Monthly Archives: February 2006

A Closing Date without a closing

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(This post is authored by Craig Blackmon, an attorney and real estate broker in Seattle whose practice focuses on residential real estate — see his web page or his blog for more information. Please note that this post is not legal advice. You should consult an attorney for specific legal counsel.)

Your purchase or sale is scheduled to close on the Closing Date. What happens if, for some reason (perhaps a delay with the lender), the transaction does not close on the Closing Date? What are the rights and obligations of the buyer and the seller?

time essenceA discussion of this scenario begins with the “time is of the essence” clause. Virtually all purchase and sale agreements (including the forms used by the MLS in Seattle), contain a clause indicating that time is of the essence. When a contract does not contain such a clause, the law affords the parties some flexibility in regards to performance of their contractual obligations. With such a clause, however, the law requires the parties to perform as indicated by the contract. Thus, assuming the contract indicates that time is of the essence, the transaction must close on the closing date or there will be problems.

If the transaction fails to close because a contingency was not satisfied, such as a financing contingency, then both parties are absolved of their contractual obligations. A contingency is a “condition precedent” — i.e. a condition that must be satisfied before the contract binds the parties. So, if the contract includes a financing contingency, and the transaction fails to close because the buyer did not get financing in time, then neither party is in breach of the contract. The contract simply expires. If the parties want to proceed with the transaction and close beyond the closing date, they need to so agree in writing by amending the contract prior to its expiration.

If the transaction fails to close because one of the parties did not live up to their obligations, however, then the other party may have an action for breach of contract. For example, suppose the seller fails to execute the documents necessary to convey good title to buyer. If, at the time of closing, buyer has performed its obligations, then buyer has a breach of contract claim against the seller. Note, however, that the buyer must have tendered performance — i.e. deposited the funds with escrow to purchase the property — in order to have a breach of contract claim (with two exceptions noted below). If neither party has performed its obligations by the closing date, the contract expires.

If buyer did not tender performance, buyer may still have a claim if seller either waived the “time is of the essence” clause, or otherwise acted in a manner inconsistent with an expectation of performance on the closing date and the seller relied on that action in not performing (the legal term is “collateral estoppel”). In either case, the law concludes that the buyer has a claim because the seller has acted in a manner inconsistent with enforcement of the closing date.

Finally, note that these are exactly the sort of questions that should only be answered by an attorney, not a real estate broker. And when an answer is needed, it’s needed now. If a buyer needs to scramble to get an attorney on board and up to speed, the buyer may not get answers soon enough. So a prudent buyer will have a team of two real estate professionals – a real estate broker and an attorney – in place at the start of the process so that the buyer is fully informed and protected, particularly when the deal gets off track.

"bottom feeder" sites and the mls

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pac Let’s start with an analogy. I love analogies.

I come to your store and ask if I can take that really cool T-shirt out into the light to see it better. The shirt costs $8.00. You say sure. I go out and set up a little stand with your T shirt and get five people who want to buy the T-shirt. Now I come back in the store and say, I don’t want to buy anything in your store after all. But I have five guys over there who will buy your shirt if you give me $2.00 each. You scratch your head and reluctantly agree.

Now I ask to look at your T-shirt out in the light one more time please. I go out and tell everyone the shirt is only five bucks. I come in the store with 10 people this time and say OK. I still want $2.00 a shirt, but these guys will only pay $5.00. Hmmmm…

How many times do you give the guy the T-shirt to see in the light? Is the horse out of the barn, Robbie? LOL

A “bottom feeder” site does not sell real estate, never has. The original site said “put your listings here for free” so we can all look at them. It’s really cool! Look you can see it on the internet. Very Kewl! Then the site said, if you pay me $250 for each of your listings, I will put your name on it. Hmmmm…well why didn’t you put my name on it in the first place. Hmmmm…OK, I do want my name on it, so here’s $3,000 for all of my listings.

Now when you go look at your listing on the internet it has your name. But it also has a little flashing button that says click here for a school report. You click on the button for a school report and there’s some other agent’s name in there. Hey! What the heck is that all about? So you call the site and they say you can buy a flashing button that says school report and get double the exposure! Hmmmm, so you pay him another $3,000 to get school report flashing buttons on all of your listings that point to you again.

Then you go back to see your listing on the internet and at the top of the page there is another flashing button that says “find a Realtor”. Your name no longer shows on your listing unless they click for details. You say Hey! I’m paying to have my name on my listing. They say sure, and if someone clicks the detail button they do see your name. But if you want to have your name behind door number 3, the flashing button at the top of the page….another $3,000, later there’s a button in the side bar….

Bottom feeder sites and the people behind them don’t know anything about how to value homes or sell homes. Bottom feeder sites don’t ever go out and see a house, nor write up a real estate contract or accompany a buyer to a home inspection. But they do get paid when a house is sold. They post the mls on a website, just like the guy who takes the T-shirt out into the light. They then sell the consumers who want the houses back to the agents, just like the guy comes in the store with people who like the shirt. Then they tell the consumers “let’s get those guys!” Let’s tell them we only want to pay 1/3 of the old price! Then they still want to get paid their “finders” fee for finding buyers using the agent’s listings to do it.

The mls doesn’t want anyone taking the t-shirts out to the pavement anymore 😉

You've got real estate questions, we've got answers!

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I thought I’d try something new and open this thread up to your real estate questions…

Do you have a question about the Seattle market? Real estate technology? Legal issues? Loan issues? Photography? Neighborhoods? Do you worry about Hanan? 😉 While there’s no guarantee we’ll know the answer, it is pretty rare that a good question goes unanswered on Rain City Guide.

Our current crop of real estate agents, mortgage brokers, real estate lawyers, real estate photographers, and real estate technology consultants are all motived to de-mystify the real estate industry, so hit us with some good questions and we’ll likely provide some interesting answers!

horse head statue

ZILLOW BUZZ

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Got my first “issue” of ZILLOW BUZZ this morning. Or actually an email announcing that ZILLOW BUZZ is coming.

ZILLOW really is exciting news…I’m not being sarcastic when I say that. We need a “shot in the arm” in this business.

That being said, I would like to say something about how real agents really value property. I read the “about us” notation on the ZILLOW BUZZ email and it showed how one of the partners had used spreadsheets to value his property. I just saw an elaborate spreadheet done by an owner at “The Newmark” in a downtown Seattle condo. Boy was it elaborate, and boy was it wrong. No way that condo is worth what that excel spreadsheet says it is worth.

The way we value property is on a comparison basis. The more we see the better we can value. That is why we go to Broker’s Opens (at least those of us who aren’t just looking for a free lunch 🙂

We have a mental running calculation in our brains. It goes like this. John’s listing last month sold for $700,000 and it was on the best view corner of the building, remodeled and up on the 21st floor. Better window configuration. Crappy cabinets, but otherwise a great remodel. The wall was knocked out around the kitchen. Penelope’s listing down stairs on the 9th floor had the best unobstructable view, but was 600 square feet smaller. Poor presentation. Owner left his clothes all over the place and it smelled like sweat. Original condition, no remodel and had a “handicapped” bathroom that gave it that “hospital” feel. That one sold for $400,000, but it was a pre-foreclosure with the owner under the gun. So I can list this one at $550,000. It is between the 9th and 21st floors. It is remodeled as to aesthetics, but no walls knocked out. It’s really worth $500,000, but I think I can squeeze an extra $25,000 out of it because it’s “the only game in town” at the moment.

I don’t think a computer can do that. Robbie, can you do a Vulcan Mind Meld? LOL.

Buying Investment Property – Entity Protection

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Many “average” Americans are dipping their toe into the world of investment real estate. Not satisfied with owning REITs, many non-real estate professionals are turning to buying vacation homes, single family rental properties, small multi-family dwellings and even small commercial buildings.

If you are in this group (or thinking of joining this group), I want to give you three letters to remember as you begin your journey – LLC.

LLCs is an acronym for limited liability company. It is a form of entity recognized by states as providing liability protection for its members. At the same time, it receives different tax treatment than traditional corporations. It also is much more flexible than corporations when structuring relationships between members. The following is a very high level discussion on some benefits of forming an LLC. While forming LLCs can be done by laypersons, you should consult an attorney or CPA before taking that step.

TAX TREATMENT – When an individual forms an LLC, the feds disregard the entity and tax the individual as if no LLC existed. If more than one unmarried persons form an LLC, again there is entity protection like a corporation and the individuals are taxed as partners by the feds. So, instead of filing a separate corporate tax return, the members file form K-1s as part of their individual return. The benefit of this is that there is no double taxation as there would be if the investor(s) had created a C-Corp. Moreover, the members can have a much more flexible relationship than had they formed an S-Corp.

LIABILITY PROTECTION – This is the main reason to form the LLC. Say you want to purchase a rental house. If you purchase it in your own name, all of your personal assets are subject to risk in the event that something goes wrong. If you and your renters get into a lease dispute, they may sue you and your individual assets are on the line. What if someone gets hurt on the property and your insurance coverage is not enough to cover the loss? Again, your assets will be at risk. If you form an LLC, you have just created an entity that is separate from you. Its assets are only those that the LLC owns – usually the property. Thus, if something goes wrong, usually only the property is at risk and not your life savings. This can be worth a lot of sleep at night.

While LLCs may not be for every real estate investor, they are certainly three letters that need to be discussed when buying investment property.

Understanding STI

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In answer to Craig’s question, when you look for property “on market” at www.SearchingSeattle.com, you will see two types of property.

The ones on which you can make an offer, that is not a “backup” offer, will show “ACTIVE”.

The others, that I have asked you to pay more attention to in my previous entry entitled USING THE INTERNET TO BUY YOUR NEW HOME, will say “OFFER STI”.

Now Craig, being a lawyer, will be the first to understand that STI (Subject To Inspection), is not necessarily about an inspection at all. It is what we might call a very broad escape hatch or an “out” clause. This “out” clause can be used for many, many reasons that have absolutely nothing to do with an inspection at all.

If a buyer makes the offer contingent on an inspection, especially if it is a 35A inspection clause and not a 35B inspection clause, they have a huge timeframe to change their mind based on many things. In fact, in parts of this country, a buyer may tie up five properties all at the same time, and cancel four “based on the inspection” as he only tied them up to have the time to consider which one he really wants to buy.

That is why our mls system internally, calls these “ACTIVE STI” vs. the public sites that call them “OFFER STI”. Sometimes the very best property on market is the one that falls out of STI status and comes back on market.

It is very important to note that you, as a buyer, should ALWAYS have an inspection, even when you do not make that inspection a contingency. The Home Inspection Addendum makes the seller responsible in some way for the results of that inspection. Sometimes you make an offer without a home inspection contingency to get a better price. The property status then goes straight to PENDING and skips the STI phase, but that does not mean you do not do an inspection. It means you are willing to lose your Earnest Money if you are not happy with the inspection.

Sometimes you can save 5% or more off the price by being the one offer without an inspection contingency, and only lose $1,000 if you want to cancel based on the inspection. But, please do not think that not having an inspection contingency means that you do not do an inspection. You still need to close on that property with full knowledge of it’s total strengths and weaknesses.

The Lame List – Real Estate Web Sites that Suck

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evccliftIn a recent post, Galen said “And no, it’s not what Windermere or ZipRealty already do: their sites s-u-c-k compared to true consumer-oriented sites like Amazon.com and Google.”.

Now, comparing nearly any web site to Amazon or Google isn’t a fair comparission. Google & Amazon have 1) many of the best software engineers on the planet working for them and 2) they have thousands of them working on their web site. Microsoft (which is in the same league as Google & Amazon) is said to spend over $100 million/year on it’s corporate web site (I’m sure they spend even more on MSN)!

The only real estate company that I can think of that could afford that level of R&D is Cendant (they own Century 21, Coldwell Banker, and ERA). Ironically enough they also own Orbitz & CheapTickets.com (who are Expedia competitors). The vast majority of brokers are probably smallish companies that under-invest in technology (and Cendant is probably happy enough with the status quo that they aren’t going to rock the boat until the waves of change force it upon them).

Now, I do think ZipRealty’s site is medicore and Windermere’s site is average. But suck is way too strong a word. Could their sites be better? Yeah. But given they aren’t billion dollar internet/software companies with multi-million dollar R&D budgets, I think the sites are OK. I could do better, but don’t mistake a medicore site for one that sucks.

What I want you to do is tell me about the WORST agent & broker web sites out there. I only want to hear about the truly awful. Let me give you an example of how bad it can be.

Teri Herrera, is a very successful agent at John L. Scott with whom I purchased my first house with. However her web site makes me cringe in horror. Fortunately, she’s a much better agent than her web site would suggest, but her site is nothing but a flash link farm. Nothing of value other than links to other places and it’s wrapped up as an obnoxious flash app. At least ZipRealty & Windermere have branded MLS searches, instead of being just a link farm or framing somebody else content.

See, ZipRealty & Windermere look pretty good now, don’t they.

Robbie

Using the Internet to Buy Your New Home

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I have recently been enlightened on how grossly inadequate many of the home viewing sites are and how misleading they can be.

Maybe I should have known this before, but frankly, those sites rarely come into play in my everyday life. I use the mls and clients use me. I truly haven’t considered until recently how people use the internet in the home buying process and why they do that.

Now that I am viewing the world through your eyes a bit, with the help of my most recent clients, I would like to “give back

Feeling "at home" on the web

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There have been some interesting conversation around the web on Zillow’s business model…

But I’d argue that it is way too early to know their business model. In an interesting interview with Inman News (The link is dead) Rich Barton stated that the purpose of building a home estimation service up front was to get people comfortable using the web to find the value of their home.

Rich also mentioned that when he started Expedia he was frequently advised that he needed to “lock-in” potential ticket buyers before giving them flight information because many people (myself included) would to go the site to find good deals, but go to their travel agent to actually purchase tickets. (Marlow, doesn’t that remind you of something that is going on in real estate right now?). However, Rich stuck to his guns in giving the information up free because he recognized how important it was to get people comfortable with finding travel information on the web. In due time, people became comfortable enough with finding travel information on the web that they did away with the travel agent altogether.

I don’t think Rich’s intentions are the same with real estate agents, but I think he’s looking down the road a few years and seeing that agents are going to be more and more marginalized as home-buying and -selling consumers do the bulk of their purchasing research using web technologies. (I’d also bet that Zillow’s business plan is closer to a sketch than a detailed drawing as he likely recognizes the importance of making things up as he goes along.)

Giving away (for free!) great tools like Zillow’s Zestimator is simply a means to getting people comfortable using the internet to set a value on a home. Nothing more, nothing less. And recognizing that Zillow is a long-term project, I don’t think it is a stretch to say that Rich is developing a bunch more tools that will be a more obvious threat to the status quo of the real estate agent commission structure.

Without a doubt, it is a much softer play than with Expedia where he went head-to-head with travel agents. But then again, the stakes are even higher in the real estate industry.