
Sam and Susan are upbeat and positive because the house is now “sold,” and they start the process of culling, packing and getting ready to move in anticipation of the pending closing. The parties’ brokers are happy to be under contract, and they start processing the contract toward closing.
The house that Susan has had her eye on is a gem. Seller Sally just put it on the market and Susan knows it will not last until she can close her house sale, so she asks her broker to prepare a purchase offer for the new house. Susan’s broker properly advises her that she should utilize the preprinted contingency in the contract form that makes Susan’s performance conditional upon the prior sale of her present home. However, Sally says that she will not consider a contingent sale offer, and insists on a $10,000 earnest money deposit as a condition of accepting the offer.
Susan already knows where her furniture will go in the new house. She has imagined how wonderful it will be in the new place, and sees herself there. On some level she likely knows it is risky (what if Sam gets run over by a bus on the way to closing, or loses his job and can’t get his loan?), but she remembers how Sam’s offer was presented by Bob and Sam as a “sure thing” and that Sam was going to take it “as is, where is and with all faults” (as it states in the preprinted in the contract) without objecting to minor defects, so she waives her home sale contingency. Sally knows that since Susan needs to sell her house in order to buy Sally’s there is a potential risk of the deal failing, but Sally is content with the idea that if Susan defaults, Sally will get the $10,000 deposit and be able to sell to another buyer. Sally and Susan go under contract on Sally’s house.
The Colorado real estate contract typically provides that a buyer has a period of time to inspect the property using any people the buyer chooses (any or all of home inspector, plumber, roofer, landscaper, HVAC person, brother-in-law handyman, pest control person, environmental expert, feng shui consultant, psychic, etc.). Based on the inspection results, the buyer has the choice of 1) terminating the contract (by the Inspection Termination Deadline); 2) making a written objection to the property or area condition by the Inspection Objection Deadline (doing so eliminates any Inspection Termination Deadline in the contract) and asking the seller to reach a written Resolution to the objections; or 3) doing nothing, taking the property as is and proceeding with the purchase.
Sam has a home inspection made of Susan’s house. The home inspector’s job is to point out to the buyer all the faults and defects that the inspector sees so that the buyer can make an informed decision about buying the property. Sam gets a written report detailing the issues the inspector found and is shocked by all the defects listed in it. Sam does not know a screwdriver from a wrench, so will have to hire all the work done and starts mentally adding up what everything will cost. The initial excitement over getting under contract has faded by now and the inspection report adds a sobering touch to the reality that Susan’s place is not the Taj Mahal he first perceived it to be. Sam starts to wonder if he should have gone after that other house he looked at, or pursued a newly built home or maybe he should go take a look at that one that just hit the market in the area he likes (grass is greener syndrome).
Sam tells Bob of his property condition concerns and says he thinks he should terminate the contract. Bob persuades Sam to instead ask Susan to make some of the repairs, some of which require licensed professionals or qualified contractors. Bob drafts the Inspection Objection which Sam signs and sends it to Susan’s broker. Sam includes a copy of the home inspection report so that Susan and her broker will be aware of all the issues the inspector noted.
Susan goes ballistic when she sees the extent of Sam’s Objections. “Sam swore he would not ask for anything minor. These are not health and safety related and most of these should be less than $400 to fix. This is bad faith on Sam’s part. And don’t even get me started on what a liar and dirtbag Bob is for his part in selling me on how serious and motivated Sam was about buying my home. I will be writing plenty of nasty Google and social media reviews about him.”
Susan’s angry reaction is typical and entirely predictable. She had mentally moved and now that dream/plan is in jeopardy. She is also scared (fear is often manifested by anger) that she may not be able to perform on her agreement with Sally, and she has no contingency in that contract that would allow her to get her $10,000 earnest money back if Sam backs out of their contract. Maybe she paid deposits to movers and others, or rented storage units and can’t get that money back. Maybe she does not have the money or time to take care of Sam’s Objection list. Susan feels helpless and over a barrel. To make matters worse, since she and her broker received the home inspection report, they are now aware of the defects it reveals and will be required to share those with any subsequent buyer if they cannot keep the deal with Sam alive.
Often when things do not go one’s way, there is a tendency to blame others for one’s misfortune, so Susan lashes out at Sam and Bob (and maybe her own broker) for getting her into this situation, forgetting that she is the one who wanted and chose to do it.
Susan’s broker tries to calm her down and explains that the Objection notice is just Sam’s wish list and that they can negotiate to whittle down the list to something manageable, which will be spelled out in the Resolution Agreement the parties now need to sign to prevent their contract from terminating on the Resolution Deadline.
Susan reluctantly agrees to take care of a number of the Objection issues by the closing date, claiming that she is signing the Resolution Agreement under duress. She gets most of them done, but finds that some can’t be completed prior to closing because of delays in getting materials. She orders the materials and plans to have them installed after closing when they arrive; it’s the best she can do, and surely Sam will be reasonable and understanding.
A day before closing, Bob and Sam come to Susan’s house to do a walk-through inspection. Susan has pretty much emptied the house, moving things to a storage unit until after her closings with Sam and Sally, hired a cleaning crew to dust and clean and has had the carpets steam cleaned per Sam’s contract request, so that Sam will be able to start with a clean house.
Sam objects that the house now smells like pet urine that was not there before (probably caused by the steam cleaning of the carpets). Susan assures that she never had pets during her ownership, so whatever was in the carpets was there all along during their transaction. Sam also notes that a few of the items on the Resolution Agreement are still not done, and he considers them health and safety related; Susan disagrees. Susan explains that it was not possible to do everything prior to closing, but the parts are ordered and will be installed as soon as they arrive. Susan also notes that some of the items on his list would be less than $400, so she should not have to do them anyway because Sam had told her that he would not ask for anything in that category. Bob reminds her broker that the Resolution Agreement modified the initial contract, so Susan had to do what she agreed to regardless of what she thought of Sam’s requests.
Bob sends Susan’s broker a notice from Sam terminating his contract, asserting that Susan breached the contract by not completing the Resolution Agreement prior to closing. Susan counters that Sam acted in bad faith by requesting things he initially said he would not request, and then by terminating at the last minute when she had acted in good faith to try and complete all the Resolution items. They then lock horns in a dispute over the $6,000 earnest money deposit Sam had made in connection with their contract.
Unable to see her house in time to save the deal with Sally, Susan loses her $10,000 deposit on Sally’s house. She tells her broker that she wants to sue Sam and Bob for her losses (earnest money, storage, moving, cleaning, lost wages, emotional distress, etc.; damage calculations can get creative), but is informed that the contract she signed is a liquidated damages contract that limits her to keeping Sam’s earnest money (if she can get it). Susan fires her broker for getting her into this situation, resolves the earnest money in mediation (rather than litigating over legal versus equitable claims), and goes on tells the world on social media how she was victimized by Sam and incompetent brokers.
The end.
I have dealt with countless such scenarios in mediation. By the time the dispute reaches me, the parties are usually so polarized that it is difficult to get them on a path to compromise to they can resolve the earnest money/damages claimed. As a real estate litigation consultant, I likewise typically see that the parties are fixed in their positions and everyone exercises selective memory as the litigation proceeds through discovery and to trial. People often want to blame others and not accept responsibility for their own choices. Real estate brokers have varying levels of skill and experience, but are always the hired help. Brokers counsel, advise and document the agreements of the parties, but all decisions are made by their clients.
I teach real estate brokers to write contracts most likely to succeed. One of my admonitions is to not include meaningless/unenforceable statements about only objecting to health and safety or major items in offers. As a practical matter, a buyer can tie most things to health and safety in the buyer’s mind, especially if they have pets and children, are hypochondriacs, are germaphobes, are perfectionists, etc. And what is major to a buyer and seller may be very different.
The concept is good, but in practice it is far too subjective to be useful. Further, the verbiage is likely to be perceived by the seller as a guarantee by the buyer, so if the buyer subsequently does ask for things, the seller can be expected to think the buyer is a liar, damaging the relationship between them. What if the buyer later needs a last-minute contract extension in order to close because the buyer’s lender did not get the closing disclosure out on time? The seller is likely to say, “Gotcha! I will only extend of you pay me more money.” Crazy, you say? I have had a fair number of such cases in mediation where the seller refused to extend, allowing the deal to blow up, just to get even with the buyer who treated them badly during the transaction. This is why we don’t want people making decisions out of anger.
Maybe the buyer and seller will never speak again after the sale, but relationship during negotiation and ex*****on of the transaction matters. Wise brokers try to nurture relationship with the other broker and between the parties by considering the other party’s needs and circumstances instead of trying only to pursue what their client wants because you never know what twists and turns the transaction may take.
If a buyer really wants to make the seller feel mor comfortable with the buyer’s intentions, it would be better for the buyer to simply waive the contractual option to object and resolve regarding property condition, and just retain the right to terminate the contract if inspections reveal significant [in the buyer’s sole subjective discretion, as our contracts say] issues. If, after inspections, the buyer wants to terminate, the buyer and seller could maybe agree on a price reduction or a dollar amount of credit to the buyer to keep the deal alive, but going into the contract the seller would know they would not be asked to make repairs or replacements prior to closing that they might or might not be able to timely complete, or that the buyer might allege were not done properly or professionally (or as the buyer thought they would or should be handled). Price reductions and cash seller concessions usually work well because they are not subjective like repairs/replacements can be.
So, the moral of the story is that the sale is not closed until the seller leaves the closing table with the cash, so it would be wise for the seller not to make commitments based on the closing happening on time that the seller cannot perform if the sale fails. You just never know what may happen between contract and closing, so play “what if” and contract accordingly.
Douglas H. Barber
CRB, GRI, MRE, e-Pro, REDS, RCC, SRES, C2EX
President/Broker
The Rawhide Company, REALTORS®
7075 Campus Drive, Suite 200
Colorado Springs, Colorado 80920
(719) 338-3053 / [email protected] / www.Rawhide.net
Real estate expertise and integrity since 1975
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