The S&P Agreement - Warped thinking

[xris]

I apologise if this is seen as negative by some but I believe it is very important for everyone to read what I am about to write.

Also, although a criticism of a company I trust it is obvious that it is based on fact and not opinion, and as such does not breach any rules.

This morning I received an email from GBI, their monthly newsletter. Many of the other posters here would have received it too.

It contains advice on the legal aspect of buying a property.

Virtually the first sentence is printed below.

Acceptance
This is the first stage of the contract. This is where both parties sign the Sale and Purchase Agreement and agree to go into negotiations.

This is not misleading, it is wrong.

When an offer is accepted both parties are bound by it. It is not in any sense a start to negotiations. Negotiations were done before the offer was accepted, thus becoming a contract.

Both parties (usually and mainly the buyer) are then legally bound to make every reasonable effort to fulfill the clauses on that contract, absolutely not to start haggling and negotiating.

Why do some of you wonder why I keep stressing the risks for a vendor in accepting an offer with a due diligence clause on it? Because the terms of that DD condition are likely to allow the buyer to make very little effort to fulfill that clause.

If you are selling and the buyer does start trying to knock you down on price take a good look at the reason he gives and then check the special conditions of the contract and the conditions built into the contract. If those conditions allow the buyer to walk then perhaps start talking, or just let him walk. If they do not allow him to walk then do not let him weasel out of the contract, however difficult it might be to hold him to it.

Your lawyer and your agent, if you have one, should advise you on all this. Some lawyers, and especially agents, are no good, and won’t realise the dangers in accepting certain conditions from the buyer, so you will need to gen up yourself and become familiar with the potential pitfalls.

My repeated advice is, at the very least:

1/ Do not accept a DD clause when selling residential.

2/ Get a deposit on acceptance.

To agree to a contract with a 15 day DD clause in it while holding no deposit money from the buyer is like standing in the middle of Queen St with your pants around your ankles.

What concerns me most about the above quote from GBI is that it is so much part of the mentality and the thinking of so many people, and that as such it is starting to become accepted as Gospel. It is quite simply wrong and if you are selling for goodness sake don’t be tricked into thinking like this. YOU are selling a very large asset. YOU are, or should be, the person most in control of the situation, not the buyer.

If you do receive this correct advice, from this site, from your agent or from your lawyer, and you choose to ignore it and things go wrong, then you only have yourself to blame.

xris

[Josko]

In all fairness xris, they make a valid point when you read the whole paragraph...

The three stages of a contract

Acceptance
Unconditional / Confirmation – the best!!!
Settlement

1. Acceptance
   This is the first stage of the contract. This is where both parties sign the Sale and Purchase Agreement and agree to go into negotiations. It is necessary for a contract to be in place so that the new purchaser can have a few days (3,5,10) to do their due diligence. i.e valuation, builder’s report, LIM and anything else they want to check out. (Keep in mind the ONLY report a banks wants is the valuation, so watch your $$) Please note the Price and terms are NOT FINAL at this stage. They are, contrary to popular belief, still negotiable after acceptance. Should you, during your due diligence period, find out something about the property that you were unaware of when you signed the contract you can still negotiate. e.g. the property is protected by the historical society in the community and therefore has very strict regulations regarding alterations. This can be a killer! Or you find the street has a reputation because gangs live there. Some agents will ask for their commission on acceptance, but we would recommend that you pay that only at the next stage of the game.
2. Unconditional / Confirmation
   The word unconditional or confirmation refers to the stage of a contract where there is NO going back for either party. The price and terms are now set and the seller has to sell the property and the buyer has to buy, exactly according to the final contract. Should anything happen to either of them i.e die in a car accident the contract is binding and their heirs still have to go ahead with the deal.
   
   Purchasers/Buyers
   The advantages of being unconditional for purchasers/investors is that at this stage they know the property is theirs and they can start doing things to it, and know that the money they put into the property will not be lost. - They can pay for permits to put up a garage. - Depending on whether the property is vacant and they can get ‘prior access’ they may start painting. - If it is occupied then they may still be allowed to work on the outside. Fences, garden, garage etc. - If the investor is into flipping properties, once the contract is confirmed and has gone unconditional, they can now safely assign or sell it to a new buyer.
   
   Vendors/Sellers
   The advantages for the sellers are that they can also now move on with their plans and confirm the next property. Or they can buy their tickets to move overseas. Or like the purchaser they can start spending money on their next project. Many people think that cannot start on their new plans until the next stage which is settlement. Certainly if the seller is cashing up the equity in the property and waiting for a large sum of money that would be true. But if money is not the main issue everything else can start at the confirmation/unconditional stage of the process.
3. Settlement
   This is the final stage. At this point the title gets transferred into the new purchaser’s name. The final money is paid out to the vendor after all the fees have been paid, lawyers, banks, agents, rates and the ‘The net proceeds of the sale’ are banked into his account. If the buyer did not already have ‘prior access’ to the property at this point the keys are handed over too. Out of the three stages, the middle one Unconditional/Confirmation is the most significant in terms of planning, as at that point the game is ON! It should also be noted that real estate agent’s statistics only use the unconditional date and NOT settlement. It is important for vendors/sellers to realise this. When an agent says “our company takes on average 43 days to sell a house” they are talking about the days until confirmation. Many a vendor has been caught with the wrong idea that they will have the money from the sale within those 43 days. The agents are only concerned with their commission which is generally paid on confirmation so that is when they receive their money and for them it is all over at that stage. Beware! For the vendor there may often another 6-8 weeks until settlement when they finally receive their funds from the sale. A long settlement i.e one or two years is ideal in a rising market where you also get to enjoy the capital gain for the period between confirmation and settlement.
   
   USA
   Some of our students are now, like us, listening to a lot of American property information. Just note that their system is a little different to ours in NZ. Their system is similar to our auction system, where the due diligence is all done before the contract is signed. The signing of the contract becomes the middle step of confirmation/unconditional.

http://newsletters.mobilizemail.com/..._may_2007.html

[Famousone]

A

Get a life Xris....you really are clutching at straws for things to pick on. You are carrying a large chip on your shoulder, and you need help.

Gary.

[xris]

Get a life Xris....you really are clutching at straws for things to pick on. You are carrying a large chip on your shoulder, and you need help.

Gary.

Hello Gary,

Fortunately for you your post, bordering on being offensive, deserves not to be taken seriously. If it is taken seriously then it reflects poorly on you, not on me.

Removing the off the cuff remarks it contains, I can see only a vacuum, a post devoid of any substance.

Why not try to re-write it, this time with some meat added.

I would regard the points I raised as quite serious and very relevant to half the people involved in property transactions in NZ - yes half, the half that call themselves vendors.

I believe those points need to be brought up here as often as possible because of the high readership of this site and especially because of the large number of people amongst that readership who are relatively new into property, relatively young perhaps, probably inexperienced and possibly too with a lot of equity burning a hole in their pockets. For these people, they will tend to take on board the above article and assume it is correct and the way to do things. It is not, not if you are selling. You may be part of this post 2001 seminar frenzy, I don't know, but whatever, your post does not give me much confidence that you can contribute much other than back slapping and chants.

Kind Regards,

xris

[xris]

Okay, let's look a little further into the paragraph.

It is necessary for a contract to be in place so that the new purchaser can have a few days (3,5,10) to do their due diligence. i.e valuation, builder’s report, LIM and anything else they want to check out.

There is a big difference between an all encompassing DD clause and the specific clauses mentioned – valuation, builders report, finance, etc. These can be, and should be (if you are the vendor) quite specific and not allow the buyer easily to walk just because he has changed his mind.

Please note the Price and terms are NOT FINAL at this stage. They are, contrary to popular belief, still negotiable after acceptance.

Misleading - Only if both parties agree to negotiate.

Should you, during your due diligence period, find out something about the property that you were unaware of when you signed the contract you can still negotiate.

Misleading. Again only if both parties agree. Depending on the terms of the condition you will have the right to confirm that clause or not to, thus cancelling the contract. You have no automatic right to negotiate.

e.g. the property is protected by the historical society in the community and therefore has very strict regulations regarding alterations.

Perfectly valid reason to pull out. This would probably come up in the LIM, a clause built in to the standard S&P, thus making a general DD unnecessary.

Or you find the street has a reputation because gangs live there

Tough. You should have found that out before making the offer.

Some agents will ask for their commission on acceptance,

Really? Who? Or is this yet further made up advice?

we would recommend that you pay that only at the next stage of the game.

So, who are we talking to now? If we are still talking to the buyer then since when has a buyer paid an agent’s commission? (Possible but not common). Again, confused and misleading advice.

It’s probably best if I stop there.

xris

[Keys]

Okay, let's look a little further into the paragraph.

It’s probably best if I stop there.

No, no, don't stop.

I understand that a comprehension lession may be needed amongst some readers here. It no longer surprises me that many people don't fully understand what it is that they read.


Keys

[cube]

So, who are we talking to now? If we are still talking to the buyer then since when has a buyer paid an agent’s commission? (Possible but not common). Again, confused and misleading advice.

The vendor pays the commision, but the salesperson is, I believe, commonly paid from the funds provided by the purchaser as a deposit.

This is why having a deposit that is large enough to cover the agent's/salesperson's commission is a useful tactic in getting them to be a bit more friendly towards you than they otherwise may be!

As a general point, I would say that discovering some problem or other with the property, street or finance is a good reason for attempting to re-negotiate some or all of the contract.

The vendor is, of course, under no obligation to re-enter negotiations, but they run the risk of the sale, which they have assumed will continue, going south.

cube

[Rolf]

Please note the Price and terms are NOT FINAL at this stage. They are, contrary to popular belief, still negotiable after acceptance.

Misleading - Only if both parties agree to negotiate.

I don't think this is misleading. You can always negotiate. It doesn't mean however that you will succeed in your negotiations.
It takes two parties to negotiate, so it is obvious that the vendor will have to agree to your proposal in order for your negotiation to succeed.

Should you, during your due diligence period, find out something about the property that you were unaware of when you signed the contract you can still negotiate.

Misleading. Again only if both parties agree.

Same as above - it says can negotiate, it's not compulsory.

[Dean@Massiveaction]

Sory Xris, I'm with famousone on this one, you need to get out more!!

[whitt]

Advice in newsletter look fine to me.

if selling a property Xris advice is good also

My repeated advice is, at the very least:

1/ Do not accept a DD clause when selling residential.

2/ Get a deposit on acceptance.

[Perry]

Words & Comprehension

Is it a matter of wording?

Would "Acceptance" not be styled better as
a "conditional offer" in stage/step one?

That would make the sequence:

1 > Conditional offer
2 > Unconditional / Confirmation [of offer]
3 > Settlement

[xris]

Is it a matter of wording?

Would "Acceptance" not be styled better as
a "conditional offer" in stage/step one?

That would make the sequence:

1 > Conditional offer
2 > Unconditional / Confirmation [of offer]
3 > Settlement

Hello perry,

I'm not sure where the confusion lies. Perhaps I'm being a bit dim this morning but your clarification of the wording is what has confused me.

xris

[Perry]

Xris

Aren't the three 'legs' of a contract:
offer, acceptance and consideration?
(Not sure where 'supply' fits in, there)

Offers can be made with conditions;
Acceptance can be made with conditions.

But acceptance without conditions is just
that - acceptance - isn't it? Is that not
what you're saying?

Like you, I have doubts about the ability
to successfully negotiate further terms
and conditions after (unqualified) acceptance
of an offer has been given, unless there's
an abundance of goodwill from both parties.

Or have I misunderstood your reservations
about the wording?

[xris]

Very quickly Perry before I rush out,

My understanding is that the offer is accepted (usually with conditions.) Later fulfilling those conditions (on unconditional date) is not in any way another acceptance - it is meeting/fulfilling the conditions you had earlier accepted.

That's my view.

xris

[David_W]

Taking things back to their basics, GBI appear to have made a slightly error in their statement to the effect of a agreement is a negotiation. To have a legally binding agreement or contract you need three things:

1) Offer
2) Acceptance
3) Consideration

Yes it is that simple. When making an offer (whether conditional or not) the other party (usually will be the vendor) can choose to accept it or alter it in some way to make a counteroffer. The consideration is the price and terms of the contract.