March, 2005

The P&S

You decide to sell your house and move to Florida.  You find a real estate broker, who in turn finds a Buyer and you all enter into a Purchase & Sale Agreement.  Those in the business call it a “P&S” for short.  I don’t know if they do that to be cool or because they’re too lazy to enunciate that 1 extra syllable.  In my case it’s the lazy thing.

When you sign the P&S, the real estate broker holds a 5% down payment from the Buyer.  And that figure comes from where?  Coincidentally, it happens to be the same amount as the broker’s commission.  They like to get their cut up front so they can keep an eye on it.  But I’m a lawyer, so who am I to cast dispersions on the weaseley ways of real estate brokers.

But at what point does that deposit become nonrefundable?  What if before the closing the Buyer changes his mind.  He finds a better deal on another house.  Or discovers you live next to Charlie?  Can he get out of the deal and get his 5% back?

The standard P&S gives the Buyer two “free” outs of the deal under certain circumstances.  The first is via the “Home Inspection” contingency, which gives him a week to have the house inspected by a professional.  If he doesn’t like the report, he can kill the deal and get his money back.  This is pretty nebulous.  What does that mean “if he doesn’t like the report”?  The smallest nitpicky thing gets him a free pass?  You can try to include language which requires more than $x amount in repairs for the Buyer to be able to back out, but it’s still pretty easy to invoke this clause if he wishes.

But what if he doesn’t spot Charlie mowing the lawn in his Speedos until after the Home Inspection period lapses.  Can he still get out of the deal?  He might be able to under the Mortgage Contingency clause.  This says that if he can’t secure a bank loan by a certain date, he can walk away and get his money back.  And even though he has to prove he tried to get a loan, it would take very little to kill a bank deal.  Call them and ask how long you have to wait after the closing to file for bankruptcy and see how fast the Mortgage Contingency clause gets invoked.

Which brings us to the most important part of the Home Inspection and Mortgage Contingency clauses.  If he wants to invoke either one, he has to affirmatively give you notice that he is backing out of the deal and why.  Look at the P&S.  It will tell you where notices need to be sent and who gets copies.  If he doesn’t follow this to the letter, you get to keep the deposit. Or most of it anyway.  The weasely lawyer and broker will want a piece of it for their time spent on the deal gone bad.