Assessing Tilt in Your Real Estate Transaction

Don’t be surprised if you question whether there is a tilt in your real estate transaction. Whether you are a buyer or seller, there are a number of events that will come up that will strike you as out of balance. Chalk up these apparent inequities to market traditions. Then see if there is a hidden benefit for you.

For example, why is it so often the case that the seller shells out a check of $500 or more for an appraisal? The seller priced the property to begin with. The buyer agreed to buy, at a firm price. The buyer wanted to finance the purchase. The lender wants an appraisal, to assess its risk. So why isn’t the buyer paying for the appraisal? It’s only because of the buyer’s choice to finance the sale, right?

Chalk it up to market tradition. Actually, seller-paid appraisals are not universal. In Anchorage residential transactions they are. (In commercial deals it’s not uncommon for buyers to pay “all costs of financing,” which is read to include the appraisal.) In many other communities the buyer pays. We are just different here.

Perhaps the reasoning is that the buyer often comes to a purchase cash-poor. By getting the seller to pay, the buyer in effect finances the appraisal cost into the total purchase price. When the seller pays, however, the seller and his representatives often have more of a say who the appraiser will be. The seller can also control the pace of the transaction by refusing to order the appraisal until the buyer removes inspection contingencies. To avoid the risk of being stuck with an appraisal the seller doesn’t want if the deal dies, sellers may require buyers to front the money, “payable by the seller only in the event of closing”.

Here’s another. Why does the seller write a check for the appraisal before closing but doesn’t pay the surveyor until the sale closes? It’s understandable that the appraiser is nervous that the deal might not close and he or she might not get paid. It’s also understandable that the appraiser fears one party or the other not liking something in the report.

Shouldn’t the surveyor have similar worries? Chalk it up to market tradition, but except for commercial ALTA surveys, these charges usually are paid from sellers’ proceeds at closing. I wonder how many surveyors get stiffed, though.

How about the free look that buyers often ask for? It’s another market tradition. Most residential buyers represented by real estate agents use the form by Anchorage Multiple Listing Service, Inc. There’s an agreed time for the buyer’s “Right and Duty of Inspection.” If the buyer finds anything about the property that is unacceptable, the buyer goes to the seller with a “request for corrective action”.

The seller can only keep the buyer in the agreement if he or she agrees to the buyer’s demand. If the seller can’t negotiate through this phase, the deal dies, even though the property by then may have been off the market for two weeks, or more.

In commercial transactions this free look may extend to sixty days, or more. Sellers can try to bind a buyer into the agreement by increasing earnest money deposits from week to week, making increasing proportions non-refundable. Many buyers will end up getting their way, however, and negotiate for the right to walk from the agreement at any time during the inspection period, for any reason.

It’s not all give by the seller, however. The seller who is liberal about the right to inspect and walk away gets something important in return. What the seller gets is the ability to say that the buyer was under no duress. That the buyer had a free hand and plenty of time to discover anything wrong with the property. Where the buyer is represented by his or her own real estate agent, attorney, inspectors and other advisors, the seller gets a measure of risk reduction. There is less chance that the buyer can credibly come back after closing and claim that he or she was taken.

This means the market tradition in Anchorage favors liberal inspection periods. It’s perceived as a tilt in favor of buyers. Sellers who would insist on more assurance, however, give up peace of mind that is good to have.

One other market tradition. Why is it that buyers who contract for a new home and later walk away from the project usually lose their earnest money, when people who back out of resale contracts often get it back? Builders routinely ask for non-refundable earnest money deposits. Many receive the money when the buyer agrees to all the details of the home design and financing. The builder often gets two or three times the amount of the deposit for an existing home of similar value.

The distinction is that the owner of an existing home already owns the property. If the deal sours, he or she has lost time, market momentum and some money. Most residential deals go bad in less than 60 days, however, and the owner is either living in the property or renting it, getting the benefits of ownership. It’s not worth fighting over a small amount of earnest money in these cases, sellers reluctantly will agree.

The builder, by contrast, does not own the home until construction begins. He or she doesn’t have to take on this assignment. To get the builder to do so means making a substantial commitment, to compensate for higher risk of owning a property that may have little appeal in the market except to the buyer who first contracted for it.

There’s balance, then, in each of these maket traditions that first appear skewed. For buyer and seller to agree, after wondering about the apparent down side, each must come to understand the benefits.