The Risks of Sweetening the Offer Too Much
Posted on June 1, 2012 by Arizona Realtor Monthly
Why Buyers Should Think Twice Before Waiving SPDS & Other Protection
It’s a tough market for buyers right now. Low inventory makes multiple offer situations common, and investors with cash often beat out traditional owner-occupants. In response, some buyers are looking for ways to make their offer stand out.
“Buyers get in a competitive mode and are willing to give up disclosures, SPDS and insurance claim history. In some cases, they’re even willing to waive inspections of the home,” reports Kelly Hand with Tierra Antigua Realty in Tucson. “This creates more risk for buyers, and I think that they’re willing to do it because they don’t understand the risk involved.”
“Buyers are willing to waive a lot right now,” agrees Ronald L. Moore, designated broker with Keller Williams Integrity First in Mesa. “We’re talking contingencies, appraisals, inspections, CLUE—things I wish they wouldn’t waive. They’re doing it to compete, I get that. And as inventory continues to drop, I expect we’ll see more rather than less of it.”
Buyers—and buyer’s agents—beware! That sweetened offer may leave you with a belly ache down the road. Here’s what you need to keep in mind.
The SPDS is a useful tool for both sides in the transaction.
Importance of SPDS for Buyers
With so many bank-owned properties and investor flips on the market, we’re seeing more sellers refuse to deliver the Seller’s Property Disclosure Statement(SPDS). In some cases, listing agents are even asking buyers to preemptively waive the SPDS. Buyer’s agents who want to give their client the best shot at the home they love are put in a tough spot.
Designated brokers don’t want to see buyers waive the SPDS, especially not up front. “It’s just not in the buyer’s best interest,” cautions Trudy Moore, CRB, CRS, the designated broker for HomeSmart in Phoenix. “If you were buying a home, wouldn’t you want the seller to put in writing everything they know about the property?”
If the buyer wants the agent to write the offer waiving the SPDS, it’s critical that the agent have good documented communication with the buyer about the ramifications of doing so. It’s also a good idea for the buyer’s agent to provide a blank SPDS and get written acknowledgement that the buyer received it, such as by initialing and signing a copy, advises AAR General Counsel Michelle Lind. Hand follows this practice so that his buyers can see “what would or could have been disclosed.” Plus, he says, “it gives them a better idea of what to look for during the inspection.”
“Lawsuits against real estate agents often have to do with the condition of the property,” explains Trudy Moore. “These are very difficult suits for a brokerage to defend.”
Importance of SPDS for Sellers
Listing agents should be aware that the SPDS is a useful tool for both sides in the transaction. A seller has a legal obligation to disclose all known defects to a buyer, even when selling a property “as is.” The SPDS can help a seller avoid unintentional lack of disclosure.
“Sellers don’t understand that it really protects them. The SPDS gets sellers thinking about every aspect of the home and gives them the opportunity to disclose all that they know,” says Hand. “If they remove it, they may not feel obligated to disclose anything. But you can bet that if something happens, that seller will get caught.”
Even if the seller is an investor who has never lived in the home, they will be able to fill out at least some portion of the form, such as the address and ownership information. “I work with a lot of investors and require them all to fill out the SPDS,” reports Dane Briggs, ABR, GRI with Firebird Realty in Phoenix. “In the listing, I state that seller will provide a limited SPDS as they have never occupied the home. But I still make them fill out every question honestly and disclose in the additional comments how long they have owned it, repairs that were made and not previously disclosed, and any issues they know about and did not fix.”
HomeSmart requires that a listing agent get the SPDS when they take a listing. “It helps us better represent the seller,” says Trudy Moore. “If the listing agent knows from the SPDS that the pool heater hasn’t worked for ten years, the agent can remove it from the warranted items. Otherwise, the seller will have to spend money to replace that.” If you do get a SPDS up front, make sure that the seller updates it if the listing is on the market for an extended period of time.
Inspections & the As-Is Addendum
“As is. Just those two words mean 100 different things to 100 different people,” laughs Hand. Some buyers think that if there is an As Is Addendum in place, they shouldn’t bother to do any inspections. If they do pay for an inspection, they think that they can’t ask that items be fixed or cancel if something’s wrong with the home. For these confused buyers, waiving the inspection seems like no big deal.
Buyers may be willing to forego the protections available to them, but you should not.
“AAR’s As-Is Addendum absolutely allows buyers to get an inspection and ask for repairs,” Hand says. “If the seller says no, the buyers can either accept that response or they can cancel.” But at least they’ll have a better feel for the integrity of the home.
If a buyer wants to waive the inspection period to make their offer more competitive, pull out that (possibly blank) SPDS or a sample home inspection report and talk to them about the risks involved in not thoroughly vetting the home. Document the conversation and put it in your files. Buyers may be willing to forego the protections available to them, but you should not.
A side note about the inspection period: “We’re seeing a lot of agents submitting offers prior to the buyer ever even viewing property. Then the buyer relies upon the inspection period to decide if they really want the property or not,” report Trudy Moore. “That’s not what the inspection period is for. It’s the time to find out new information about the property. Not, ‘If the offer gets accepted, then I’ll get in the car.’”
The Appraisal Contingency
When cash is king and homes are scarce, conventional buyers can start to feel that they’ll have no chance of getting their offer accepted unless they waive the appraisal contingency. But do they really understand the ramifications of doing so?
Agents need to educate their buyers on the risks involved. “Explain to the buyer: If the property appraises for less than you’ve offered to pay, you’ll need to come up with the extra money to close—unless the seller will reduce the amount, which a lot of banks will not,” advises Ron Moore. It’s their earnest money at stake. “Most of the time, if you counsel them correctly and the buyers realize what they’re actually waiving away, they decide against it,” says Ron Moore.
Of course, appraisals do not always keep up with rising prices. If a buyer feels that the home is worth more than the appraisal and has access to additional funds, they may be willing to come in with more money. That’s a very different situation than waiving the appraisal contingency from the get-go. The agent should still document the discussion about risk in writing, Ron Moore warns.
Note: AAR’s Additional Clause Addendum has language for waiving the appraisal that clarifies what is really means to do so.
Rather than waive the contingency in the offer, some buyer’s agents have included language indicating that if the property appraises below the purchase price, the buyer will agree to pay a certain amount over the appraised value. This keeps the contingency but limits the buyer’s exposure.
This Too Shall Pass?
It’s a little nuts out there right now. “If a house goes on the market under $200,000—and is remotely priced correctly—the listing agent is going to get 100 telephone calls,” acknowledges Trudy Moore. “They’ll get 15 offers, and no one will even have been to the property.”
So what’s a buyer’s agent to do in this environment? Talk with your buyers about today’s challenges. Educate them about the risks involved in waiving the protections available to them. And document your conversations. Then do your darnedest to get them that home.
Or you could just focus on listings—convincing possible sellers to get off the fence and get their homes on the market. Just think of it: Then all of the buyer’s agents will be knocking down your door!