Offer To Purchase

Signing or not signing?TRID Update: Please review our article on new changes with the PS Agreement 

As a real estate attorney, I always take the time to fully explain to our clients the intricacies of the Massachusetts Purchase and Sale Agreement.

The purchase and sale agreement is the governing contract between the Buyer and the Seller regarding the proposed property to purchase. Most Buyers submit an initial Offer to Purchase to a Seller, which spells out the terms of the contract.  The purchase and sale agreement supersedes the offer, and can be thought of as the “long form” contract. At first blush, the purchase and sale agreement, like most legal documents, can be difficult to read and comprehend.

Deal Terms

First, like all contracts, the purchase and sale agreement sets out the terms of the deal. These terms primarily are taken from the offer. This includes the names of the parties, the legal description of the property (taken from the current deed), the purchase price, the mortgage commitment date, the closing date, any Seller credits, and any agreed upon fixtures that will remain with the property or be taken by the Seller.

Title and Deed

Second, the purchase and sale agreement deals with the title to the property and the deed. It lays out the framework for a conveyance (a real estate transfer) in Massachusetts. The agreement spells out that the Seller conveys the deed to the Buyer in return for consideration, then the deed is recorded and the Buyer becomes the owner of the property. However, in Massachusetts, once the deed is recorded at the proper Registry of Deeds, then any title issues “run with the land.”  Thus, the new owner becomes responsible for any outstanding encumbrances or liens that were not properly discharged. In order to protect the Buyer, the purchase and sale agreement provides that the Seller must convey “good, clear and marketable” title. Acting as the buyer’s or lender’s counsel, or both, attorneys will review the title exam and work with the Seller’s attorney to clear any title issues, so that the buyer will receive a certification of title and an owner’s title insurance policy.

Seller Responsibilities

Third, the purchase and sale agreement lays out the responsibilities of the Seller. This includes maintaining insurance and upkeep on the property until closing, obtaining a smoke and carbon monoxide certificate at closing, paying the broker’s commission, obtaining a 6(d) certificate for a condominium, and requiring that the taxes be paid by Seller up until the closing date (through an adjustment to the HUD Settlement Statement). The agreement also provides that the Seller’s agent (either the realtor or the attorney) holds the buyer’s deposit in an escrow account.

Anything But “Standard”

There is a note of caution about the standard form Massachusetts purchase and sale agreement. The standard form provides several hidden advantages to a Seller, I’ve written about on this Blog. Thus, buyers must have an experienced attorney revise the agreement and flag those built in deficiencies. For example, if a Buyer were to default prior to closing, the standard form document provides no cap on the damages; a skilled attorney will know to cap the damages at the deposit. The same is true if a buyer loses his rate lock if there is a delay of the closing; a skilled attorney would use language to protect the buyer in this situation.

An experienced attorney will produce a Rider to the purchase and sale agreement that will have language that protects a Buyer’s deposit and provides an aggressive layer of due diligence. For example, if the Buyer is purchasing a condominium, the Rider should have the Seller make representations that the association is not contemplating any special assessments, there are no pending lawsuits against the association, and the budget is in good order. Other issues include seller repairs, septic system/Title V compliance, radon gas, UFFI insulation, lead paint, and buyers’ access to the property while it is under agreement.

Since the P&S is “anything but standard,” an experienced real estate attorney who review and negotiates the document will certainly add value to the closing process.

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Today is the deadline for buyers to have a “binding contract” for the $8,000 Home Buyer Tax Credit.

  • Under the IRS guidelines, Buyers must have a “binding contract” on or before April 30, 2010, and close on or before June 30, 2010. Buyers will need to attach to their 1040 tax returns a copy of the signed contract and the HUD-1 Settlement Statement for the closing.
  • Is a signed offer to purchase or signed purchase and sale agreement sufficient for the April 30 deadline? There’s been quite a bit of debate on this issue in Massachusetts and the rest of the country with a 2-step contract process. Unfortunately, there’s been no formal IRS guidance. There is case law that the standard form Greater Boston Real Estate Board Offer to Purchase is a binding agreement. But all offers are different, and some may have special contingencies (see, short sales), which may take it out of this case law rule. Buyers can eliminate the risk of having their credit disallowed by getting a purchase and sale agreement signed by today. You can always defer the home inspection until next week and make it a contingency in the purchase and sale agreement.
  • If buyers cannot sign a purchase and sale agreement by today and intend to submit a signed offer for the tax credit know that the IRS rules require the names of all parties on the “binding contract.” Make sure the names of the sellers and buyers are legible on the offer. Realtors, who customarily fill out the offer to purchase, typically address offers to the “owner of record.” Realtors: make sure you spell out the names of both buyers and sellers, get all the signatures, spell out the closing date for on or before June 30, 2010, and write legibly so the IRS can read it.
  • For all tax credit qualification issues, consult a tax attorney or CPA, and contact us to get your purchase and sale agreement done by Friday.

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As we head to the April 30th deadline for the $8,000 Home Buyer Tax Credit, here’s a quick summary of the rules.

  • Buyers must be under contract on or before April 30, 2010, and close on or before June 30, 2010. Buyers will need to attach to their 1040 tax returns a copy of the signed purchase contract and HUD-1 Settlement Statement.
  • There’s been quite a bit of debate as to whether a signed offer to purchase or signed purchase and sale agreements is sufficient for the April 30 deadline. I’ve been erring on the side of caution by recommending getting the P&S signed by Friday, but some realtors and attorneys disagree and say that a signed offer is enough. I’d like to see some formal IRS guidance here. The IRS rules require the names of all parties on the “binding contract,” and the offer typically is addressed to “owner of record.” If Realtors are going to use the offer, ensure that all parties names are legibly shown on the offer. Bottom line: consult a tax attorney or CPA on tax credit issues, and contact us to get your purchase and sale agreement done by Friday.
  • The maximum credit amount remains at $8,000 for a first-time homebuyer –– that is, a buyer who has not owned a primary residence during the three years up to the date of purchase.
  • The new law also provides a “long-time resident” credit of up to $6,500 to others who do not qualify as “first-time home buyers.” To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.
  • The new law raises the income limits for people who purchase homes after Nov. 6. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

New Requirements

Several new restrictions on purchases that occur after Nov. 6 go into effect with the new law:

  • Dependents are not eligible to claim the credit.
  • No credit is available if the purchase price of a home is more than $800,000.
  • A purchaser must be at least 18 years of age on the date of purchase.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.

A new version of Form 5405, First-Time Homebuyer Credit, is now available here. A taxpayer who purchases a home after Nov. 6 must use this new version of the form to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, must also use the new version of Form 5405. Taxpayers who claim the credit on their 2009 tax return will not be able to file electronically but instead will need to file a paper return.

Here’s an IRS produced video outlining the program.

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As we head towards a major deadline for the popular $8,000 home buyer tax credit, we’ve been asked a number of times by real estate agents and mortgage professionals whether buyers need a signed offer to purchase or signed purchase and sale agreement by the upcoming April 30th tax credit deadline. We’re advising that buyers need a signed purchase and sale agreement by the deadline, as explained below.

In order to qualify for the $8,000 federal home buyer tax credit, the IRS states that buyers need to sign a “binding contract” for the sale by April 30, 2010.

In Massachusetts, there is a two-part system for real estate contracts. The parties first sign an Offer To Purchase, then about 2 weeks later, they sign a more comprehensive Purchase and Sale Agreement. Under the Massachusetts case of McCarthy v. Tobin, a signed standard form Greater Boston Real Estate Board Offer To Purchase may be considered a valid and binding contract even though a purchase and sale agreement must be signed at a later date. However each transaction/offer is unique and may have contingencies or future considerations which take it out of this case law rule. And remember, most of these types of cases are litigated in the courts, so it’s really fact-specific.

Under IRS rules, to claim the $8,000 credit, the buyer will have to attach to their tax return a copy of the “binding contract” showing an execution date on or before April 30, 2010. We just don’t know whether the IRS will interpret a signed Offer To Purchase as a “binding contract.” There is no question a signed Purchase and Sale Agreement is sufficient. However, there’s a risk that the IRS could reject reliance on a signed Offer to Purchase or it could delay qualification for the credit. This is a new rule so we just don’t know how the IRS will interpret it, and that raises a risk.

Accordingly, the prudent approach is to have all buyers claiming the credit sign a purchase and sale agreement by April 30th.  That is what we are advising our buyers, their Realtors and loan officers. We are also now inserting a special tax credit provision in purchase and sale agreements protecting the buyer’s eligibility for the credit.

Of course, our office is well-equipped to get a Purchase and Sale Agreement completed and signed by the Friday deadline. We’ll be working around the clock this week for our buyers and sellers! Contact us at 508-620-5352 or by email.

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This week, a very interesting decision involving the negotiation of a residential purchase and sale agreement came down from the Massachusetts Appeals Court in Coviello v. Richardson. Click here to view the decision. The case highlights the need for realtors and real estate attorneys to be proactive with respect to mortgage contingencies and requests for extensions.

The Facts

In the case, on February 12, 2008, buyer (Coviello) and seller (Richardson) signed the standard form Offer to Purchase, which provided that a Purchase and Sale Agreement would be executed by 5:00pm on February 26th. Under the mortgage contingency clause of the offer, which gives the buyer the right to cancel if she cannot obtain financing, the buyer was required to secure a firm mortgage commitment by February 29th. The realtor, who prepared the offer, made the first mistake here: requiring her client, the buyer, to obtain a firm mortgage commitment not even 2 weeks after the parties signed the offer. This was and remains completely unrealistic.

Predictably, the buyer and her broker had immediate concerns that they would be unable to meet the mortgage commitment deadline. The broker asked the buyer’s attorney, Scott Kriss, if he would ask the seller to agree to extend the commitment deadline for an additional week. According to the decision, the request was not immediately conveyed to the seller.

Two hours before the 5:00pm deadline to sign the purchase and sale agreement, Attorney Kriss sent an email to the seller’s attorney, Alan Sharaf, requesting the extension. The seller, who was dealing with a high-risk pregnancy, refused to extend the deadline. No agreement could be reached, and there was no tender or signing of the purchase and sale agreement. (It does appear that the pregnant seller got “cold feet” and backed out of the deal–the request for a one week extension is eminently reasonable and wouldn’t have exposed her to any significant risk).

The buyer sued, claiming that the seller’s refusal to agree to the extension was a breach of the deal. The Land Court initially ruled in favor of the buyer, but the Appeals Court overruled the decision in favor of the seller, holding that a jury would have to decide whether the seller repudiated the contract or would have proceeded with the original terms. The case will be heading to trial.

Take Away

In our opinion, the lesson for realtors and attorneys from this case is (1) make the mortgage contingency dates workable in the offer, and (b) if you are asking for an extension at the 11th hour, protect your buyer in case the seller refuses to agree.

First, the realtor should have used a more realistic mortgage contingency deadline. In the current underwriting environment, realtors should allow at least 30-45 from the signing of the offer for a mortgage commitment.

Second, in our opinion, the buyer’s attorney’s apparent delay in asking for the extension until the 11th hour certainly didn’t help the situation. He could have protected the buyer a lot more had he coupled the request for the extension of the mortgage commitment deadline with either (a) notice that if the seller would not agree, the buyer would opt out of the deal entirely, or (b) a tender of the purchase and sale agreement with the original deadlines (assuming the buyer would take on the risk of being unable to make the deadlines). This would have “boxed in” the seller to either agree to the extension or go through the deal, essentially calling her bluff. At least it would have enabled the buyer to have been in a much better position for litigation because now the fight is over whether the seller would have gone through the original deal. Granted, it appears that the pregnant seller had already made up her mind that she wasn’t going through the deal, no matter the reason.

To the credit of the realtor and attorneys involved, it’s much easier for me to play Monday morning quarterback.

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What Is A Short Sale?

A short sale is special type of real estate transaction between a homeowner, his mortgage holder, and a third party buyer. In a short sale, the homeowner’s mortgage company agrees to take less than what is owed on the outstanding mortgage, thereby being left “short.” In some but not all cases, the lender will agree to wipe out the entire debt. Many people believe that short sales offer bargain basement prices, but lenders will do their best to get as close to fair market value as possible so as to minimize their loss.

Short sales are a unique type of transaction and far different from the typical transaction between parties of equal bargaining power. Likewise, the legal aspects of a short sale are unique.

Short Sale Approval Required

The most important legal issue in a Massachusetts short sale is to recognize that the deal doesn’t go through unless the seller’s lender(s) approve the short sale. Thus, the offer and purchase and sale agreement must reflect that the buyer’s and seller’s obligation to close is contingent upon the lender’s approval of the short sale.

Sometimes, sellers need to obtain short sale approval from not one, but two, lenders with mortgages on the property. Buyers and their agents should research the title ahead of time because a second lienholder can often muck up an otherwise promising short sale.

The Waiting Game

Another significant issue is timing. The typical time-line on a short sale can vary greatly from 45 days to 6 months or more from accepted offer to closing. The approval of a short sale and the negotiation for the reduction in the mortgage balance can be a time-consuming process. There is a long, but manageable, list of documents that must be submitted by the seller/homeowner before a lender will approve a short sale.

Inspections and Financing

Short sale transactions don’t follow the typical process of the “normal” transaction, especially with financing and inspection contingencies. Due to the often lengthy wait for short sale approval, most buyers are reluctant to lock in mortgage financing and otherwise spend to secure a firm loan commitment. The same is true for home inspections. Buyers argue why should I pay for a home inspection if the deal may not even happen? Sellers and their agents often feel that buyers should put a little “skin in the game” and do a home inspection early on. These issues will be negotiated from deal to deal.

When I represent buyers of short sales, I insist that the the closing, inspection, and mortgage contingency deadlines dates in the offer and purchase and sale agreement start “x” days from the short sale approval. There should also be a end date for obtaining short sale approval and protection for the buyer’s rate lock so the agreement is not left completely open-ended and delays won’t adversely affect the buyer’s financing.

Short Sale Addendum/Rider

The deal agreements must be tailored quite specifically to a short sale transaction. Experienced Massachusetts short sale attorneys (like us!) always use a customized short sale addendum/rider. A form, however, is no substitute for an experienced short sale attorney and guidance through the complicated short sale process.

Buyers Bring Your Tools

Also, cash strapped sellers are usually unwilling to do any repairs in a short sale situation. Inspections may be performed and “outs” may be negotiated for significant repairs, but most buyers must ultimately accept the property “as is.”ar123517806003655

Get Experienced Advice and Watch For Scams

Lastly, there’s a growing perception that short sales are akin to the old Wild West. There are also reports of scams and illegal and unethical behavior by realtors such arranging for illegal buy backs to the defaulting homeowners. I suggest reading Metrowest Realtor Bill Gassett’s advice on realtor ethical issues in short sales.

Given the unique nature of the Massachusetts short sale transaction, the sage advice is to work with ethical Realtors and short sale attorneys who have significant experience with short sale transactions.

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Update (6/10/13): Battle of the Forms! Mass. Ass’n of Realtors vs. Greater Boston Bd. of Realtors Standard Form Offers

Update (10/3/15) New TRID Addendum

The Standard Massachusetts Offer To Purchase

The first step in purchasing or selling Massachusetts residential real estate is the presentation and acceptance of an Offer To Purchase. Most often, the buyers’ real estate broker prepares the offer to purchase on a pre-printed Greater Boston Real Estate Board standard form and presents it to the seller for review, modification, and acceptance. Attorneys are often not involved in the offer stage. However, in light of the legal significance of a signed offer and recent litigation over offers, buyers (and their brokers) and sellers may be wise to consult an attorney to review the offer.

An Accepted & Signed Offer Is A Binding Contract

Many sellers (and their brokers) are under the misconception that the offer to purchase is merely a formality, and that a binding contract is formed only when the parties sign the more extensive purchase and sale agreement. This is not true. Under established Massachusetts case law, a signed standard form offer to purchase is a binding and enforceable contract to sell real estate even if the offer is subject to the signing of a more comprehensive purchase and sale agreement. So if a seller signs and accepts an offer and later gets a better deal, I wouldn’t advise the seller to attempt to walk away from the original deal. Armed with a signed offer, buyers can sue for specific performance, and record a “lis pendens,” or notice of claim, in the registry of deeds against the property which will effectively prevent its sale until the litigation is resolved. I’ve handled many of these types of cases, and buyers definitely have the upper hand given the current state of the law.

There have also been recent court rulings holding that both email and text may constitute an enforceable contract even where no formal offer has been signed by both parties.

In some cases, the seller may not desire to be contractually bound by the acceptance of an offer to purchase while their property is taken off the market. In that case, safe harbor language can be drafted to specify the limited nature of the obligations created by the accepted offer. This is rather unusual, however, in residential transactions.

Home Inspection & Mortgage Contingencies

With the offer to purchase, I always advise buyers and their brokers to use a standard form addendum to address such contingencies as mortgage financing, home inspection, radon, lead paint, and pests. The home inspection and related tests are typically completed before the purchase and sale agreement is signed and any inspection issues are dealt with in the purchase and sale agreement. If they are not, there is an inspection contingency added to the P&S. See my post on purchase and sales agreements for that discussion.

The mortgage contingency is likewise critical. With mortgage loans harder to underwrite and approve, we are seeing loan commitment deadlines extended out for at least 30-45 days from the signing of the purchase and sale agreement. Always consult your mortgage lender before making an offer to see how much time they will need to process and approval your loan. The loan commitment deadline is one, if not the most, important deadlines in the contract documents.

In order to help finance the acquisition of said premises, the BUYER shall apply for a conven­tional bank or other institutional mortgage loan of $[proposed loan amount] at prevailing rates, terms and conditions.  If despite the BUYER’S diligent efforts, a commitment for such a loan cannot be obtained on or before [30-45 days from signing of purchase-sale agreement], the BUYER may terminate this agreement by written notice to the SELLER in accordance with the term of the rider, prior to the expiration of such time, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreements shall be void without recourse to the parties hereto.  In no event will the BUYER be deemed to have used diligent efforts to obtain such commitment unless the BUYER submits a complete mortgage loan application conforming to the foregoing provisions on or before [2-5 business days from signing of purchase and sale agreement].

Any time the parties agree to an extension of any deadline in the offer (and the purchase and sale agreement for that matter) make sure it’s in writing.

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RDV-profile-picture.jpgRichard D. Vetstein, Esq. is an experienced Massachusetts real estate closing and conveyancing attorney and former outside counsel to a national title insurance company. Please contact him if you need legal assistance with your Massachusetts real estate transaction.

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