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Buyer Seek Expanded Legal Coverage
Buyers seek expanded legal coverage
Mortgage contingencies, strict closing dates just some of the clauses being added to contractsDecember 30, 2008 05:24PMBy Candace Taylor
The current financial crisis has given buyers a newfound leverage that they are using to secure more legal protections than ever before when negotiating contracts on residential deals.
In the last few months, buyers have asked sellers to create contracts that include everything from lower-than-usual deposits to mortgage contingency clauses to extremely specific closing time frames.
"It's been a long time since buyers have been in the driver's seat," said Michael Signet, director of sales at the brokerage firm Bond New York. "Sellers are being a lot more flexible ... because they're anxious to get deals done."
In the not-so-distant past, sellers had the upper hand in contract negotiations, confident that if one buyer didn't agree to their terms, another one would quickly come along. But in the wake of the Wall Street meltdown, qualified buyers are scarce, and sellers are now willing to negotiate once-boilerplate contracts in order to ease nervous buyers' concerns. This is especially the case in new developments where sponsors have a large number of units to sell, said Luigi Rosabianca, principal attorney and founder of the law firm Rosabianca & Associates.
"With new construction, the sponsors wouldn't allow you to negotiate too much," Rosabianca said. "Now, every contract is custom made, like a suit."
Corey Wecler, an associate broker at City Connections Realty, said he recently weathered a very protracted negotiation while representing the seller of a condo at 15 Broad Street in the Financial District. After the contracts had gone out, the buyer insisted the deal be contingent on his ability to get a letter of commitment for financing from a bank. He also managed to lower his initial deposit from 10 percent down to just 1 percent.
"He was changing a million different things," said Wecler. "It got unbelievably ugly." The deal eventually fell through, so neither Wecler nor the buyer's broker was paid.
Until very recently, this kind of negotiation almost never took place after the contracts had been sent out.
"The responsibility of the brokers is to bring a solid deal to the table," Wecler said. "The attorneys are just supposed to draw up the contracts. Now, it's not like that any more. Any attorney will tell you that they're doing the job of brokers right now."
One of the most common requests made by buyers, like the one Wecler encountered at 15 Broad Street, is for a mortgage contingency clause. Virtually nonexistent a few months ago, a mortgage contingency (sometimes known as a financing contingency) stipulates that if the buyer can't get home financing within a certain amount of time, the deal is off, with all or some of the deposit returned.
"When it was a really hot market, every seller demanded no mortgage contingency," Bond New York's Signet said.
But in today's difficult lending environment, buyers almost never commit to a purchase unless they know they can get out of it if financing falls through. "Buyers won't sign if there's no mortgage contingency," he noted.
Whether the deal is mortgage contingent or not, sellers are giving buyers much more time to assess their financing options, Signet said. In the past, buyers usually had seven to 10 days to sign the contract. Now, they often have 35 to 40 days.
"Banks are so much tougher these days," he said. "Buyers are asking for more time to get the financing in place."
Buyers are also asking for much stricter clauses regarding closing dates, Rosabianca said. In the past, buyers were often unconcerned about delayed closings because skyrocketing property values meant their new home was climbing in value while they had time to save up for a down payment. But delays are now a major concern for buyers worried about future job security and unsure if they will be able to get financing months down the road.
"The actual closing dates were very fuzzy for years," Rosabianca said. "Now, we're negotiating much tighter time frames."
Buyers are demanding that specific closing dates be stated in the contract, and that they be scheduled as soon as possible after the contract is signed. Many contracts state that if the seller misses the closing date, the buyer may receive monetary compensation or cancel the contract altogether.
"They want [closing dates] sooner, and certain," Rosabianca said.
These days, even contracts worded in a seller's favor don't necessarily mean the seller will come out on top.
Most contracts without a mortgage contingency clause, for example, stipulate that the seller may keep the buyer's deposit if the deal does not close. But now that the financing climate has changed drastically, many buyers are backing out of their contracts after finding that they can't get a mortgage, or can no longer afford the purchase.
"We're entering very unusual times," said attorney Neil Garfinkel, a partner at Abrams Garfinkel Margolis Bergson and residential counsel to the Real Estate Board of New York.
"In 99 percent of the deals that I've done, both parties wanted to do the deal. All of a sudden, things have changed so dramatically that one of the parties doesn't want to," said Garfinkel, who oversees his firm's real estate and banking practices.
Meanwhile, more lawsuits are popping up as buyers try to get their deposits back or delay the seller from pocketing the money.
"The idea of the seller keeping the deposit is not always a slam dunk," especially given the unusual economic circumstances, Garfinkel said. Buyers can object to the seller claiming the deposit, and ask that the funds be put in escrow while litigation takes place. "It's not so easy for a seller to access that money," he added.
Signet from Bond New York said one of his clients bought an Upper East Side one-bedroom as a pied-à-terre in an all-cash deal before the Wall Street crisis. But the buyer then "lost a ton of money when the stock market crashed" and asked for a lower price. The seller balked, and the two parties are now in litigation.
Left with few other options, sellers are trying to protect their interests by doing extensive background and credit checks to ensure that buyers are well qualified before contracts are signed.
"Sellers are asking for much more documentation to prove that the buyer can get their financing," Signet said. "Each party is concerned with protecting themselves. That was always the case, but it never was as risky as it is now."