|Traps for Sellers
In the more than twenty five years of experience in specializing in the brokerage of income properties, exclusively, we have encountered many potential traps that a sellers can fall into. Many of these can result in sever financial loss. The vast majority of these traps are inadvertent and not maliciously planned in advance. Some are. Here are examples of both:
The Unsolicited Offer. This is perhaps the most trap for sellers. There are many aspects of the unsolicited offer that are appealing, such as:
- No market period is needed, which is almost always a period of discomfort for the seller, the property manager and often the tenants as well.
- The offer is usually presented as "as good as, or better than an offer created by aggressive market". Sometimes this contention is supported by comparable sales data.
- The buyer is often portrayed as the perfect " buyer " because of his motivation and his appreciate of the subject property.
- The buyer is so familiar with the property the closing will take little time to close the escrow and with almost no discomfort to the seller.
- The buyer is so familiar with the subject type of property, and is so sophisticated, that he probably will not even look at the property.
- He has tons of money and will close the escrow even if he doesn't sell his existing property he has for sale.
- The prospect buyer is very popular with his present tenants in his own properties. So, he will not create any problems with your existing tenants trying to raise rent or make upsetting changes.
- The amount of commission may also be appealing, sometimes none at all. This is usually the "hook" for many sellers because not having to pay sales commissions is very appealing. One should not forget that no matter what the amount of the commission is, the seller is paying such a broker for representing the buyer's point of view. If that were not true how else could the broker get a signature on a purchase agreement for a property not even on the market?
Most of the time all, or most, of the above representations of untrue. The agent must have an appealing story in order to obtain the seller's signature on the purchase agreement. Why pay a broker to represent the buyer only? The seller, in accepting an unsolicited offer, is acting totally un represented.
The "Buyer Favorable" Contract Clauses:
Remember that the agent presenting the unsolicited offer has a pre-existing relationship with the buyer, the purchase agreement may contain many clauses unfavorable to the seller, such as:
- A clause that is so cleverly composed as to make the close of escrow on the seller's property contingent upon the close of escrow on the buyer's currently owned property. This could take months, or even years as it has in some cases.
- Language making it necessary for the seller to cure all deferred maintenance before close of escrow. This is standard language in some boilerplate contracts used by residential brokers.
- Language allowing the buyer to assign the property to some undisclosed third party during the escrow period and keep the difference in purchase price himself.
- A closing period for a period of time for the broker to market the property to undisclosed prospective buyers of the broker, allowing the broker to "mark up" the price and keep the difference. "This should be properly labeled as "Broker Favorable" contract clauses.
- Cleverly disguised language which allows the buyer to extend the close of escrow for previously undisclosed inspections. Since the buyer could sue the seller for undisclosed defects it would be foolish to deny as much access for inspections as the buyer reasonably requires.
- Small forfeitable deposit allowing the buyer to find a more appealing property and then just walk away from his present contract. This is the equivalent of a cheap option to buy. The seller has no recourse to the buyer.
- Clauses that make it mandatory for the seller to turn over all personal property on the property to the new owner.
The Renegotiating of the Contract Terms
This is the most often used tactic by the buyer brought to a seller by an agent who is representing the buyer's interest only. The buyer attempts to renegotiate the original price and terms which are not the buyer's or the broker's. This trap is almost impossible to avoid when the contract has been drawn by a broker adverse to the seller's interests. The excuses are usually:
- The buyer didn't know about the bad tenant history. He needs to lower the price to justify the the smaller income he will probably receive.
- The buyer didn't know about all the deferred maintenance the subject property has.
- The buyer didn't know that a toxic report would be required by the lender. (They usually are not, but it's a good excuse).
- The buyer has had a small financial reverse and needs another few weeks to cash in his CDs without penalty.
- The roof inspection came in very unfavorably. (Don't they all?) The seller needs a discount to continue the deal.
Keep in mind that making these types of demands does not give the seller the right to cancel the contract. These demands are almost made verbally so that the seller will have no grounds to cancel the agreement. The successful renegotiations almost always take the form of verbal communications.
This is but a small fraction of the list of seller traps that brokers use in representing buyers who present the unsolicited offer.
More seller traps
This is only an example. There are at least a dozen more traps that even the most knowledgeable buyer can fall into. There may be some that we haven't yet come across, but after 25 years of specialization it would be rare.