The Offer to Purchase is a binding contract
Richard D. Vetstein, today, he explains why buyers and sellers should treat an Offer to Purchase as a legally binding contract:
The first step in purchasing or selling residential real estate is the acceptance of an Offer To Purchase. Most often, the real estate broker prepares the offer on a pre-printed standard form offer and presents it to the seller for review and acceptance. Attorneys are not typically involved in the offer stage but given the amount of recent litigation over offers to purchase, it’s never a bad idea to consult an attorney even at the earliest stages of the home buying process.Many buyers and sellers (and their brokers) are under the misconception that the offer to purchase is merely a formality, and that a binding contract is formed only when the parties sign the more extensive purchase and sale agreement. This is not true. Under established Massachusetts case law, a signed standard form offer to purchase is a binding and enforceable contract to sell real estate even if the offer is subject to the signing of a more comprehensive purchase and sale agreement. So if a seller signs and accepts an offer and later gets a better deal, I wouldn’t advise the seller to attempt to walk away from the original deal. Armed with a signed offer, buyers can sue for specific performance, and record a “lis pendens,” or notice of claim, in the registry of deeds against the property which will effectively prevent its sale until the litigation is resolved.
In some cases, the seller may not desire to be contractually bound by the acceptance of an offer to purchase while their property is taken off the market. In that case, safe harbor language can be drafted to specify the limited nature of the obligations created by the accepted offer. This is rather unusual, however.
With the offer to purchase, I always advise buyers and their brokers to use some type of standard form addendum to address such contingencies as mortgage financing, home inspection, radon, lead paint, and pests. The home inspection and related tests are typically completed before the purchase and sale agreement is signed and any inspection issues are dealt with in the P&S. If they are not, there is an inspection contingency added to the P&S. Another crucial aspect of the offer are the various deadlines: for closing, for inspections, for mortgage financing. Buyers push for more time, while sellers push for less time. Reasonableness should prevail here. It may be unrealistic for a financed transaction to close in less than 30 days in this market. And it’s critical to build enough time to complete the home inspection process and get estimates for repairs.
As a real estate broker, I know that some of my attorneys get twitchy at the idea of agents handling an Offer to Purchase. Some make changes that they instruct me to use. In some states, agents can’t touch any contracts; do you think that is a better idea?
Also, what’s your experience with broken Offer to Purchase contracts? Have you ended one? Has the other party ended one? Do you think the current contingencies for inspections and mortgage are sufficient?
Do you have more Offer to Purchase questions for our guest attorney?
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As a seller I think the time constraints outlined in the standard contracts are too short. According to Vetstein, it is usually the buyer who is pressing for more time and the seller who wants it to proceed more quickly. In our case it is the opposite. Our buyers wanted to close in less than thirty days from the date of their offer contract - yet they were waiting until the end of that first week to even begin the inspection process. We have really felt very squeezed to tie up all the loose ends in the house that our buyer wants and still pack the place up to get out of here in such a short time frame. Their requests are perfectly reasonable, but the time allotted has made it all very challenging. First time home buyers perhaps do not understand that when you need to schedule a service for your home (such as having the furnace cleaned, for example) sometimes you can't get an appt. for several weeks.
Yet we are in no position to complain, because after all, we have a buyer! So we're dealing.
Thanks for pointing this out. I don't have anything to add but I wanted to compliment you a particularly informative post.
Interesting to note that the pre-printed standard form offer specifies that the buyer can breach the offer agreement with no risk of the seller successfully seeking specific performance. Forfeiture of the buyer's initial deposit as "liquidated damages" is the seller's sole remedy as per offer's pre-printed terms. So a seller may find the accepted offer a binding obligation, but the buyer can walk away from the accepted offer agreement so long as he is willing to lose that initial deposit.
personally, and no offense intended to you rona or any other realtor out there, as someone who deals with business contracts professionally -- and i am not an attorney but do work with them to ensure my contracts are legally tight and proper -- i think that only a real estate attorney is qualified to review and approve an offer to purchase. because it is a legally-binding contract, i do not think that realtors should not be in charge. certainly they play a role in serving as a non-emotional third party in the negotiations, but an offer should never be signed without review by attorneys on both sides.
not to moention that attorneys have malpractice insurance of some sort if something goes hideously wrong, whereas with realtors there is very little recourse.
when i have been involved in a real estate transaction of my own, it has always freaked out the other side when i say i want to have my attorney review the offer. i don't know why -- it should be my right, just as i would have no problem with the other side doing the same.
WR -- not all pre-printed forms specify that the deposit is liquidated damages that will preclude suit for specific performance; also, in some states, such a preclusion is not actually enforceable, despite the forms (some states do not like liquidated damages when the damages can in fact be easily ascertained or the breach easily remedied, as would be the case with a home purchase). That's precisely why a real estate attorney should be involved. Not all contract provisions are enforceable in all respects in all jurisdictions. It ultimately protects all the parties involved to have an attorney look over a contract. It adds some expense, but a home purchase is an expensive proposition -- given the amount at stake, some of the cost-cutting measures some buyers take make no sense (such as, no attorney, or worse, no home inspector). Real estate agents might know one or two cases, but they won't know the ins and outs of contract law.
Chloe,
I frequently have attorneys who want to tweak the language on the offer template before my client begins making offers.
Once that is done, I can fill in the dates and offer amount and not worry that the contract is not up to the buyer's attorney's standards.
I'm not an attorney and I don't play one on this blog!
rona, you definitely seem like one of most ethical and diligent realtors around. i don't think i said that you play lawyer, but there are many who do, on either side of the deal. in my experience (and i have dealt with a few realtors), i have worked with realtors who work with my attorney (one realtor was married to an attorney -- that was handy :)). but i have also worked with one realtor (who should not hold a license of any kind) who did not even present us with the written offer for over four days and resisted my wanting our attorney to review it.
i am betting there are quite a few out there who believe that they can handle the offer to purchase and don't give it the same weight as the P&S. and that may be precisely because they do not understand that it has just as much legal weight as that P&S, until a P&S is signed.
Q?
Can the offer to purchase bind you even if the offer to purchase that you signed was presented to the banks for loan was declined by the banks due to the incorrect ID numbers,meaning first page of the offer the offer my ID was incorrectly written and the last page it was a complete different ID number?
Advise.
Itumeleng,
A lawyer needs to look at the details of this problem. It is specific to what is on the paperwork, when it was signed who signed it. I can't play lawyer, even if I had all the paperwork in front of me. Give a lawyer.
This blogger might want to review your comment before posting it.
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