Broker Newsletter
January 15, 2008
In This Issue
· Dual Agency
· Waiving the SPDS
· Continuing Education
· Broker Blog
· FHA Loan Changes
· Maximum Allowable Contributions
· EA vs. ER
· Getting Short Sales Approved
Revelation Links
Training Calendar
Current RE Issues
Homebuilders In Trouble
Several Valley New Home Subdivisions are Stalled – see list with status
Updated Buyer Advisory
Renters’ have a right to SPDS. Also, Buyer Advisory now available in mobile format for use on your phone.
Broker Blog
Read Our Online Broker Blog
Continuing Education Requirements
Enter your CE hours as you take them on the ADRE website
Contact Us
480.722.9800 Office
480.802.1599 Broker Hotline
http://www.mywestusa.com
brokerreview@westusa.com
Dual Agency: When to use and when to avoid
Dual agency is defined as a transaction in which one broker represents both clients. Dual representation can be even more complex when both parties are represented by one licensee. It can even be advantageous in some ways but it is not without its inherent risk of conflicts.
The ADRE Commissioner’s Rules state that “A licensee shall not … represent both parties to a transaction without prior written consent of both parties.” ADRE can sanction a licensee that has “acted for more than one party in a transaction without the knowledge or consent of all parties to the transaction.”
· If you have a listing, either for sale or for lease, and you find a buyer or tenant that is not working with an agent, you do not need to offer representation to that customer. You can write the contracts and collect the full commissions. The discussion you need to have with the customer before you show them your clients’ home is as follows: Pull out the Agency Election form, explain it to them, and let them know that you work for the sellers, checking boxes 43 and 44 and have them acknowledge that they are the buyers on line 47 before they sign.
· Remember that the time to discuss agency with a buyer is before you show the buyer any homes. Likewise, discuss agency situations with your sellers before you bring any buyers through the home.
· When working with short sales, it is important to know that when the contract goes through the bank approval process, it is very possible that they will not pay more than 4% total commission when one agent represents both parties.
Waiving the SPDS?
In section 4a of the purchase contract, lines 131 through 133, verbiage clearly states that the seller shall deliver a completed Seller Property Disclosure Statement (SPDS) to the buyer within 5 days of contract acceptance.
In today’s market with vacant properties and bank owned REO properties, we have become comfortable with accepting no SPDS in a transaction.
If your seller initially refuses to complete the SPDS on the basis that they have never occupied the property, or maybe they’ve never even seen the property, be persistent. All owners should be able to answer the questions in the “Ownership and Property” sections which refer to address, legal owner, retirement community, vacancy, whether it is rented, etc. Even the questions in the rest of the SPDS are generally worded as “are you aware?” which the seller can answer.
If you are working with a buyer and the seller will not provide a SPDS, provide your buyer with a blank copy of the SPDS before you have them waive the SPDS. Also have them sign and initial the bland SPDS for your records.
Continuing Education Requirements
Although license renewals are now valid for four years, don’t forget that Continuing Education Periods are still 2 years. Therefore, all agents are required to take 24 continuing education hours every 24 months. Remember to enter your hours online at the ADRE website as you earn them.
Visit Our Broker Blog for Answers
Don’t forget our online Broker Bulletin for West USA Revelation agents. We will post information on specific real estate and contract topics to assist you with your transactions. If you look today, you will find information on topics ranging from Using Lease Option Contracts to Mortgage Fraud as well as Short Sales. Additionally, I post the monthly Broker Newsletters there for you to refer back to.
FHA Loan Updates
Guidelines for FHA mortgages changed at the beginning of the year. The maximum loan amount is now $271,000, and the minimum down payment was raised to 3.5% of purchase price.
Remember to get your FHA buyers to sign the “For Your Protection Get a Home Inspection” form (A140 in A-Forms).
Don’t forget that FHA mortgages allow your lender to build a credit file for your clients with little to no credit history. We just saw a buyer get approved based on his rent, cell phone, and Tivo bill!
Maximum Allowable Contributions
When you are involved in a transaction where the seller is contributing to the buyer’s closing costs, make sure you know what the maximum allowable contribution is for the loan program that they buyer and lender intend to use. Compensation in lieu of repairs will also be counted towards the maximum allowable contribution and may become a deal killer. Look for alternatives like getting the seller to actually pay for the repairs directly through escrow at close of escrow.
Exclusive Agency vs. Exclusive Right to Sell
Lately we’ve had a few agents using the Exclusive Agency Listing Contract instead of the Exclusive Right to Sell contract. For clarification, the Exclusive Agency offers you only the right to be the “exclusive agent” as it states. Meaning that no other realtor will be enlisted to advertise the property and find a buyer. However, it offers you no compensation or rights if the sellers find their own. Always use the Exclusive Right contract; it provides you with the exclusive right to sell the property with no exceptions. If you and the seller agree upon a particular situation in which your compensation would be reduced or excluded, write it on page 3 of the listing contract.
Additionally, as our in-house short-sale negotiator has pointed out, for lender approval, it is critical that you use the ER paperwork in order to get the transaction approved and get paid.
Getting Short Sales Approved
Whether you are representing the buyer or the seller, there are a few key points to getting your short sales transactions approved:
n Make sure the seller’s personal package including their financial statements and hardship letter is prepared and ready to be submitted.
n Make sure the house is priced appropriately. Realize that before approving short sales, the lenders attain Broker Price Opinions (BPO’s) and use comparable sales to justify their losses. Do not price your short sale listings significantly below the comparables in a desperate attempt to attain a contract that will never get accepted anyway. Don’t let your buyers fall victim to ridiculously priced listings which tie your buyers up and impact their reality of market prices. Discuss the comps!
Monday, February 9, 2009
December Broker Newsletter
Broker Newsletter
December 18, 2008
In This Issue
· Contract 101 Q & A
· Representing Buyers in REO’s
· Announcing Broker Blog
· Quadrennial Code of Ethics Requirement
· Subsequent Offers on Short Sale Listings
Revelation Links
Training Calendar
Current RE Issues
Homebuilders In Trouble
Several Valley New Home Subdivisions are Stalled – see list with status
Updated Buyer Advisory
Renters’ have a right to SPDS
Broker Blog
Read Our Online Broker Blog
Code of Ethics Course
Take the course online before December 31, 2008
Contact Us
480.722.9800
http://www.mywestusa.com
brokerreview@westusa.com
Contract 101 Q & A
By AAR General Counsel Michelle Lind
Q – If a buyer elects to cancel a purchase contract during the inspection period, does the buyer need to state the reason for the cancelation?
A – Yes. The buyer is permitted to cancel the contract during the inspection period at their sole discretion; however, per section 6j of the purchase contract, the buyer is required to “deliver signed notice of items disapproved.” If the buyer fails to provide a reason for the cancelation, the seller can cure the buyer to provide a reason, and if the buyer fails to do so prior to the expiration of the cure notice, the buyer will be in breach of contract.
Tips for Representing Your Buyer in the Purchase of REO Property
REO property sales accounted for 20% of the total residential transactions in the valley in October. It is impossible to effectively work with buyers and avoid the REO properties.
In an effort to prepare you and your buyers for this specific type of transaction, our own top-producing agent Ann Schude has provided some tips from her own experience to help you navigate the process smoothly.
· Prepare your buyers for the timeline specific to REO property transactions. Some banks may take up to 4 weeks to get the seller signed addendums back from the bank.
· Make sure your buyer is using a lender that will not require the seller signed contract to begin working on the loan. It is imperative that your buyer uses the time in which you are waiting for signed contract and addendums to secure financing.
· Let your buyer know in advance that it is not unusual for the transaction to close a few days, even weeks, late.
· In most cases, the bank will require that the earnest money to become non-refundable after the inspection period. Ensure that your buyer’s financing is solid before entering into the contract.
· Each bank defines the beginning of the inspection period differently – some start upon verbal acceptance while others start on the official contract date. Carefully mind the contract specific timelines for the protection of your buyer.
· If your buyer is paying cash, have them investigate title insurance policies with the title company. They may wish to purchase an owner’s policy for protection against title issues.
· As with all of your buyer transactions, make sure your buyer finds acceptable homeowners’ insurance specific to the property during the inspection period. Excessive previous insurance claims on the property will affect the cost of insurance and may give your buyer insight to past repair issues.
· For your own protection, make sure that your buyer signs off on waiving their rights to Sellers Property Disclosure Statements and Clue Reports on bank owned properties. You can include this verbiage on page 7 of the purchase contract or in an addendum. Also acquire a signed BINSR and Final Walkthrough.
· Prepare your buyer for higher than normal escrow fees. Ann’s experience is that escrow fees may be as much as double normal fees -- $650 per side in one particular transaction. I checked with our partner Fidelity Title, and they charge the standard escrow fees on REO transactions, and the fees are calculated from the purchase price of the property.
Your buyers may benefit from the aggressive prices of REO properties, and with these tips, you can provide excellent service by preparing your buyers for the process and protecting their interests.
Visit Our Broker Blog for Answers
We have started an online Broker Bulletin for West USA Revelation agents. We will post information on specific real estate and contract topics to assist you with your transactions. If you look today, you will find information on topics ranging from Using Lease Option Contracts to Mortgage Fraud as well as Short Sales.
Review the Bulletin periodically for assistance with topical real estate issues.
Quadrennial Code of Ethics Requirement
Arizona Association of Realtors requires that every REALTOR® complete 2½ hours of Code of Ethics training in between January 1, 2005 and December 31, 2008. If you were new to the business during that period of time, you should have already taken the class as a new member requirement; however, in not, you only have a couple of weeks to squeeze it in.
Use the link provided to the left to take the course online at no charge to you now. The penalty for not taking the class before the deadline is a suspension of your real estate board membership.
Exclusive Agency vs. Exclusive Right to Sell
How should you handle subsequent offers on short sale listings when you represent the seller?
We have all heard that submitting multiple offers to lenders for approval on short sale transactions can stall the approval process; however, we have to keep the sellers’ best interests at heart through the process and follow the contract provisions as well. Once a seller has accepted a contract with Buyer A with a short sale addendum, and that contract has been submitted to the lender for approval, it is not in your seller’s best interest to submit additional offers to the bank until they respond to the initial offer.
What if Buyer B submits an offer $10,000 higher than the initial contract with Buyer A?
n If the seller accepts the offer with the short sale addendum, you are required per lines 17-18 of the addendum to submit the contract to the lender for approval within 5 days of contract acceptance.
n If the seller does not accept the offer, or accepts it only as a back up contract with verbiage such as “this contract is contingent upon cancellation of the contract in first position between parties…”, then you are not obligated to provide the contract to the lender for approval until it becomes a contract.
You must present all offers to your seller unless they specifically give you written permission not to present offers. At the initial listing appointment, you should prepare your seller for the procedure in which you will handle subsequent purchase offers to minimize the approval process delays and maximize your sellers’ chances of a successful short sale.
December 18, 2008
In This Issue
· Contract 101 Q & A
· Representing Buyers in REO’s
· Announcing Broker Blog
· Quadrennial Code of Ethics Requirement
· Subsequent Offers on Short Sale Listings
Revelation Links
Training Calendar
Current RE Issues
Homebuilders In Trouble
Several Valley New Home Subdivisions are Stalled – see list with status
Updated Buyer Advisory
Renters’ have a right to SPDS
Broker Blog
Read Our Online Broker Blog
Code of Ethics Course
Take the course online before December 31, 2008
Contact Us
480.722.9800
http://www.mywestusa.com
brokerreview@westusa.com
Contract 101 Q & A
By AAR General Counsel Michelle Lind
Q – If a buyer elects to cancel a purchase contract during the inspection period, does the buyer need to state the reason for the cancelation?
A – Yes. The buyer is permitted to cancel the contract during the inspection period at their sole discretion; however, per section 6j of the purchase contract, the buyer is required to “deliver signed notice of items disapproved.” If the buyer fails to provide a reason for the cancelation, the seller can cure the buyer to provide a reason, and if the buyer fails to do so prior to the expiration of the cure notice, the buyer will be in breach of contract.
Tips for Representing Your Buyer in the Purchase of REO Property
REO property sales accounted for 20% of the total residential transactions in the valley in October. It is impossible to effectively work with buyers and avoid the REO properties.
In an effort to prepare you and your buyers for this specific type of transaction, our own top-producing agent Ann Schude has provided some tips from her own experience to help you navigate the process smoothly.
· Prepare your buyers for the timeline specific to REO property transactions. Some banks may take up to 4 weeks to get the seller signed addendums back from the bank.
· Make sure your buyer is using a lender that will not require the seller signed contract to begin working on the loan. It is imperative that your buyer uses the time in which you are waiting for signed contract and addendums to secure financing.
· Let your buyer know in advance that it is not unusual for the transaction to close a few days, even weeks, late.
· In most cases, the bank will require that the earnest money to become non-refundable after the inspection period. Ensure that your buyer’s financing is solid before entering into the contract.
· Each bank defines the beginning of the inspection period differently – some start upon verbal acceptance while others start on the official contract date. Carefully mind the contract specific timelines for the protection of your buyer.
· If your buyer is paying cash, have them investigate title insurance policies with the title company. They may wish to purchase an owner’s policy for protection against title issues.
· As with all of your buyer transactions, make sure your buyer finds acceptable homeowners’ insurance specific to the property during the inspection period. Excessive previous insurance claims on the property will affect the cost of insurance and may give your buyer insight to past repair issues.
· For your own protection, make sure that your buyer signs off on waiving their rights to Sellers Property Disclosure Statements and Clue Reports on bank owned properties. You can include this verbiage on page 7 of the purchase contract or in an addendum. Also acquire a signed BINSR and Final Walkthrough.
· Prepare your buyer for higher than normal escrow fees. Ann’s experience is that escrow fees may be as much as double normal fees -- $650 per side in one particular transaction. I checked with our partner Fidelity Title, and they charge the standard escrow fees on REO transactions, and the fees are calculated from the purchase price of the property.
Your buyers may benefit from the aggressive prices of REO properties, and with these tips, you can provide excellent service by preparing your buyers for the process and protecting their interests.
Visit Our Broker Blog for Answers
We have started an online Broker Bulletin for West USA Revelation agents. We will post information on specific real estate and contract topics to assist you with your transactions. If you look today, you will find information on topics ranging from Using Lease Option Contracts to Mortgage Fraud as well as Short Sales.
Review the Bulletin periodically for assistance with topical real estate issues.
Quadrennial Code of Ethics Requirement
Arizona Association of Realtors requires that every REALTOR® complete 2½ hours of Code of Ethics training in between January 1, 2005 and December 31, 2008. If you were new to the business during that period of time, you should have already taken the class as a new member requirement; however, in not, you only have a couple of weeks to squeeze it in.
Use the link provided to the left to take the course online at no charge to you now. The penalty for not taking the class before the deadline is a suspension of your real estate board membership.
Exclusive Agency vs. Exclusive Right to Sell
How should you handle subsequent offers on short sale listings when you represent the seller?
We have all heard that submitting multiple offers to lenders for approval on short sale transactions can stall the approval process; however, we have to keep the sellers’ best interests at heart through the process and follow the contract provisions as well. Once a seller has accepted a contract with Buyer A with a short sale addendum, and that contract has been submitted to the lender for approval, it is not in your seller’s best interest to submit additional offers to the bank until they respond to the initial offer.
What if Buyer B submits an offer $10,000 higher than the initial contract with Buyer A?
n If the seller accepts the offer with the short sale addendum, you are required per lines 17-18 of the addendum to submit the contract to the lender for approval within 5 days of contract acceptance.
n If the seller does not accept the offer, or accepts it only as a back up contract with verbiage such as “this contract is contingent upon cancellation of the contract in first position between parties…”, then you are not obligated to provide the contract to the lender for approval until it becomes a contract.
You must present all offers to your seller unless they specifically give you written permission not to present offers. At the initial listing appointment, you should prepare your seller for the procedure in which you will handle subsequent purchase offers to minimize the approval process delays and maximize your sellers’ chances of a successful short sale.
Monday, November 10, 2008
Lease Option Agreements
Lease/purchase and Lease/option Agreements
By: Christopher A. Combs and K. Michelle LindPosted June 2008
There are many reasons why a client may want to enter into a lease/purchase or lease/option agreement. Most commonly, the buyer wants to enter into a lease/purchase or lease/option agreement because the buyer is unable to obtain financing for some period of time. A seller may consider a lease/purchase or lease/option agreement if the seller has been marketing the property for some period of time without success. This article answers some of the most common questions asked about these agreements.
Lease/Purchase Agreements
A lease/purchase agreement is an agreement in which the buyer and seller enter into both a lease agreement and a purchase contract at the same time. The buyer will lease the property, for example, for one year, and at the end of the one-year period the buyer is obligated to purchase the property by closing escrow.
Should the parties execute both a lease agreement and a purchase contract? Answer: Yes.
In a lease/purchase agreement, the parties should enter into a lease agreement for the specified period of time. The AAR Residential Lease Agreement should be used for this purpose. The parties should also enter into an AAR Residential Resale Real Estate Purchase Contract. The lease agreement should reference the purchase contract and vice versa. Additionally, the lease agreement and purchase contract should have cross default clauses; in other words, a breach of one agreement constitutes a breach of both.
During the term of the lease in the lease/purchase agreement, prior to close of escrow, is the relationship between the parties governed by the Arizona Residential Landlord and Tenant Act (“Landlord/ Tenant Act”)?
Answer: Yes.
The Landlord/Tenant Act applies during the lease period of a lease/purchase agreement. Although the Landlord/Tenant Act at A.R.S. §33-1308(2) excludes “[o]ccupancy under a contract of sale of a dwelling unit or the property of which it is a part, if the occupant is the purchaser or person who succeeds to his interest,” this provision should be construed to exclude occupancy under an “agreement for sale” (also known as contract for deed, land contract, or installment contract), not a lease/purchase. Thus, the Landlord/Tenant Act should govern the rights of the parties in a lease/purchase agreement prior to close of escrow.
What are the landlord/seller’s rights if the tenant/buyer fails to make the rental payments as required under the lease/purchase agreement?
Answer: If the tenant/buyer fails to make the rental payments as required, such a breach of the lease agreement should also constitute a breach of the purchase contract, if the lease/purchase agreement contains a cross default clause. Therefore, if the tenant fails to pay the rental payments as required, the landlord/seller may institute a special entry and detainer action pursuant to A.R.S. §33-1368(A) to evict the tenant and terminate the purchase contract as a result of the breach.
Lease/Option Agreements
A lease/option agreement differs from a lease/purchase agreement. In a lease/option agreement, the buyer and seller enter into a lease agreement containing a clause that gives the tenant/buyer the right, but not the obligation, to purchase the property under specified conditions. The lease/option should be drafted to provide that a default in the lease agreement results in the termination of the tenant/buyer’s option to purchase.
Should a lease/option require the tenant/buyer to purchase at a fixed price agreed upon at the time the lease/option is entered into?
Answer: An option to purchase may be at a fixed price, based on fair market value established by an appraisal at the time the option is exercised, or the option may be drafted as a “first right of refusal” in which the tenant/buyer has an option to purchase the property on the same terms as an offer from a bona fide third party. There are benefits and risks associated with each method.
What are some other considerations in drafting a lease/option?
Answer: A lease/option should be carefully drawn to document the understanding of the buyer and seller. Since you cannot predict future events or economic conditions, the option should be limited in time and the price should be based on the anticipated fair market value of the property at the time the option is exercised. Additionally, the tenant/buyer should be required to take title to the property in the condition of the property at the time the option is exercised, rather than the condition that existed when the lease/option was executed. The lease/ option should also provide that the option terminates with the expiration of the lease and can only be exercised if the tenant/buyer is not in default.
How should the lease/option agreement provide that the option be exercised?
Answer: The lease/option agreement should set forth (1) the period during which the option can be exercised: i.e., 90 days prior to the expiration of the lease; (2) the manner in which it can be exercised: i.e., written notice; (3) to whom notice must be given, normally the seller; (4) how soon after the option is exercised the closing must occur; and (5) the manner of determining the purchase price: i.e., appraisal or fixed price.
What are some additional considerations if the option is a “first right of refusal”?
Answer: When writing an option as a “first right of refusal,” the agreement should provide that the tenant/buyer must be given written notice of the proposed offer or a copy of the offer, all terms of the proposed sale, and the specific time period and manner in which to respond.
Conclusion
A lease/purchase or lease/option agreement can be complex, and if the parties are entering into such an agreement because of a potential buyer’s inability to obtain financing, the chance for a default or breach of the agreement is increased. However, a carefully drafted agreement in which the rights and obligations of the parties are clearly stated can prevent unnecessary disputes.
Christopher A. Combs, Phoenix attorney, is a partner with the firm of Combs Law Group, P.C., and is on the AAR Legal Hotline team.
K. Michelle Lind, Esq.Michelle is general counsel to the Arizona Association of REALTORS® (“AAR”) and a State Bar of Arizona board certified real estate specialist. She serves as the primary legal advisor to the association, provides legal direction in the development of standard forms, is involved in legislative advocacy, and assists in the association’s educational efforts.Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.
By: Christopher A. Combs and K. Michelle LindPosted June 2008
There are many reasons why a client may want to enter into a lease/purchase or lease/option agreement. Most commonly, the buyer wants to enter into a lease/purchase or lease/option agreement because the buyer is unable to obtain financing for some period of time. A seller may consider a lease/purchase or lease/option agreement if the seller has been marketing the property for some period of time without success. This article answers some of the most common questions asked about these agreements.
Lease/Purchase Agreements
A lease/purchase agreement is an agreement in which the buyer and seller enter into both a lease agreement and a purchase contract at the same time. The buyer will lease the property, for example, for one year, and at the end of the one-year period the buyer is obligated to purchase the property by closing escrow.
Should the parties execute both a lease agreement and a purchase contract? Answer: Yes.
In a lease/purchase agreement, the parties should enter into a lease agreement for the specified period of time. The AAR Residential Lease Agreement should be used for this purpose. The parties should also enter into an AAR Residential Resale Real Estate Purchase Contract. The lease agreement should reference the purchase contract and vice versa. Additionally, the lease agreement and purchase contract should have cross default clauses; in other words, a breach of one agreement constitutes a breach of both.
During the term of the lease in the lease/purchase agreement, prior to close of escrow, is the relationship between the parties governed by the Arizona Residential Landlord and Tenant Act (“Landlord/ Tenant Act”)?
Answer: Yes.
The Landlord/Tenant Act applies during the lease period of a lease/purchase agreement. Although the Landlord/Tenant Act at A.R.S. §33-1308(2) excludes “[o]ccupancy under a contract of sale of a dwelling unit or the property of which it is a part, if the occupant is the purchaser or person who succeeds to his interest,” this provision should be construed to exclude occupancy under an “agreement for sale” (also known as contract for deed, land contract, or installment contract), not a lease/purchase. Thus, the Landlord/Tenant Act should govern the rights of the parties in a lease/purchase agreement prior to close of escrow.
What are the landlord/seller’s rights if the tenant/buyer fails to make the rental payments as required under the lease/purchase agreement?
Answer: If the tenant/buyer fails to make the rental payments as required, such a breach of the lease agreement should also constitute a breach of the purchase contract, if the lease/purchase agreement contains a cross default clause. Therefore, if the tenant fails to pay the rental payments as required, the landlord/seller may institute a special entry and detainer action pursuant to A.R.S. §33-1368(A) to evict the tenant and terminate the purchase contract as a result of the breach.
Lease/Option Agreements
A lease/option agreement differs from a lease/purchase agreement. In a lease/option agreement, the buyer and seller enter into a lease agreement containing a clause that gives the tenant/buyer the right, but not the obligation, to purchase the property under specified conditions. The lease/option should be drafted to provide that a default in the lease agreement results in the termination of the tenant/buyer’s option to purchase.
Should a lease/option require the tenant/buyer to purchase at a fixed price agreed upon at the time the lease/option is entered into?
Answer: An option to purchase may be at a fixed price, based on fair market value established by an appraisal at the time the option is exercised, or the option may be drafted as a “first right of refusal” in which the tenant/buyer has an option to purchase the property on the same terms as an offer from a bona fide third party. There are benefits and risks associated with each method.
What are some other considerations in drafting a lease/option?
Answer: A lease/option should be carefully drawn to document the understanding of the buyer and seller. Since you cannot predict future events or economic conditions, the option should be limited in time and the price should be based on the anticipated fair market value of the property at the time the option is exercised. Additionally, the tenant/buyer should be required to take title to the property in the condition of the property at the time the option is exercised, rather than the condition that existed when the lease/option was executed. The lease/ option should also provide that the option terminates with the expiration of the lease and can only be exercised if the tenant/buyer is not in default.
How should the lease/option agreement provide that the option be exercised?
Answer: The lease/option agreement should set forth (1) the period during which the option can be exercised: i.e., 90 days prior to the expiration of the lease; (2) the manner in which it can be exercised: i.e., written notice; (3) to whom notice must be given, normally the seller; (4) how soon after the option is exercised the closing must occur; and (5) the manner of determining the purchase price: i.e., appraisal or fixed price.
What are some additional considerations if the option is a “first right of refusal”?
Answer: When writing an option as a “first right of refusal,” the agreement should provide that the tenant/buyer must be given written notice of the proposed offer or a copy of the offer, all terms of the proposed sale, and the specific time period and manner in which to respond.
Conclusion
A lease/purchase or lease/option agreement can be complex, and if the parties are entering into such an agreement because of a potential buyer’s inability to obtain financing, the chance for a default or breach of the agreement is increased. However, a carefully drafted agreement in which the rights and obligations of the parties are clearly stated can prevent unnecessary disputes.
Christopher A. Combs, Phoenix attorney, is a partner with the firm of Combs Law Group, P.C., and is on the AAR Legal Hotline team.
K. Michelle Lind, Esq.Michelle is general counsel to the Arizona Association of REALTORS® (“AAR”) and a State Bar of Arizona board certified real estate specialist. She serves as the primary legal advisor to the association, provides legal direction in the development of standard forms, is involved in legislative advocacy, and assists in the association’s educational efforts.Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.
Monday, October 13, 2008
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