An Offer Is a Contract – All Parties Have To Take It Seriously!

It’s silly season in real estate and that means spring!  Another year of low inventory with many motivated buyers who will seemingly do anything to get their offer accepted on the house of their dreams.  Buyers are signing all kinds of offers.  Some will waive their mortgage and other contingencies, while others may have escalation clauses built.  Such clauses dictate that the seller can accept a higher offer if one is presented.  Some buyers are simply jumping in to compete and then finding themselves in a regrettable situation later.
Recently, we saw all three of these scenarios come up.  This makes me wonder how buyers are being advised and counseled when they are making their offers.
For example, we have a loan approved with just a few final and minor conditions to be met by the buyer.  However, the buyer has gotten cold feet and no longer wants to buy the house.  They ask us if we could decline their loan so that they may get their deposit back.  This is not something we can do.  We have to report to our regulators our pre-qualification process, decline rates and any and all reasons for any decline.  We cannot simply decline a loan because the borrower changes their mind.  “What if I just don’t send in the documents you requested?” the buyer asks.  When you sign a contract with a mortgage contingency you agree to meet all conditions of the mortgage process.  If the borrower never sends in the required documents, we can withdraw the loan after we send out a ‘notice of incomplete’.  This notice gives the borrower a specific amount of time to respond before their loan is cancelled.
The standard mortgage contingency has an ‘apply by date’ to insure that the buyers perform in a timely manner.  This contingency forbids them from saying that they are unable to get their loan approved by the commitment date as a result of them not getting their information to the mortgage company by the dates in the original contract.
The time to make sure that buyers fully understand their contractual obligations is before the offer is made.  An offer is a contract and the purchase and sales agreement is a secondary contract, however once the offer is signed there is no guarantee that you can change the terms when you get to the purchase and sales agreement.
In another situation, we have a set of buyers approved to close on their new home.  There is an escalation agreement in their offer stating that the seller could continue showing the property.  If the sellers get an offer higher than the agreed upon price our borrowers would then have 48 hours to meet the new offer.  So, lo and behold, a higher offer comes in!  The agent negotiates the seller down a bit to keep the current buyers on track, but of course the current buyers are upset about having to pay more.  However, they did sign the offer and the worst-case scenario as outlined in that offer materialized.  Their only choice was to meet the higher price or start their home search all over again.
This same scenario also played out in a precedent setting lawsuit.  In this case, a seller accepted an offer but the buyers didn’t sign the purchase and sales agreement on the date specified in the offer, the seller then accepted a higher offer from another party and the first buyer filed suit and won.  The court determined that the original offer was a contract and had to be honored.
The bottom line is to not take any risks; make sure all parties fully understand what they are getting into when they make an agreement to purchase a piece of real estate.  Be certain that they know what they can and cannot expect as the transaction moves forward and they fully understand their legal obligations in the event they get cold feet.

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About Amy Tierce

As one of the top rated mortgage professionals in New England, Amy is sought out both locally and nationally to speak at mortgage industry events and training programs including the “Turn on Your Million Dollar Brain” workshops. Amy has also been featured in both radio and print media including the programs “Financially Speaking” and “Money Matters,” and “Mortgage Originator” and “Banker and Tradesman.” Amy regularly shares her industry knowledge via her “Fairway Promise” blog to keep clients and industry related professionals apprised of the latest news, trends, and tips in the mortgage industry.

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