First, let me say I am not a lawyer, and what I am saying is only my opinion. I encourage you to consult a member of your state BAR Association who specializes in real estate before you use this information to make any decisions. It is good advice to advise any consumer to always consult a lawyer before they sign a real estate contract. But I will insist on my customer, Buyer or Seller, consulting a lawyer before they enter into a contingency contract, a first right of refusal contract, or a lease purchase.
The Attorney of Record for the Board REALTORS® to which I belong told me to always get a lawyer to write a Lease Purchase, and not to call him. There are just too many opportunities for conflict.
For one thing, if a party is going to lease a house for one year and then purchase it, one of two things could happen. Either the value of the house will have gone up more than anticipated, and the Seller will want out of the contract, or the value will have gone down and the Buyer will not want to close. You just stand too good of a chance to get to a closing where one party wants out of the contract.
I extend this good legal advice to contingency contracts and first right of refusal contracts. I like a “win-win” contract, fair to all parties, so my customers and I can stay out of courtrooms. Too often contingencies and first right of refusals only benefit one party. Always get a lawyer who has a fiduciary responsibility to make sure that contract benefits you.
The following hypothetical situation shows good reason to avoid a First Right of Refusal Contracts or a Contingent upon Your Buyer’s House Closing Contract. Imagine your house is listed for sale with a REALTOR.® A Buyer sees your house and would like to buy it, but can’t commit right now. I’ve seen Buyers who wanted to “tie up” a property until their house sold, they found out for sure about a new job, they got an insurance settlement, or their credit improved. So their REALTOR® tells them they can put one of these contracts on it and improve their chances of buying it when they are able. Both contracts basically allow the Seller to continue to market the property and get other offers. On a first right of refusal contract, if a second offer comes in, the Seller notifies the first Buyer who then has a few days to commit to buying the house, or pass. So the Buyer is basically making sure he or she can buy the house at an agreed upon price if and when they become able to close.
On the Contingent upon Closing Contract, the contract says the Buyer will close on the sale if the house they are selling closes before the agreed upon date. It the Buyer’s sale does not close for any reason, the Buyer is released from the contract and typically gets their deposit back. The Sellers, who took their house off the market for however long they agreed to, get nothing. A win for the Buyers, but a lose for the Sellers.
From a Sellers’ point of view, I can think of no good reason to get tied down to either one. Recently I had another REALTOR® who wanted to bring my Seller one of these contracts. My advice to the Seller was to thank them and promise the Buyers they would be notified and given opportunity to make an offer if the Sellers receive an offer. From the Seller’s point of view the main difference is I have given my word to notify the Buyer’s agent as opposed to their being legally bound by a contract to do so. Also, if the second offer is more than the first, they can accept the second offer. If they had given the first Buyer the first right of refusal, they could have to turn down more money. Of course the first Buyer may lower the offer they would have made if prices continued to drop. But if prices had dropped and the Buyer wanted out, and they had a small enough deposit, they could probably walk anyway. If not, there are always the financing and inspection clauses that may be used. It’s hard to make a Buyer buy a house if they have changed their minds, even with these contracts.
Why else would a Seller accept one of these contracts? I cannot say exactly. But quite possibly the offer can be made to sound better than it was. “At least this Buyer is a ‘bird in the hand.’ And it shows other Buyers this is a sellable property. Buyers want the houses other Buyers want, and this contract advertises that fact.” Since I have never, and would never, encourage my Seller to accept a first right of refusal contract, I do not know what sales pitches can be thrown.
But accepting either of these contracts effectively does something else. For all practical purposes they take the house off the market. While this contract can be made to sound like a “bird in the hand” for the seller, a better analogy would be that of “a scarecrow to other birds,” or Buyers.
In both of these contracts, the problem is many REALTORS® might believe they could be wasting their time to show a house under any type of contract, and they won’t bother. I can remember being taught several years ago 20% of real estate contracts fail. Conversely then, if I show a house under any type of contract there is an 80% chance we can’t get it, regardless. If a Buyer wants to see a house that is under contract, I will tell them they may. But I will also tell them there is a good chance, perhaps as much as 80%, they are wasting their time. Most Buyers I have told that have said, “Is there anything else we can see?” And, as long as there was, they looked elsewhere.
I once knew a real estate person who put a first right of refusal contract on a house s/he wanted to buy and told me s/he was just trying to tie the house up and keep it off the market until s/he could get his/her house sold (no bargain price there, I will promise you). S/He was surprised when someone showed it and presented a contract as s/he didn’t expect many experienced people to bother.
But above all else, hear this: I am not a lawyer, and what you have read is one person’s opinion based on his experience and understanding. If you are in a position where one of these contracts is an option for you, consult a real estate attorney. Get their advice, and have them go over the contract before you sign anything. Especially if you are working with me!
The Attorney of Record for the Board REALTORS® to which I belong told me to always get a lawyer to write a Lease Purchase, and not to call him. There are just too many opportunities for conflict.
For one thing, if a party is going to lease a house for one year and then purchase it, one of two things could happen. Either the value of the house will have gone up more than anticipated, and the Seller will want out of the contract, or the value will have gone down and the Buyer will not want to close. You just stand too good of a chance to get to a closing where one party wants out of the contract.
I extend this good legal advice to contingency contracts and first right of refusal contracts. I like a “win-win” contract, fair to all parties, so my customers and I can stay out of courtrooms. Too often contingencies and first right of refusals only benefit one party. Always get a lawyer who has a fiduciary responsibility to make sure that contract benefits you.
The following hypothetical situation shows good reason to avoid a First Right of Refusal Contracts or a Contingent upon Your Buyer’s House Closing Contract. Imagine your house is listed for sale with a REALTOR.® A Buyer sees your house and would like to buy it, but can’t commit right now. I’ve seen Buyers who wanted to “tie up” a property until their house sold, they found out for sure about a new job, they got an insurance settlement, or their credit improved. So their REALTOR® tells them they can put one of these contracts on it and improve their chances of buying it when they are able. Both contracts basically allow the Seller to continue to market the property and get other offers. On a first right of refusal contract, if a second offer comes in, the Seller notifies the first Buyer who then has a few days to commit to buying the house, or pass. So the Buyer is basically making sure he or she can buy the house at an agreed upon price if and when they become able to close.
On the Contingent upon Closing Contract, the contract says the Buyer will close on the sale if the house they are selling closes before the agreed upon date. It the Buyer’s sale does not close for any reason, the Buyer is released from the contract and typically gets their deposit back. The Sellers, who took their house off the market for however long they agreed to, get nothing. A win for the Buyers, but a lose for the Sellers.
From a Sellers’ point of view, I can think of no good reason to get tied down to either one. Recently I had another REALTOR® who wanted to bring my Seller one of these contracts. My advice to the Seller was to thank them and promise the Buyers they would be notified and given opportunity to make an offer if the Sellers receive an offer. From the Seller’s point of view the main difference is I have given my word to notify the Buyer’s agent as opposed to their being legally bound by a contract to do so. Also, if the second offer is more than the first, they can accept the second offer. If they had given the first Buyer the first right of refusal, they could have to turn down more money. Of course the first Buyer may lower the offer they would have made if prices continued to drop. But if prices had dropped and the Buyer wanted out, and they had a small enough deposit, they could probably walk anyway. If not, there are always the financing and inspection clauses that may be used. It’s hard to make a Buyer buy a house if they have changed their minds, even with these contracts.
Why else would a Seller accept one of these contracts? I cannot say exactly. But quite possibly the offer can be made to sound better than it was. “At least this Buyer is a ‘bird in the hand.’ And it shows other Buyers this is a sellable property. Buyers want the houses other Buyers want, and this contract advertises that fact.” Since I have never, and would never, encourage my Seller to accept a first right of refusal contract, I do not know what sales pitches can be thrown.
But accepting either of these contracts effectively does something else. For all practical purposes they take the house off the market. While this contract can be made to sound like a “bird in the hand” for the seller, a better analogy would be that of “a scarecrow to other birds,” or Buyers.
In both of these contracts, the problem is many REALTORS® might believe they could be wasting their time to show a house under any type of contract, and they won’t bother. I can remember being taught several years ago 20% of real estate contracts fail. Conversely then, if I show a house under any type of contract there is an 80% chance we can’t get it, regardless. If a Buyer wants to see a house that is under contract, I will tell them they may. But I will also tell them there is a good chance, perhaps as much as 80%, they are wasting their time. Most Buyers I have told that have said, “Is there anything else we can see?” And, as long as there was, they looked elsewhere.
I once knew a real estate person who put a first right of refusal contract on a house s/he wanted to buy and told me s/he was just trying to tie the house up and keep it off the market until s/he could get his/her house sold (no bargain price there, I will promise you). S/He was surprised when someone showed it and presented a contract as s/he didn’t expect many experienced people to bother.
But above all else, hear this: I am not a lawyer, and what you have read is one person’s opinion based on his experience and understanding. If you are in a position where one of these contracts is an option for you, consult a real estate attorney. Get their advice, and have them go over the contract before you sign anything. Especially if you are working with me!
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