“A Buyers Risk Pyramid”

In this highly competitive market, buyers are removing language in the Purchase and Sale Agreement (PSA) and some of their contingencies to entice sellers to accept their Offer to Purchase.  The removal of any of the language protections and contingencies creates risks to the buyer of losing the money they pledge to the seller (Earnest Money) prior to the transfer of title to the buyer (Closing) on their purchase and, not purchasing the home.  Below I discuss those items from least risky to most risky to the buyer.

1. Paragraph X of the PSA – Paragraph X allows 10 days for the buyer to review the information provided by the seller and listing agent to confirm there are no items that are materially incorrect like; year built, square footage, school district, construction material, sewer/septic connection, energy source, etc.

• Title Contingency – The buyer and his/her agent should confirm with the Title Officer any condition of the property that may impact it’s use like; encumbrances, easements, restrictions, post-closing assessments, etc. prior to submitting an Offer to Purchase.  This review is very easy and only takes a couple of minutes.

• Seller Disclosure Statement – The State requires each seller to provide a detailed description of various aspects of the home including; condition of seller’s title, condition of improvements, environmental issues, water source, quality of sewer/septic system, etc.  Any material information that is not disclosed allows the buyer to terminate the transaction up until closing and preserve their Earnest Money.  It is in the seller’s best interest to honestly complete this disclosure to avoid potential litigation.

• Resale Certificate – If the seller is part of a condominium or, the living unit is in a condominium building, the seller is required by the State to provide information to the buyer on its’ financial condition, legal issues, upcoming capital improvements costs, etc.  When a buyer waives their ability to review the Resale Certificate and supporting documents there may be additional risks and costs to the buyer following Closing.  Prior to submitting an Offer to Purchase the buyer should review the Resale Certificate and supporting documentation to fully understand the condition of the property, homeowner’s association, rules and regulations, etc.

• Financing Contingency – When submitting a PSA a buyer states they are capable of purchasing the property at it’s agreed price.  If the buyer is relying on securing financing from a third party, the buyer must disclose this to the seller.  If the buyer does not include a Financing Contingency with their PSA, and the buyer is relying on this financing, the buyer will lose their Earnest Money if they cannot Close on the purchase.  The financing contingency protects a buyer from anything that may get in the way of a bank being able to provide them with a loan.  This could range from the loss of a job to a low appraisal.  It’s very risky for a buyer to waive their financing contingency.  A buyer should use a high-quality local lender and get fully underwritten prior to submitting an Offer to Purchase.

• Appraisal Contingency – Buyers have the ability to waive their Financing Contingency and retain their ability to have an inspection and appraisal by a potential lender to determine the loan amount a lender will lend to the buyer.  The loan amount allows the buyer to determine if there will be an additional down payment amount the buyer will be required to bring to Closing.  A buyer should have additional cash on hand if a larger down payment is required or, confirm they have the ability for finance their purchase with a higher loan-to-value ratio with their lender.

• Early Release of Earnest Money – To entice a seller to accept their Offer to Purchase, buyers are releasing their Earnest Money to the seller prior to Closing.  In some cases they’re releasing the Earnest Money upon mutual acceptance, X days after mutual acceptance, or upon waiver of their Inspection Contingency.  This is risky to the buyer because if, for any reason, the transaction fails to Close, the buyer has little hope of the return of their Earnest Money back from the seller.

• Inspection Contingency – Buyers are required to fully inspect the home, or waive that right, for defects that may allow them to terminate the transaction and retain their Earnest Money.  Buyers who do not perform an inspection, or accept a seller provided inspection, are putting themselves at great risk for potential unexpected problems in the future.  The costs of material defects may far exceed their Earnest Money Deposit.  Buyers should always include an Inspection Contingency, or perform a pre-inspection with their own general inspector, prior to submitting an Offer to Purchase.

Waterfront Local Improvement District (LID)

     On June 14^th the Seattle City Council finalized the Special Assessments for all property owners in the downtown area for the new Waterfront Local Improvement District (LID).  The $174,380,000 million dollars will pay a portion of the overall cost of $737,000,000 for;

1. Waterfront Promenade

• Waterfront Overlook Walk

• Pioneer Square Street Improvements

• Union Street Pedestrian Connection to the Waterfront

• Pike/Pine Streetscape Improvements

• Waterfront Park

     Every landowner, whether it’s a vacant lot, office building, hotel, other commercial building, apartment building, condominium building, etc., has a new Special Assessment owed to the City of Seattle for these improvements.  The City Council’s reasoning is these property owners will be the beneficiaries of the $174,380,000 improvements.  CLICK HERE to see what the Special Assessments are for each building/property owner.

     If you can, please help me understand what the great benefits are to;

1. Youth Care (Homeless Shelter) at 1305 Denny Way for $3,134.

• Catholic Seamans Club at 2330 1^st Avenue for $6,661.

• Edward P., Unit owner at the Pomeroy Condominiums for $2,085.

• Mark H., Unit owner at the Florentine Condominiums for $3,851.

     In my opinion, the entire $737,000,000 should be paid for by Federal, State, County and City revenue.  Why is Youth Care paying for street improvements in Pioneer Square and the Pike/Pine Corridor?  Why are condo and business owners paying for the Waterfront Promenade?

Delayed Possession

     Several weeks ago, I attended a continuing education program sponsored by the Washington Realtors Association titled “Legal Symposium” where some of the top attorneys in the State presented various topics important to realtors.  One session was taught by an economist with one of the largest real estate firms in the country who’s presentation included some of the terms and conditions included in Offers to Purchase in various parts of the United States.  Not surprisingly, because how competitive the market is in Seattle, buyers in this market must submit some of the most aggressive Offers in the United States to be accepted by our local sellers.  Selecting a top real estate agent to draft an Offer to Purchase that is acceptable in this market is imperative.  And yet, the best terms and conditions may still be not enough.

     Before I get to Delayed Possession, let me tell you about the current status of the terms and conditions that are being negotiated in the Seattle market.  Approximately 30% of the Offers are all-cash, the buyer has cash in his/her accounts to purchase this property outright.  There are many Offers do not have financing contingencies but, request the ability to have the home appraised.    They’re actually financing a portion of the purchase price but, effectively have waived their financing contingency.  Most Offers do not have an inspection contingency.  They either have a copy of an inspection performed by the seller, do a pre-inspection prior to submitting an Offer or, assume the risks if the property requires future repairs.  Offers do not include Title Contingencies.  Many purchasers are making large non-refundable earnest money deposits upon Mutual Acceptance of the Offer or, within 24-48 hours of Mutual Acceptance.  Most Offers today include Escalation Clauses which increases the buyers original purchase price, if there is a competing Offer.  The list prices are usually increased by 5% to 15% in this market.

     Now, let’s get to Delayed Possession.  Because most sellers are also in the market to purchase another home, and the supply of inventory is so low, buyers are offering to purchase their home and allow the seller 30 to 60 days to stay in the home while they search for their next home.  If I’m a seller and I don’t currently have a home under contract, this allows me time to find something I like.  This scenario could be very problematic for the buyer.  I advise buyers to seek legal council to understand the pitfalls of Delayed Possession.  Seattle has some of the most tenant friendly regulations and it may take many, many months to evict someone currently occupying the home.

Reading a Condo Re-Sale Certificate

When a condominium is sold in the State of Washington, the Seller must provide the Buyer with a Re-Sale Certificate and supporting documents, with a few exceptions.  It’s important for a Buyer to review these documents for information that may influence his purchase of the condominium.  You are advised by the State of Washington and your Real Estate Agent to seek the advice of a real estate attorney.  Your real estate agent is not allowed to answer the Buyers questions about information within these documents.

So, what should a Buyer focus on when reviewing the Re-Sale Certificate and supporting documents?

RE-Sale Certificate

Items 2 (b), (c), & (d) – If there are any unpaid assessments or HOA Dues against this unit, the Buyer should add language on a separate Form 34 to the P & S Agreement that these items will be paid off by the Seller at, or before, Closing.

Item 3 – If there is a large amount of past due assessments or HOA Dues within the complex this indicates that there are owners who are not paying their HOA dues.  The process for the collection of past due amounts will be outlined in the supporting documents but may include placing a lien against the individual condominium unit.  This process is done by the Professional Management Company or the Board of Directors and not an individual owner.  Also, lenders may not finance a purchase within the complex by your Buyer if there are to many units that are delinquent in paying their assessments or HOA Dues.

Item 6 – This section identifies how much money there is in capital reserves for repairs and improvements.  The more the better, unless there are required repairs that have not been done.  The available money in the capital reserves should be compared to the items identified in the most recent Reserve Study to determine whether this is a financially healthy association.  What may look like a financially healthy association today may not be healthy following some major capital improvements, ie. The cost of re-roofing the buildings in the complex in the next 3 months may deplete the entire capital reserves. 

Item 10 – You can identify how many units in the complex are owner-occupied and how many are rental units.  Historically, the greater the percentage of owner-occupied units the more pride of ownership and care is taken within the complex.  There are also some loan programs that require a minimum percentage of units to be owner-occupied, like 80%.

Reserve Study

The HOA or Professional Management Company typically orders a “Reserve Study” every three years from an independent third party to look at the capital reserves and the projected capital improvements and repairs.  It’s important for a Buyer to review this document and get a sense of whether the current reserves and monthly/yearly contributions into the capital reserve will adequately pay for those repairs and improvements.  Without the proper reserves to pay for the expenses, it’s likely that there will be a “Special Assessment” for each of the owners to pay in a lump sum or over a period of months, typically 24 to 36 months.

Financial Statements

The Balance Sheet and Income and Expense Statements will help the Buyer evaluate the financial stability and health of the association.  You’re strongly urged to seek the advice of a professional.   As you read through the Financial Statements take notes and write down your questions.  The Professional Management Company who prepared the documents should be able to answer your questions.

Meeting Minutes

The condominium association will be required by Declarations, Bylaws, and Rules and Regulations to have a Board of Directors (B of D) meeting of the current condominium owners.  These documents will dictate the minimum number of (B of D) meetings to be held each year.  Most associations are required to have one annual meeting but the Board usually holds meetings quarterly.  It’s imperative for the Buyer to review the Meeting Minutes in detail.  You’ll learn about issues raised by the owners as well as what is being discussed regarding future improvements and repairs.  You will get a sense of whether there may be a “Special Assessment” if future repairs will cost more that the capital reserves.  Besides the 4-5 page Re-Sale Certificate, the Buyer should always read through the Meeting Minutes. 

The Capital Markets

The Capital Markets comprise just about anything; people, companies, nations, etc. want to invest in.  Everything from stocks and bonds, mortgage backed securities, real estate, and venture capital opportunities, to name just a few.  In the last several weeks, I’ve come to realize I either don’t understand much about the capital markets or the capital markets aren’t acting correctly.

The stock market appears to be doing incredibly well.  And yet, there are millions of people out of work, the major driving force of the GDP which is consumer spending is down, the travel industry is decimated, the hospitality industry is decimated, and with all of the additional costs of Covid-19, the health care industry is on thin ice.  Please tell me, I’m I missing something?  Shouldn’t the stock market and investors recognize these factors and also be down?  Is it because the electronically traded funds (ETF’s) are having a bigger impact on the stock market than the institutional or individual investors or is it the possibility of finding a vaccine for the pandemic?

Investors in mortgage backed securities must be purchasing at historically low rates of returns, probably around two and one-half percent (2.5%).  And yet, there were an estimated 5 million home owner’s who have been receiving a forbearance of their mortgage payments in the last six months.  Nearly 30% of renters did not pay their rent in August.  Is it because the federal government is purchasing 4 billion dollars worth of mortgage backed securities each month to keep the mortgage interest rate low?  Or is it that with all of the turmoil in our country, and around the world, mortgage backed securities are perceived as a safe investment?

I don’t track investments in commercial real estate these days but, to me, most office buildings and shopping centers don’t seem like a good investment.  With a huge number of employees working from home, I expect companies will reduce the amount of office space they lease when their current lease expires.  Until there is a vaccine for the coronavirus, many people will be avoiding in-person shopping except for the essentials.  With the recent huge increase in people shopping on-line, I expect that to grow in the future.  As more and more restaurants go out of business, it will be challenging for owners of those buildings to pay their mortgages or investors.