Sunday, January 15, 2017

Buyer Must Give a Reason for Cancelling Purchase Contract

A new Purchase Contract will be used for home sales in Arizona, effective February 1. While I am not sure the new "as is" condition is for the best (see next post), I do like the requirement that buyers give a reason for cancelling a contract. If the buyer does not give a written reason for cancelling the contract, he will forfeit his earnest money to the seller.

When a buyer gets a house under contract, he has what many agents call a 10 day "free look". The buyer can hire home inspectors, and investigate anything he wants, including building permits, flood plain status, sewer connection, zoning compliance, nearby development plans, schools, etc. This is called due diligence.

Currently, if the due diligence produces something that is unacceptable to the buyer, he can cancel the contract during the inspection period without explanation and get his earnest money back.

If fairness to the seller, the buyer should not be making shot gun offers on several houses without disclosing this to the seller. The buyer should not decide that he can't afford the house or he'd rather buy a different house. He should make a serious, good faith offer, and should only cancel the contract if he learns something new during the inspection period.

Sometimes one of my buyers is interested in a house that was under contract with a different buyer, but the first buyer cancelled the contract and the deal fell through (DFT). Sometimes the DFT was due to something unrelated to the property and my buyer's interest in it. The most common reason for a DFT is the first buyer couldn't get financing. However, if the DFT occurred because of a material fact, like a structural crack or lack of building permits, having that information will affect whether my buyer wants the house, what he should pay, and whether he can get financing.

Unfortunately, when I call a listing agent to ask why the previous sale DFTed, the agent often says he doesn't know; the buyer just flaked out. Now that the buyer is required to give a reason for cancelling, the listing agent can't claim they don't know what happened.

By the way, the seller and listing agent are required by state law and the Realtor Code of Ethics to disclose any material fact that they learn from a buyer's due diligence.

All Home Sales are "As Is" Sales!

Last week I was in the first class in Tucson to learn about the changes to the Arizona Association of Realtors Purchase Contract. This new contract goes into effect on February 1, and I expect it will take many agents by surprise.

The biggest change is that all contracts are now "as is". In current Purchase Contract, seller must provide heating, cooling, plumbing, electrical and mechanical systems that work. No longer. Seller is only obligated to transfer the property in the same condition as it was at contract acceptance. How anyone proves that a system that is not working at close of escrow was working at contract acceptance is unknown. The home inspection report may be useful in documenting any changes in the condition of the property during the escrow period.

When I started in real estate in 1995, the seller had to provide a leak-free roof and rid the house of termites. Those requirements were removed from the contract several years ago. Now the seller isn't required to do anything except fix anything that broke during the escrow period.

The State of Arizona requires that a septic system be inspected and repaired at seller's expense, and this requirement is not affected by the new "as is" clause.

The buyer still retains the right to inspect the property and can request repairs within the inspection period, which is usually 10 days from contract acceptance. The big difference is the seller doesn't have to fix anything. If the seller won't make the repairs the buyer requests, the buyer can cancel the contract and get his earnest money refunded.

This is going to create a problem for buyers who are getting an FHA or VA mortgage. Appraisers for these government-insured mortgages sometimes produce a list of required repairs, and if the seller won't make the repairs, the buyer won't get a mortgage. Requirements for conventional mortgages (non-government insured) are not as strict, but the house still must be habitable.

So if a buyer wants to make get a mortgage on a house with broken windows, leaking roof, or no water service, they should write in the contract that the seller will fix these things. If the seller is unable or unwilling to make the house habitable, the buyer shouldn't waste $400 on home inspections and $375 on an appraisal, because he is not going to get a mortgage.

The class I took was taught by one of the agents involved in writing the new Purchase Contract. She said when the committee discussed the "as is" clause, eight people were against it, and three people were for it. They asked an attorney to research how this is handled in other states where real estate agents write purchase contracts. The attorney found that aside from Arizona, no other state requires the seller to fix anything.

Another change to the purchase contract is the seller now has to provide the Seller's Property Disclosure Statement (SPDS) within three days of contract acceptance, which is a slight improvement over the current five days. It is very important for the buyer to have the SPDS before doing their home inspection so the inspector can check out any problems the seller has disclosed.

I have always tried to get the SPDS before my buyers make an offer. This is especially important now that all sales are "as is". Unfortunately, most agents don't even think about asking their seller to complete the SPDS until the house is under contract, then the seller drags his feet completing the form. Some sellers just refuse to complete the SPDS. That is the topic for another blog post.

When I have a listing, I tell my sellers we are not putting the house on the market until the SPDS is complete. I add the SPDS to the documents attached to the MLS listing and require the buyer to submit the signed SPDS with their offer. This protects the seller from buyers who want to renegotiate or cancel the contract when they learn something about the house that the seller already knew.

Doing what I can to reduce the chaos in the world!