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California Real Estate Practices

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					Washington Real Estate Practices

        Lesson 6:
Preparing and Negotiating
         Offers
                The Offer
Under statute of frauds, offer to purchase
property must be in writing.
                The Offer
Under statute of frauds, offer to purchase
property must be in writing.

Offer becomes binding contract—purchase
agreement—when signed by seller.
                The Offer
           Preparing the offer
Parties to transaction are always allowed to
write contract.
Buyer can write own offer.
                The Offer
           Preparing the offer
Parties to transaction are always allowed to
write contract.
Buyer can write own offer.


Generally, anyone NOT a party to transaction
can’t write contract: would be unauthorized
practice of law.
                The Offer
           Preparing the offer
Exception in real estate transactions:

Licensees may prepare routine purchase
agreements as long as they use standard
forms originally written and approved by real
estate attorneys.
               The Offer
           Preparing the offer
Agents may fill out purchase agreement forms
only for transactions they are handling.

Can’t charge separate fee for this service.
               The Offer
           Preparing the offer
Example: You represent buyer who is ready to
make offer.

You prepare standard purchase agreement
form for buyer to sign and do not charge
separate fee for this service.
                 The Offer
            Preparing the offer
Example: You represent buyer who is ready to
make offer.

You prepare standard purchase agreement
form for buyer to sign and do not charge
separate fee for this service.

This is legal.
                The Offer
            Preparing the offer
Example: Your friend is making offer on house
and wants to pay you $100 to prepare offer.

She doesn’t want you to act as licensee in
transaction; she just wants help with offer.
                The Offer
            Preparing the offer
Example: Your friend is making offer on house
and wants to pay you $100 to prepare offer.

She doesn’t want you to act as licensee in
transaction; she just wants help with offer.

If you prepare offer, you are engaging in
unauthorized practice of law—this is illegal.
                 The Offer
            Preparing the offer
Licensee preparing offer is only allowed to fill
in blanks on standard form.

Can’t write additional clauses.
                 The Offer
            Preparing the offer
Don’t advise client as to legal effect of form’s
provisions: might constitute unauthorized
practice of law.
               The Offer
           Preparing the offer
Licensee preparing offer is held to same
standard of care as an attorney.
                The Offer
           Preparing the offer
Licensee preparing offer is held to same
standard of care as an attorney.

If licensee negligently makes mistake when
filling out form, and mistake harms a party,
licensee could be held liable for mistake.
                 The Offer
            Reviewing the offer
Once offer form is filled out, review it with
buyer and make sure she understands its
terms.
                 The Offer
            Reviewing the offer
Once offer form is filled out, review it with
buyer and make sure she understands its
terms.

If she has questions about certain provisions,
advise her to talk to real estate attorney.
               The Offer
           Reviewing the offer
As you review offer’s financial aspects, use
estimated costs worksheet to list buyer’s
estimated costs and calculate total amount of
cash buyer will need to close transaction.
               The Offer
           Reviewing the offer
Have buyer sign offer and give her a copy.

Buyer gives you good faith deposit, which you
give to your brokerage.
               The Offer
          Reviewing the offer
Purchase agreement serves as buyer’s receipt
for deposit.
                 The Offer
            Reviewing the offer
Purchase agreement serves as buyer’s receipt
for deposit.

If pre-printed form is filled out properly, buyer’s
offer should be valid.
                   The Offer
              Reviewing the offer
Three key criteria for valid offer:
1) Offer must be in writing.
                  The Offer
             Reviewing the offer
Three key criteria for valid offer:
1) Offer must be in writing.
2) Offer must be definite and certain in its terms.
   Can’t be vague.
                  The Offer
             Reviewing the offer
Three key criteria for valid offer:
1) Offer must be in writing.
2) Offer must be definite and certain in its terms.
   Can’t be vague.
3) Offer must express willingness to contract.
   Must be clear buyer is willing to enter into
   binding sales contract with seller.
              The Offer
         Reviewing the offer
Three potential problem areas: property
description, method of payment, and special
contingencies.
              The Offer
         Reviewing the offer
Three potential problem areas: property
description, method of payment, and special
contingencies.

Property description: Make sure property’s
legal description is accurate and complete.
             The Offer
         Reviewing the offer
Method of payment: Offer should state how
buyer intends to pay for property.
             The Offer
         Reviewing the offer
Method of payment: Offer should state how
buyer intends to pay for property.

Even if buyer doesn’t know all details of
financing, include basics, such as
downpayment amount and whether buyer will
get institutional loan or needs seller
financing.
              The Offer
         Reviewing the offer
Special contingencies: Any special
conditions or contingencies buyer requires
must be noted in offer.
              The Offer
         Reviewing the offer
Special contingencies: Any special
conditions or contingencies buyer requires
must be noted in offer.

Example: If buyer needs to sell current home
before purchasing new home, offer should
include clause making it contingent on sale of
current home.
               The Offer
            Seeking advice
If you feel problem may exist, or you’re not
sure how to fill in pre-printed form, seek
advice.

Talk to your managing or designated broker
whenever you are unsure about buyer’s offer
or if you think you may have made mistake.
              The Offer
            Seeking advice
Talk to real estate attorney if:
You have question and your managing or
  designated broker is not available.

You and your managing or designated
 broker have discussed your question and
 think you should ask attorney.
               The Offer
             Seeking advice
You can’t use pre-printed form for sale
 because of unusual or complicated terms in
 buyer’s offer.

You need additional legal documents
 prepared, such as easement or road
 maintenance agreement.
                 The Offer
            Presenting the offer
If you’re a selling agent with offer to give seller,
listing agent may want to be the one who
presents offer. (Most commonly, offers are
presented by listing agent.)
                 The Offer
            Presenting the offer
If you’re a selling agent with offer to give seller,
listing agent may want to be the one who
presents offer. (Most commonly, offers are
presented by listing agent.)

Review offer with listing agent, explaining all
  terms.
                 The Offer
            Presenting the offer
If you’re a selling agent with offer to give seller,
listing agent may want to be the one who
presents offer. (Most commonly, offers are
presented by listing agent.)
 Review offer with listing agent, explaining all
   terms.
 If you think seller may have questions about
   buyer or offer, arrange to be there when
   offer is presented.
               The Offer
          Presenting the offer
Example: Your buyers are offering to pay cash
and want to close sale very quickly—this is
unusual.

You want to explain in person that buyers
recently received inheritance and are
expecting a baby very soon, so they want to
move in as soon as possible.
                 The Offer
           Presenting the offer
If you go with listing agent to present offer,
disclose your agency status to sellers.

Make sure sellers have chance to talk to their
agent privately about offer.
                 The Offer
           Presenting the offer
If you are listing agent and receive offer for
seller’s property, you must present it to seller
right away.
                 The Offer
           Presenting the offer
If you are listing agent and receive offer for
seller’s property, you must present it to seller
right away.
 Arrange to meet with seller in person and
   discuss offer’s terms.
                The Offer
           Presenting the offer
If you are listing agent and receive offer for
seller’s property, you must present it to seller
right away.
 Arrange to meet with seller in person and
   discuss offer’s terms.
 If more than one seller—such as married
   couple—make extra copy of offer and give
   each a copy to read while you review terms.
               The Offer
          Presenting the offer
As you review offer, explain items (where
misunderstandings are most likely to occur):
closing date and date of possession,
                The Offer
           Presenting the offer
As you review offer, explain items (where
misunderstandings are most likely to occur):
closing date and date of possession,
list of included items (items included in sale
  and transferred to buyer),
                The Offer
           Presenting the offer
As you review offer, explain items (where
misunderstandings are most likely to occur):
closing date and date of possession,
list of included items (items included in sale
  and transferred to buyer),
any conditions or contingencies, and
                The Offer
           Presenting the offer
As you review offer, explain items (where
misunderstandings are most likely to occur):
closing date and date of possession,
list of included items (items included in sale
  and transferred to buyer),
any conditions or contingencies, and
any obligations seller must fulfill prior to
  closing (such as repairs or cleanup).
                The Offer
           Presenting the offer
If seller has any legal questions, advise him to
talk to attorney.

Don’t try to answer legal questions yourself.
                The Offer
           Presenting the offer
When you explain offer’s terms, avoid
describing buyer in terms that might violate fair
housing laws.
                The Offer
           Presenting the offer
When you explain offer’s terms, avoid
describing buyer in terms that might violate fair
housing laws.

Don’t mention buyer’s race, national origin,
religion, etc.
 These characteristics shouldn’t be part of
  seller’s decision-making process.
                The Offer
           Presenting the offer
Help seller analyze financial aspects of offer.
Under offer’s terms, how much money will
 seller walk away with?
                The Offer
           Presenting the offer
Help seller analyze financial aspects of offer.
Under offer’s terms, how much money will
 seller walk away with?

Use seller’s estimated net proceeds worksheet
to list estimated costs of selling property and
calculate total amount of cash seller can
expect to receive at closing.
       Presenting The Offer
             Multiple offers
No matter how many offers seller has received
or how attractive or unattractive they are, you
must always present any new offer to seller
immediately.
        Presenting The Offer
              Multiple offers
Example: You presented very attractive offer to
your seller yesterday and seller was interested.

Today you get second, less attractive offer on
same property. You’re sure seller will reject it.

Can you avoid giving second offer to seller?
        Presenting The Offer
               Multiple offers
No. You must pass second offer on to seller
immediately.

Don’t wait for him to accept or reject first offer.
        Presenting The Offer
              Backup offers
Sometimes buyer is so interested in home that
she’s willing to make offer even though seller
has already accepted another offer.

Backup offer: Offer contingent on first sale
failing.
        Presenting The Offer
              Backup offers
Example: Your buyer finds perfect house but
seller accepted another offer just last night.

Your buyer makes backup offer and seller
accepts it.
        Presenting The Offer
               Backup offers
Example: Your buyer finds perfect house but
seller accepted another offer just last night.

Your buyer makes backup offer and seller
accepts it.

Now if first sale fails to close, your buyer will
get to purchase property.
            Backup Offers
       Contingent counteroffers
Contingent counteroffer: When a seller
agrees to sell property to second buyer only if
first sale doesn’t close.
            Backup Offers
       Contingent counteroffers
Contingent counteroffer: When a seller
agrees to sell property to second buyer only if
first sale doesn’t close.

Gives seller security of having second buyer
waiting if first buyer is unable to complete
purchase.
              Backup Offers
       Contingent counteroffers
Example: Seller receives two offers.

First offer is for full listing price, but buyer can
make only small good faith deposit and needs
to finance 95% of purchase price. Seller isn’t
sure buyer will be able to obtain loan.
             Backup Offers
       Contingent counteroffers
Second offer is for $5,000 below listing price,
but second buyer can make substantial good
faith deposit and needs only 80% loan.

Seller doesn’t accept second offer, because he
doesn’t want to reduce price by $5,000.
But if first buyer fails to get 95% loan, seller
wants to be able to sell to second buyer.
              Backup Offers
       Contingent counteroffers
Seller accepts first buyer’s offer but makes
contingent counteroffer on second offer.

Second buyer accepts counteroffer.

If sale to first buyer falls through, seller can sell
to second buyer.
           Backup Offers
  Purchase agreement addendum
To make backup offer, use purchase
agreement addendum form.
            Backup Offers
  Purchase agreement addendum
To make backup offer, use backup addendum
form.

Addendum to standard purchase
 agreement.
Makes contract contingent on failure of first
 sale.
            Backup Offers
  Purchase agreement addendum
Backup offer contingent on written cancellation
of any prior agreements.
            Backup Offers
  Purchase agreement addendum
Backup offer contingent on written cancellation
of any prior agreements.

Oral statement that first sale is canceled not
  enough to turn backup offer into binding
  agreement.
            Backup Offers
  Purchase agreement addendum
Seller and first buyer have right to change
terms of first sale.
             Backup Offers
  Purchase agreement addendum
Seller and first buyer have right to change
terms of first sale.

Otherwise, second buyer could claim that any
changes to original deposit receipt constituted
failure of first sale, obligating seller to sell
property to second buyer.
             Backup Offers
  Purchase agreement addendum
Second buyer may cancel backup offer, in
writing, at any point before seller presents her
with written cancellation of first sale.
           Backup Offers
  Purchase agreement addendum
Escape date: Second buyer can set date on
which backup offer may be terminated.
             Backup Offers
  Purchase agreement addendum
Escape date: Second buyer can set date on
which backup offer may be terminated.

Second buyer shouldn’t have to wait
  indefinitely to see if first sale will close.
            Backup Offers
           Breach of contract
What if backup offer is so much more attractive
that seller wants to back out of first sales
contract and accept this offer?
              Backup Offers
              Breach of contract
What if backup offer is so much more attractive
that seller wants to back out of first sales
contract and accept this offer?

You can’t stop seller from breaching sales
  contract.
             Backup Offers
           Breach of contract
But make it clear to seller that he could be
sued by first buyer and held liable for your
commission.
             Backup Offers
           Breach of contract
But make it clear to seller that he could be
sued by first buyer and held liable for your
commission.

Strongly advise seller to seek legal advice
before taking such a drastic step.
             Backup Offers
           Breach of contract
Encouraging seller to back out of first contract
to accept second, more attractive offer is an
unlawful act: “tortious interference with a
contractual relationship.”
             Backup Offers
           Breach of contract
Encouraging seller to back out of first contract
to accept second, more attractive offer is an
unlawful act: “tortious interference with a
contractual relationship.”

Licensee committing act may have to pay
  damages to first buyer for any financial loss
  caused by interference.
      Summary
       The Offer

 Preparing the offer
 Presenting the offer
 Backup offers
         Revoking an Offer
     Anytime before acceptance
Buyer can revoke offer to purchase any time
until his offer has been accepted.
          Revoking an Offer
      Anytime before acceptance
Buyer can revoke offer to purchase any time
until his offer has been accepted.

Even if offer indicates it will remain open for
  certain length of time.
          Revoking an Offer
      Anytime before acceptance
Example: Buyer’s offer states it will terminate
in 48 hours. If 48 hours pass without
acceptance, offer terminates automatically.
          Revoking an Offer
      Anytime before acceptance
Example: Buyer’s offer states it will terminate
in 48 hours. If 48 hours pass without
acceptance, offer terminates automatically.

But if buyer changes mind after just 24 hours
and offer hasn’t been accepted yet, buyer can
revoke it. Seller can’t force buyer to keep offer
open for full 48 hours.
          Revoking an Offer
      Anytime before acceptance
Offer without time limit will terminate after
reasonable period of time.
           Revoking an Offer
      Anytime before acceptance
Offer without time limit will terminate after
reasonable period of time.

“Reasonable” determined on case-by-case
  basis.
             Counteroffers
Seller rarely accepts buyer’s offer as is:
typically there are some objections to purchase
price, good faith deposit amount, closing date,
included items, or financing terms.
             Counteroffers
Seller rarely accepts buyer’s offer as is:
typically there are some objections to purchase
price, good faith deposit amount, closing date,
included items, or financing terms.

But if offer is reasonable, seller will probably
  want to make counteroffer.
            Counteroffers
           Counteroffer form
Counteroffer possible by making simple
changes to original offer form.
            Counteroffers
           Counteroffer form
Counteroffer possible by making simple
changes to original offer form.

More complicated changes require using
separate counteroffer form.
            Counteroffers
           Counteroffer form
Example: Buyer offers $275,000 with good
faith deposit of $5,500. Seller agrees to terms
but wants $7,500 good faith deposit.
             Counteroffers
           Counteroffer form
Example: Buyer offers $275,000 with good
faith deposit of $5,500. Seller agrees to terms
but wants $7,500 good faith deposit.

Simply cross out $5,500 good faith figure on
offer and write in $7,500. Seller initials change;
counteroffer is presented back to buyer.
             Counteroffers
            Counteroffer form
Example: Seller wants larger good faith
deposit, slightly higher purchase price,
different closing date, and to exclude antique
chandelier and stained glass window from
sale.
             Counteroffers
            Counteroffer form
Example: Seller wants larger good faith
deposit, slightly higher purchase price,
different closing date, and to exclude antique
chandelier and stained glass window from
sale.

Making all these changes to original form is too
complicated—use separate form.
             Counteroffers
            Counteroffer form
Counteroffer form may be used for either
seller’s counteroffer or buyer’s counteroffer.
            Counteroffers
          Making counteroffer
If your client wants to make counteroffer, make
sure he understands that the counteroffer acts
as rejection of previous offer or counteroffer.
            Counteroffers
          Making counteroffer
If your client wants to make counteroffer, make
sure he understands that the counteroffer acts
as rejection of previous offer or counteroffer.

If his counteroffer is rejected, he cannot
 simply accept earlier offer or counteroffer.
Process of offer and acceptance must begin
 again.
             Counteroffers
         Receiving counteroffer
When presenting counteroffer to your client,
carefully review each altered term and financial
impact of changes.
             Counteroffers
         Receiving counteroffer
When presenting counteroffer to your client,
carefully review each altered term and financial
impact of changes.

If changes affect transaction’s costs, it is a
good idea to prepare another estimated costs
worksheet for client.
            Counteroffers
           Counteroffer form
Example: Buyer might not be able to accept
counteroffer if new terms involve increased
purchase price or downpayment.
             Counteroffers
            Counteroffer form
Example: Buyer might not be able to accept
counteroffer if new terms involve increased
purchase price or downpayment.

Buyer might not have necessary cash
available or might not be able to qualify for
larger loan.
            Counteroffers
      Withdrawing counteroffers
Like any offer, counteroffer can be withdrawn
at any time before acceptance.
             Counteroffers
      Withdrawing counteroffers
Like any offer, counteroffer can be withdrawn
at any time before acceptance.

Example: Seller makes counteroffer, then
receives attractive offer from another buyer.
             Counteroffers
      Withdrawing counteroffers
Like any offer, counteroffer can be withdrawn
at any time before acceptance.

Example: Seller makes counteroffer, then
receives attractive offer from another buyer.

As long as first buyer hasn’t accepted
  counteroffer, seller is free to withdraw it and
  accept offer from second buyer.
             Counteroffers
      Withdrawing counteroffers
If your seller decides to withdraw counteroffer,
notify buyer as quickly as possible.

Note in your files the date and time you told
  buyer counteroffer was withdrawn.
     Summary
    Counteroffers

 Revoking  an offer
 Counteroffer
 Multiple counteroffers
 Revoking a counteroffer
       Accepting the Offer
When offer or counteroffer is accepted,
contract is formed.
          Accepting the Offer
   When offer or counteroffer is accepted,
   contract is formed.

Requirements for valid acceptance:
1) Must be communicated to person making
   offer.
          Accepting the Offer
   When offer or counteroffer is accepted,
   contract is formed.

Requirements for valid acceptance:
1) Must be communicated to person making
   offer.
2) Must be made in manner specified.
          Accepting the Offer
   When offer or counteroffer is accepted,
   contract is formed.

Requirements for valid acceptance:
1) Must be communicated to person making
   offer.
2) Must be made in manner specified.
3) Can’t change any terms of offer.
        Accepting the Offer
    Communicating acceptance
To create binding contract, seller must accept
buyer’s offer and inform buyer of acceptance.
         Accepting the Offer
    Communicating acceptance
To create binding contract, seller must accept
buyer’s offer and inform buyer of acceptance.

Until seller (or seller’s agent) receives buyer’s
acceptance, seller can still revoke offer.
         Accepting the Offer
     Communicating acceptance
Example: Brad offered to purchase Sara’s
house, and Sara decides to accept.
          Accepting the Offer
     Communicating acceptance
Example: Brad offered to purchase Sara’s
house, and Sara decides to accept.

Right after Sara signs offer, she gets phone
call from Brad’s agent revoking offer.
          Accepting the Offer
     Communicating acceptance
Example: Brad offered to purchase Sara’s
house, and Sara decides to accept.

Right after Sara signs offer, she gets phone
call from Brad’s agent revoking offer.

Because Sara hadn’t yet communicated her
acceptance to Brad, he can revoke his offer.
          Accepting the Offer
     Communicating acceptance
Acceptance may be communicated to offeror
in different ways: face-to-face, by mail, or by
fax.
          Accepting the Offer
     Communicating acceptance
Acceptance may be communicated to offeror
in different ways: face-to-face, by mail, or by
fax.

When communicated in person, acceptance
deemed to take place at time of delivery.
 Exception: Mailbox rule
  Communicating Acceptance
               Mailbox rule
Mailbox rule: A mailed acceptance creates
binding contract as soon as it’s dropped in
mailbox.
  Communicating Acceptance
               Mailbox rule
Mailbox rule: A mailed acceptance creates
binding contract as soon as it’s dropped in
mailbox.

Example: Sara signs Brad’s offer and drops it
off at post office. An hour later, Brad’s agent
calls to say Brad is revoking offer.
  Communicating Acceptance
                Mailbox rule
At this point, it’s too late for Brad to revoke
offer, because Sara’s acceptance is
considered communicated as soon as she
mailed it.
  Communicating Acceptance
                Mailbox rule
At this point, it’s too late for Brad to revoke
offer, because Sara’s acceptance is
considered communicated as soon as she
mailed it.

Mailbox rule has been extended to other
media, such as telegrams or faxed messages.
       Accepting the Offer
        Manner of acceptance
Generally, acceptance may be communicated
in any reasonable way.
        Accepting the Offer
         Manner of acceptance
Generally, acceptance may be communicated
in any reasonable way.

If offer is sent to seller by fax, seller may
respond by fax or another customary method,
such as mail or delivery in person.
        Accepting the Offer
         Manner of acceptance
Generally, acceptance may be communicated
in any reasonable way.

If offer is sent to seller by fax, seller may
respond by fax or another customary method,
such as mail or delivery in person.

Acceptance may also be communicated by
notifying buyer’s agent of acceptance.
        Accepting the Offer
        Manner of acceptance
If offer specifies particular method of
acceptance, acceptance must be in specified
manner.
        Accepting the Offer
        Manner of acceptance
If offer specifies particular method of
acceptance, acceptance must be in specified
manner.

Otherwise acceptance is invalid.
         Accepting the Offer
         Manner of acceptance
Example: Brad offers to purchase Sara’s
property. He includes this provision in offer:

“This offer shall become a binding contract
when written acceptance is hand delivered to
my attorney at 437 First Avenue, Suite 312.”
        Accepting the Offer
        Manner of acceptance
To create binding contract, Sara must
communicate her acceptance in specified
manner only.
        Accepting the Offer
        Manner of acceptance
To create binding contract, Sara must
communicate her acceptance in specified
manner only.

A mailed acceptance to Brad’s residence
would be invalid.
        Accepting the Offer
                In writing
Acceptance of offer to purchase real estate
must be in writing.
        Accepting the Offer
                In writing
Acceptance of offer to purchase real estate
must be in writing.

Oral acceptance not valid.
        Accepting the Offer
                 In writing
Example: Brad offers to purchase Sara’s
property using standard purchase agreement.
Sara likes offer, calls Brad and accepts offer
over phone.
        Accepting the Offer
                 In writing
Example: Brad offers to purchase Sara’s
property using standard purchase agreement.
Sara likes offer, calls Brad and accepts offer
over phone.

Two hours later, Sara receives better offer.
She can change mind and accept new offer,
because acceptance of first offer was not in
writing.
        Accepting the Offer
  Acceptance cannot change terms
Acceptance cannot change any of offer’s
terms.
         Accepting the Offer
  Acceptance cannot change terms
Acceptance cannot change any of offer’s
terms.

Acceptance with any modification is
counteroffer and acts as rejection of original
offer.
        Accepting the Offer
  Acceptance cannot change terms
Acceptance cannot change any of offer’s
terms.

Acceptance with any modification is
counteroffer and acts as rejection of original
offer.
 Counteroffer must be accepted by other
   party before binding contract can be formed.
      Contract Amendments
Parties may change terms of their agreement
only with written consent of both parties.
      Contract Amendments
Parties may change terms of their agreement
only with written consent of both parties.

Parties can use addendum form to change
contract terms.
      Contract Amendments
Parties may change terms of their agreement
only with written consent of both parties.

Parties can use addendum form to change
contract terms.

Addendum becomes part of original
  purchase agreement.
       Contract Rescission
Parties may decide to terminate agreement or
sale may fail for some other reason.
        Contract Rescission
Parties may decide to terminate agreement or
sale may fail for some other reason.

Use a rescission agreement: each party
releases the other from any liability in
connection with purchase agreement.
       Contract Rescission
        Rescission agreement
Using form ensures sale truly “dead”—allows
licensee to begin marketing property again.
       Contract Rescission
        Rescission agreement
Using form ensures sale truly “dead”—allows
licensee to begin marketing property again.

Agreement should specify how earnest money
deposit is to be disbursed.
       Contract Rescission
        Rescission agreement
Using form ensures sale truly “dead”—allows
licensee to begin marketing property again.

Agreement should specify how earnest money
deposit is to be disbursed.
 Prevents problems with buyer and seller
  who can’t agree on how to treat deposit.
     Summary
Accepting the Offer

 Acceptance
 Amendments
 Rescission
     Earnest Money Deposits
Buyer gives seller deposit to show intent to
purchase property according to offer’s terms.
 Not legally required, but customary.
     Earnest Money Deposits
Buyer gives seller deposit to show intent to
purchase property according to offer’s terms.
 Not legally required, but customary.


Sellers don’t want to take home off market
without some assurance buyer will follow
through with purchase.
     Earnest Money Deposits
          Amount of deposit
Amount of deposit is up to buyer.
Often depends on buyer’s situation.
     Earnest Money Deposits
           Amount of deposit
Amount of deposit is up to buyer.
Often depends on buyer’s situation.


From seller’s point of view, major consideration
is whether size of the deposit gives buyer
added incentive to complete purchase.
     Earnest Money Deposits
          Amount of deposit
Larger deposit discourages buyer from walking
away from transaction.
     Earnest Money Deposits
           Amount of deposit
Larger deposit discourages buyer from walking
away from transaction.

And if buyer does walk away, seller receives
more money as compensation for delay,
inconvenience, and disappointment.
     Earnest Money Deposits
             Form of deposit
Licensee who accepts deposit from buyer is
legally required to disclose deposit’s amount
and form to seller.
     Earnest Money Deposits
             Form of deposit
Licensee who accepts deposit from buyer is
legally required to disclose deposit’s amount
and form to seller.

Deposit may take form of:
  • cash,             • cashier’s check,
  • money order,      • postdated check, or
  • personal check, • promissory note.
     Earnest Money Deposits
            Form of deposit
If these disclosures aren’t made, licensee may
be subject to disciplinary action.
     Earnest Money Deposits
            Form of deposit
If these disclosures aren’t made, licensee may
be subject to disciplinary action.

If disclosures aren’t made and seller never
gets deposit money because personal check
bounced or buyer doesn’t pay promissory note,
licensee may be liable for amount seller lost.
     Earnest Money Deposits
             Form of deposit
Example: Your buyer is making offer. He says
he’ll make $5,000 earnest money deposit but
needs to transfer funds into checking account
first. He promises to bring check tomorrow, but
wants you to present offer right away.
        Good Faith Deposits
             Form of deposit
Example: Your buyer is making offer. He says
he’ll make $5,000 earnest money deposit but
needs to transfer funds into checking account
first. He promises to bring check tomorrow, but
wants you to present offer right away.

You present offer and mention $5,000 earnest
money deposit, but don’t say you don’t actually
have deposit yet. Have you broken law?
        Good Faith Deposits
             Form of deposit
Yes. You could be subject to disciplinary
action.
        Good Faith Deposits
             Form of deposit
Yes. You could be subject to disciplinary
action.

And if seller accepts offer and buyer fails to
come through with check, you could also be
subject to civil lawsuit for seller’s loss.
          Form of Deposit
            Personal check
Personal checks are most common form of
earnest money deposits.
          Form of Deposit
            Personal check
Personal checks are most common form of
earnest money deposits.

Buyer should make check out to brokerage
that will actually deposit check.
           Form of Deposit
                Personal check
So if buyer gives you check, it should be made
payable to your brokerage firm.

Never have buyer make check out to you
  personally.
          Form of Deposit
            Personal check
Your brokerage may have policy requiring
cashier’s check or money order (not personal
check).
           Form of Deposit
             Personal check
Your brokerage may have policy requiring
cashier’s check or money order (not personal
check).

If so, let buyer know early on—gives her time
for extra step of getting cashier’s check or
money order.
          Form of Deposit
           Postdated check
Buyer may ask you to accept postdated check,
which can’t be cashed or deposited before
date written on check.
          Form of Deposit
           Postdated check
Buyer may ask you to accept postdated check,
which can’t be cashed or deposited before
date written on check.

Some brokerages refuse to accept postdated
checks—find out your company’s policy.
           Form of Deposit
            Postdated check
If you do accept postdated check, be sure to
tell seller.

Good idea to disclose this fact in writing.
           Form of Deposit
            Postdated check
Alternative to postdated check that your
brokerage and seller may be willing to accept:
           Form of Deposit
            Postdated check
Alternative to postdated check that your
brokerage and seller may be willing to accept:

Buyer makes small earnest money deposit
when offer is submitted, and includes clause in
offer requiring her to make additional deposit
within short time period.
          Form of Deposit
            Postdated check
Example: Your buyer is making offer but has
only enough cash to make $1,000 deposit.
More downpayment funds are tied up in CD
maturing in seven days. She doesn’t want to
cash in CD early and pay penalty.
           Form of Deposit
            Postdated check
Example: Your buyer is making offer but has
only enough cash to make $1,000 deposit.
More downpayment funds are tied up in CD
maturing in seven days. She doesn’t want to
cash in CD early and pay penalty.

So she gives you check for $1,000 now and
promises in writing to make additional $3,000
deposit in seven days.
          Form of Deposit
              Using cash
Many brokerages refuse to accept cash
deposits because cash can cause problems.
          Form of Deposit
              Using cash
Many brokerages refuse to accept cash
deposits because cash can cause problems.

Example: On Saturday afternoon your buyer
makes offer with $3,500 cash earnest money
deposit. You can’t give cash to your
designated broker until Monday. What do you
do with cash over weekend?
           Form of Deposit
                Using cash
Because of prohibition against commingling
client funds, you can’t deposit check in your
own account and write check to your
brokerage for same amount.
           Form of Deposit
                Using cash
Because of prohibition against commingling
client funds, you can’t deposit check in your
own account and write check to your
brokerage for same amount.

But responsibility is yours if cash were lost or
stolen.
           Form of Deposit
            Promissory note
It’s up to seller whether or not to accept
promissory note offered as deposit, but most
experts recommend against it.
           Form of Deposit
             Promissory note
It’s up to seller whether or not to accept
promissory note offered as deposit, but most
experts recommend against it.

If buyer walks away from sale, seller is left with
only promissory note.
          Form of Deposit
            Promissory note
Both seller and your brokerage would probably
have to sue buyer to collect on it.
           Form of Deposit
            Promissory note
Both seller and your brokerage would probably
have to sue buyer to collect on it.

Unless promissory note is for large amount,
attorney’s fees and court costs may make it
impractical to sue.
          Form of Deposit
           Personal property
Buyer may want to offer personal property as
an earnest money deposit, such as stock or
bonds, or even boat or jewelry.
            Form of Deposit
            Personal property
Buyer may want to offer personal property as
an earnest money deposit, such as stock or
bonds, or even boat or jewelry.

It’s up to seller to accept or reject item as
deposit.
     Earnest Money Deposits
        Trust fund procedures
Earnest money deposits must be handled in
compliance with laws and regulations
regarding trust funds.
     Earnest Money Deposits
        Trust fund procedures
Earnest money deposits must be handled in
compliance with laws and regulations
regarding trust funds.

Trust funds generally must be deposited into
trust account within one business day after
they are received.
   Earnest Money Deposits
      Trust fund procedures
However, the purchase and sale agreement
may specify the brokerage is to hold deposit
uncashed until offer is accepted.
     Earnest Money Deposits
        Trust fund procedures
Example: Purchase and sale agreement
permits brokerage to hold check uncashed
until seller accepts buyer’s offer.

When offer is accepted, designated broker
then deposits check into her trust account
within the specified number of days.
     Earnest Money Deposits
         Trust fund procedures
If seller rejects offer, agent can simply return
uncashed check to buyer.
 Same thing if buyer rejects counteroffer
   made by seller.
     Earnest Money Deposits
         Trust fund procedures
If seller rejects offer, agent can simply return
uncashed check to buyer.
 Same thing if buyer rejects counteroffer
   made by seller.

But if buyer accepts seller’s counteroffer,
brokerage must deposit check into trust
account within specified number of days.
     Earnest Money Deposits
        Trust fund procedures
Alternatively, purchase and sale agreement
may direct brokerage to hold earnest money
deposit uncashed until another event occurs,
such as removal of contingency.
       Good Faith Deposits
        Trust fund procedures
Alternatively, purchase and sale agreement
may direct brokerage to hold earnest money
deposit uncashed until another event occurs,
such as removal of contingency.

Purchase and sale agreement may also
  direct brokerage to give deposit to escrow
  agent.
     Earnest Money Deposits
        Trust fund procedures
Agent must deliver money to right person
within the specified number of days after
purchase and sale agreement is signed.
     Earnest Money Deposits
        Trust fund procedures
Agent must deliver money to right person
within the specified number of days after
purchase and sale agreement is signed.

Escrow agent or attorney should give agent a
dated receipt for deposit.
     Earnest Money Deposits
         Trust fund procedures
If earnest money check is for $10,000 or less,
brokerage must keep it in a pooled trust
account.
     Earnest Money Deposits
         Trust fund procedures
If earnest money check is for $10,000 or less,
brokerage must keep it in a pooled trust
account.

Interest on the account is paid to the state
Housing Trust Fund.
     Earnest Money Deposits
         Trust fund procedures
If earnest money check is for more than
$10,000, brokerage must keep it in a separate
trust account, unless buyer chooses to keep it
in a pooled account.
     Earnest Money Deposits
         Trust fund procedures
If earnest money check is for more than
$10,000, brokerage must keep it in a separate
trust account, unless buyer chooses to keep it
in a pooled account.

Interest is paid to the buyer.
     Earnest Money Deposits
         Trust fund procedures
If earnest money check is for more than
$10,000, brokerage must keep it in a separate
trust account, unless buyer chooses to keep it
in a pooled account.

Interest is paid to the buyer.

Buyer must complete IRS form W-9 before
check is deposited in separate account.
     Earnest Money Deposits
         Trust fund procedures
Usually selling agent receives earnest money
deposit and is thus responsible for handling it
properly.
     Earnest Money Deposits
         Trust fund procedures
Usually selling agent receives earnest money
deposit and is thus responsible for handling it
properly.

Your brokerage will have office procedures for
handling earnest money deposit from buyer.
     Earnest Money Deposits
         Trust fund procedures
Usually selling agent receives earnest money
deposit and is thus responsible for handling it
properly.

Your brokerage will have office procedures for
handling earnest money deposit from buyer.
 Includes instructions for when designated
  broker gone or office closed when deposit is
  received.
     Earnest Money Deposits
        Trust fund procedures
Problems may occur after check has been
deposited into brokerage trust account.

Buyer might stop payment on check or
  check might not clear bank.
     Earnest Money Deposits
         Trust fund procedures
If buyer asks for refund of deposit before your
firm is aware of the problem with check, your
designated broker may end with shortfall in
trust account.
     Earnest Money Deposits
        Trust fund procedures
Example: On Tuesday, Brenda makes offer on
Steve’s property and gives you personal check
for $6,000 earnest money deposit, which you
give to your brokerage.
     Earnest Money Deposits
        Trust fund procedures
Example: On Tuesday, Brenda makes offer on
Steve’s property and gives you personal check
for $6,000 earnest money deposit, which you
give to your brokerage.

Your designated broker deposits check into
trust account Wednesday morning.
Wednesday evening, Steve rejects Brenda’s
offer and Brenda asks for refund of deposit.
     Earnest Money Deposits
        Trust fund procedures
Thursday morning, your designated broker
writes Brenda $6,000 check from trust
account. Friday morning, bank calls your
designated broker and tells her Brenda’s check
failed to clear because of insufficient funds.
     Earnest Money Deposits
         Trust fund procedures
Thursday morning, your designated broker
writes Brenda $6,000 check from trust
account. Friday morning, bank calls your
designated broker and tells her Brenda’s check
failed to clear because of insufficient funds.

Now your designated broker has $6,000
shortfall in trust account and could be subject
to disciplinary action.
       Earnest Money Deposits
           Trust fund procedures
Ways to avoid this problem:

  Holding earnest money check uncashed
    until seller accepts offer.
       Earnest Money Deposits
          Trust fund procedures
Ways to avoid this problem:

  Holding earnest money check uncashed
   until seller accepts offer.
  Requiring deposit to be in form of cashier’s
   check or money order.
       Earnest Money Deposits
          Trust fund procedures
Ways to avoid this problem:

  Holding earnest money check uncashed
   until seller accepts offer.
  Requiring deposit to be in form of cashier’s
   check or money order.
  Waiting until buyer’s check has cleared
   before refunding deposit.
       Earnest Money Deposits
          Trust fund procedures
   Once seller accepts offer, certain rules apply
   to earnest money deposit:

1) Deposit check held uncashed can’t continue
   to be held uncashed without seller’s written
   permission.
       Earnest Money Deposits
          Trust fund procedures
2) Check may be given to seller only with
   written permission from both buyer and
   seller.
       Earnest Money Deposits
          Trust fund procedures
2) Check may be given to seller only with
   written permission from both buyer and
   seller.

3) Deposit cannot be refunded—in part or in
   full—without seller’s written permission.
     Trust Fund Procedures
            Failure to close
If sale fails to close, earnest money deposit is
either returned to buyer or forfeited to seller,
depending on reason sale failed to close.
     Trust Fund Procedures
            Failure to close
If sale fails to close, earnest money deposit is
either returned to buyer or forfeited to seller,
depending on reason sale failed to close.

Usually buyer entitled to refund of deposit if
sale fails through no fault of buyer.
    Trust Fund Procedures
           Failure to close
Example: Brian and Sheila enter into
purchase agreement conditioned on Brian
obtaining 90% loan. Brian makes good faith
effort to obtain loan but is unsuccessful.
     Trust Fund Procedures
            Failure to close
Example: Brian and Sheila enter into
purchase agreement conditioned on Brian
obtaining 90% loan. Brian makes good faith
effort to obtain loan but is unsuccessful.

Contingency not fulfilled, but not Brian’s fault.
Agreement no longer binding; Brian entitled
to refund of earnest money deposit.
      Trust Fund Procedures
             Failure to close
Three most common contingencies that can
cause sale to fail through no fault of buyer:

Financing contingency
Inspection contingency
Sale of buyer’s property contingency
      Trust Fund Procedures
                 Default
If buyer breaches purchase agreement,
earnest money deposit generally treated as
liquidated damages:
      Trust Fund Procedures
                  Default
If buyer breaches purchase agreement,
earnest money deposit generally treated as
liquidated damages:

Seller keeps deposit rather than suing buyer
for damages.
     Trust Fund Procedures
                 Default
Example: Barbara and Samir enter into sales
contract. She gives him $5,000 earnest money
deposit.
      Trust Fund Procedures
                  Default
Example: Barbara and Samir enter into sales
contract. She gives him $5,000 earnest money
deposit.

Two weeks later, Barbara is transferred to
another city. She informs Samir she can’t
follow through on contract.
      Trust Fund Procedures
                  Default
Example: Barbara and Samir enter into sales
contract. She gives him $5,000 earnest money
deposit.

Two weeks later, Barbara is transferred to
another city. She informs Samir she can’t
follow through on contract.

Is she entitled to refund of earnest money
deposit?
     Trust Fund Procedures
                 Default
No. Barbara has defaulted on purchase
agreement.
     Trust Fund Procedures
                 Default
No. Barbara has defaulted on purchase
agreement.

Under contract terms, Samir entitled to keep
earnest money deposit as liquidated damages,
but can’t sue for additional damages.
       Trust Fund Procedures
                    Default
No. Barbara has defaulted on purchase
agreement.

Under contract terms, Samir entitled to keep
earnest money deposit as liquidated damages,
but can’t sue for additional damages.

Barbara’s liability for default is limited to
$5,000 paid as deposit.
     Trust Fund Procedures
                Default
When parties treat earnest money deposit as
liquidated damages, the total amount of
deposit forfeited can’t exceed 5% of purchase
price.
    Trust Fund Procedures
                Default
Purchase and sale agreement should clearly
describe circumstances under which earnest
money deposit will be refunded to buyer or
forfeited to seller.
     Trust Fund Procedures
                 Default
Purchase and sale agreement should clearly
describe circumstances under which earnest
money deposit will be refunded to buyer or
forfeited to seller.

Disbursement of deposit should also be
clearly outlined in any rescission agreement.
     Trust Fund Procedures
                 Default
If disagreement over deposit does arise, your
designated broker must send a notice to the
parties describing how she intends to
distribute the funds.
     Trust Fund Procedures
                 Default
If disagreement over deposit does arise, your
designated broker must send a notice to the
parties describing how she intends to
distribute the funds.

The designated broker must then make the
disbursement within 30 days of her notice.
     Summary
Good Faith Deposits

 Earnest  money deposit
 Amount of deposit
 Form of deposit
 Trust fund procedures
 Refund of deposit
Avoiding Discriminatory Conduct
             Prohibited acts
Many actions are unlawful under both federal
and Washington fair housing laws.
Avoiding Discriminatory Conduct
             Prohibited acts
Many actions are unlawful under both federal
and Washington fair housing laws.

Brief list:
refusing to receive or failing to transmit bona
  fide offer;
refusing to negotiate for sale of residential
  property, or otherwise making it unavailable;
Avoiding Discriminatory Conduct
              Prohibited acts
 changing terms of sale for different potential
  buyers;
 discriminating in providing services or
  facilities in connection with real estate
  transaction;
Avoiding Discriminatory Conduct
              Prohibited acts
 changing terms of sale for different potential
  buyers;
 discriminating in providing services or
  facilities in connection with real estate
  transaction;
 representing property is not available for
  inspection or sale when it is in fact available;
 failing to advise prospect about property
  listing;
Avoiding Discriminatory Conduct
             Prohibited acts
 using any application form or making any
  record or inquiry which indicates, directly or
  indirectly, an intent to discriminate; and
Avoiding Discriminatory Conduct
              Prohibited acts
 using any application form or making any
  record or inquiry which indicates, directly or
  indirectly, an intent to discriminate; and
 discriminating in negotiating or executing
  any service or item in connection with real
  estate transaction (such as title insurance or
  mortgage insurance).
Avoiding Discriminatory Conduct
             Prohibited acts
These discriminatory actions can be divided
into three groups:
Avoiding Discriminatory Conduct
             Prohibited acts
These discriminatory actions can be divided
into three groups:

 1) refusing to show a property based on
    discriminatory considerations,
 2) steering, and
 3) treating certain types of buyers less
    favorably than others.
Avoiding Discriminatory Conduct
      Refusal to show properties
Example: Your clients, the Kawaguchis, ask to
see a home whose owner is extremely
prejudiced against Asians. You know he’ll
refuse any offer from the Kawaguchis.
Avoiding Discriminatory Conduct
      Refusal to show properties
Example: Your clients, the Kawaguchis, ask to
see a home whose owner is extremely
prejudiced against Asians. You know he’ll
refuse any offer from the Kawaguchis.

You want to avoid a confrontation, so you tell
them the house is no longer available.
Avoiding Discriminatory Conduct
      Refusal to show properties
Have you violated law, even though it is seller,
not you, who is prejudiced?
Avoiding Discriminatory Conduct
      Refusal to show properties
Have you violated law, even though it is seller,
not you, who is prejudiced?

Yes. You’ve unlawfully discriminated against
the Kawaguchis by saying house was not
available when it was available.
Avoiding Discriminatory Conduct
     Refusal to show properties
You must never refuse to show home based
on discriminatory reasons.
Avoiding Discriminatory Conduct
      Refusal to show properties
You must never refuse to show home based
on discriminatory reasons.

If buyer wants to see home, you must show it
to her unless some other problem exists.
Avoiding Discriminatory Conduct
      Refusal to show properties
Seller can place restrictions on showings as
long as they aren’t discriminatory.
Avoiding Discriminatory Conduct
      Refusal to show properties
Seller can place restrictions on showings as
long as they aren’t discriminatory.

If it’s Thursday and seller never allows
showings on Thursdays because of his work
schedule, you can tell the Kawaguchis you
can’t show them the house today.
Avoiding Discriminatory Conduct
                  Steering
Example: Acme Realty is located in minority
area of city. It employs several minority agents,
and they work with any minority buyers who
come in.
Avoiding Discriminatory Conduct
                  Steering
Example: Acme Realty is located in minority
area of city. It employs several minority agents,
and they work with any minority buyers who
come in.

They’re told to show these prospects homes
only in minority neighborhoods, because
Acme’s designated broker believes white
sellers will discriminate against his clients.
Avoiding Discriminatory Conduct
                 Steering
Another brokerage, Bates Realty, instructs its
agents to show minority buyers properties only
in minority neighborhoods, where the
designated broker assumes they’d be more
comfortable.
Avoiding Discriminatory Conduct
                 Steering
Another brokerage, Bates Realty, instructs its
agents to show minority buyers properties only
in minority neighborhoods, where the
designated broker assumes they’d be more
comfortable.

Which of these brokerages has violated law?
Avoiding Discriminatory Conduct
                 Steering
Both brokerages are guilty of steering.
Avoiding Discriminatory Conduct
                 Steering
Both brokerages are guilty of steering.

Steering: Channeling prospective buyers
toward or away from certain neighborhoods
based on minority status.
Avoiding Discriminatory Conduct
                 Steering
Both brokerages are guilty of steering.

Steering: Channeling prospective buyers
toward or away from certain neighborhoods
based on minority status.

Always offer to show your prospects all listed
properties in market areas that meet their
criteria.
Avoiding Discriminatory Conduct
             Equal treatment
Always give same level of service to all clients,
regardless of race, religion, ethnic background,
or national origin.
Avoiding Discriminatory Conduct
             Equal treatment
Always give same level of service to all clients,
regardless of race, religion, ethnic background,
or national origin.

Treat all prospects equally in terms of
scheduling appointments and showings,
making keys available, conducting
negotiations, and following up on transactions.
Avoiding Discriminatory Conduct
             Equal treatment
 Report any suspected discriminatory acts or
  statements on part of seller to your
  brokerage immediately.
Avoiding Discriminatory Conduct
             Equal treatment
 Report any suspected discriminatory acts or
  statements on part of seller to your
  brokerage immediately.

 Check with your designated broker on how
  to deal with rejection based on
  discriminatory reasons.
Avoiding Discriminatory Conduct
            Equal treatment
Example: You’re working with Jewish buyer
who makes full price offer seller rejects.
Avoiding Discriminatory Conduct
            Equal treatment
Example: You’re working with Jewish buyer
who makes full price offer seller rejects.

You know he’s rejected two other offers from
non-Christian buyers.
Avoiding Discriminatory Conduct
            Equal treatment
Example: You’re working with Jewish buyer
who makes full price offer seller rejects.

You know he’s rejected two other offers from
non-Christian buyers.

You believe only reason he’s rejected your
buyer’s offer is because she’s Jewish.
Avoiding Discriminatory Conduct
            Equal treatment
Let your brokerage know what is happening
and advise your buyer of her right to lodge
complaint with Department of Fair Employment
and Housing.
          Summary
Avoiding Discriminatory Conduct

      Refusing   to show property
      Steering
      Unequal  treatment
      Nondiscriminatory sales
       practices

				
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