The “Offer To Purchase And Contract” (Standard Form 2-T, aka OTP, dated 7/2018) is 13 pages long and updates tend to happen on an annual basis.
Old timers in the real estate industry remember when the contract was 1 page!
So let’s take a look at some of the “finer” points of the contract. I say “finer” points because I am not going to discuss the obvious.
Also, in this particular blog, I’ll be examining the OTP from the perspective of a seller.
I’ll start with page one so feel free to follow along by downloading your own sample copy by clicking Offer To Purchase And Contract.
Remember, as a seller, this will be the form a buyer’s realtor will review, complete, and submit to us on behalf of their buying client.
*NOTE: Italicized words are defined within the actual OTP.
FROM THE BEGINNING
Let’s begin on the bottom of page 1:
“Should Buyer fail to deliver either the Due Diligence Fee or any Initial Earnest Money Deposit by their due dates, or should any check or other funds paid by Buyer be dishonored, for any reason, by the institution upon which the payment is drawn, Buyer shall have one (1) banking day after written notice to deliver cash, official bank check, wire transfer or electronic transfer to the payee. In the event Buyer does not timely deliver the required funds, Seller shall have the right to terminate this Contract upon written notice to Buyer.”
What makes this paragraph so intriquing is the fact that agreed upon due diligence (DD) money is due upon the effective date of the contract. So, in essence, as soon as we are under contract, the money is due.
Going under contract may happen so quickly that the delivery of the DD money may not take place until hours to days later. If the due diligence fee has not been paid by the effective date, the seller can send written notice to the buyer to deliver the funds.
Then, the buyer has one banking day to deliver the due diligence; otherwise, the seller may terminate the contract by delivering notice to the buyer’s agent.
If I am representing a seller in an attempt to secure the best terms possible for my selling client AND we happen to receive a much superior offer over night for example, I may recommend my seller client send the written notice to deliver the funds if due diligence money has not been paid.
NOT SO OBVIOUS
Although I mentioned I would not be covering the obvious, I feel obligated to suggest to all of my sellers to pay particular attention to section 2: Fixtures and Exclusions.
I have seen so many problems and arguments develop because the seller was legally obligated under this paragraph to leave an item for the buyer and either forgot or neglected to read and follow the instructions in this paragraph.
For example, bathroom mirrors were always a hot button between sellers and buyers. In past years, only bathroom mirrors that were attached to the wall automatically conveyed with the property.
During the final walkthrough before taking possession of the property, a buyer would exclaim, “where are the bathroom mirrors?”.
Well, it would turn out the bathroom mirrors were taken by the sellers because they weren’t attached to the walls but perhaps they were just hanging on a picture hook.
Today, ALL bathroom mirrors convey so if a seller has a keepsake bathroom mirror they’d like to take with them, my suggestion would be to swap it out with a replacement mirror BEFORE putting the house on the market.
Alternatively, the seller has the option of identifying and items that do not convey by listing them in subparagraph (d).
Let’s jump to subsection 4(c). The buyer has agreed to purchase the property as is, in its current condition.
So, the buyer signs the OTP knowing the home is being sold as is UNLESS the seller and buyer agree to negotiate for repairs or improvements to the home. The seller is NOT required to negotiate for repairs.
However, at least in our MLS, it is common practice for the listing agent to indicate in the listing that the home is being sold “as is”.
Knowing that the seller will not do any repairs allows the buyer to take that information into consideration while deciding on the terms to offer the seller.
BUYER’S RIGHT TO TERMINATE
Section 4(f) reads:
“(f) Buyer’s Right to Terminate: Buyer shall have the right to terminate this Contract for any reason or no reason, by delivering to Seller written notice of termination (the “Termination Notice”) during the Due Diligence Period (or any agreed-upon written extension of the Due Diligence Period), TIME BEING OF THE ESSENCE. If Buyer timely delivers the Termination Notice, this Contract shall be terminated and the Earnest Money Deposit shall be refunded to Buyer.”
The due diligence period begins on the effective date of the contract and ends on an agreed upon date.
During that time frame, the buyer may back out of this contract.
In doing so, the buyer forfeits the due diligence fee they paid, if any.
From both a seller’s and buyer’s perspective, the negotiated due diligence fee is a vitally important and strategic contract term and therefore, should be negotiated appropriately.
HOW WILL BUYER PAY?
Sections 5(a)(b) This answers the question, “How does the buyer intend to pay for the property?”.
Depending on current market conditions, these two sections alone may determine whether a seller decides to accept an offer or not.
For example, in a highly competitive seller’s market where multiple offers are common, an offer contingent upon the buyer selling their own home would most likely not be accepted by the seller.
Sections 5(d)(e) It’s a best practice to complete and provide copies of both disclosures prior to the buyer making an offer.
Otherwise, the door is left open for a buyer to terminate the contract AND recoup their due diligence money.
WHAT ABOUT UTILITIES?
Section 8(c). Seller needs to understand they’ll need to keep ALL utilities on through closing or buyer possession.
There have been times where a seller had already moved out of the property and thinking they’d save some money on utility costs, they inadvertently turn off one or more utility services.
Additionally, the seller will need to provide “reasonable” access to the property to allow the buyer to conduct their due diligence.
EVERYTHING MUST GO!
Section 8(d). There have been instances when a seller wasn’t aware of debris that had been discarded onto their property or debris that had been stored under the house inside the crawlspace. Those items must be removed.
Similarly, the seller may decide to leave patio furniture since they’re downsizing and the furniture just won’t fit in the new place.
Well, the seller is obligated to remove ALL debris and personal items from their property prior to the date the property will be made available to the buyer.
Section 8(i). Any amount in this field will be paid by the seller at closing.
SELLER AGREES TO REPAIRS
Section 8(m). In the event the seller and buyer agree that certain repairs will be done to the property prior to closing, these repairs must be made in a “good and workmanlike manner” and the buyer has the right to verify the repairs prior to settlement.
Many times, the seller has a relative or close friend they reach out to in order to complete those repairs.
Just keep in mind, they need to be completed in a “good and workmanlike manner”.
Under most circumstances, the selected repair person will need to possess an applicable license for the repair they’ll be completing.
SELLER BREACH OF CONTRACT!
Section 8(n). If the seller fails to comply with any of their obligations under Section 8, or the seller materially breaches the OTP, the buyer can elect to terminate the contract and have both their earnest money and due diligence money refunded.
Additionally, the seller will need to reimburse the buyer for expenses incurred during their due diligence period and may be liable to pay court costs if legal proceedings are brought forth by the buyer.
Section 10 has to do with a home warranty. Sometimes a seller will offer one to incentivize a buyer and other times, the buyer will check the second box stating the buyer will purchase the home warranty AND the seller will pay for it at settlement.
CONDITION OF HOME
Section 11 states the home must be in similar or better condition at closing as it was when this offer was made, reasonable wear and tear excepted. Sometimes a seller will ask me what to do about small holes in the walls after the pictures were removed. That would be considered reasonable wear and tear and can be left alone.
BUILT IN GRACE PERIOD!
Section 13. Most sellers are unaware there is a built-in 14-day “grace period” extending 14 days beyond the agreed upon closing date as long as the delaying party is acting in good faith and with reasonable diligence to proceed to settlement and gives as much notice as possible to the non-delaying party.
If the transaction fails to close within those 14 days AND there is no agreed upon extension of the closing date, then the delaying party shall be in breach and the non-delaying party may terminate the contract.
QUESTIONS? CALL ME!
Well, we’ve touched upon many of the finer points of the offer to purchase and contract from the seller’s perspective, and as always, if you have any questions or concerns, please don’t hesitate to reach out to me.