- The Washington Times - Friday, March 10, 2000

Sales are up, and inventory is down. The Washington area housing market continues to warm sellers and scorch buyers. In January, sales remained steady in Fairfax County, Fairfax City, Arlington, Alexandria, Falls Church, Montgomery County and the District compared with the previous year.

But inventory was down a whopping 37 percent compared with January 1999, according to the Metropolitan Regional Information Systems. As a result, buyers are lining up to bid on homes. Sellers are receiving multiple bids.

All this market frenzy can lead to contractual problems. Desperate to get a ratified contract, some buyers are skimping on legal protections, which could add thousands of dollars to the cost of their homes.

"Buyers should always include a home inspection contingency," says Brennan Reilly, partner at Reilly & Goodwin PLLC, in Alexandria and Tysons Corner. Some buyers under pressure are leaving it out, he says. "[This] leaves [them] open for a lot of problems down the road," he says.

Sellers, on the other hand, are tending to say no to most or all of the requested changes, Mr. Reilly says. Nonetheless, the home inspection contingency still protects buyers from structural problems, he says.

The latest standard contract in Virginia, which is also used in the District and Montgomery County, allows buyers to walk away from the contract once problems are discovered, says Carol Taylor, a real estate agent with Century 21 in McLean. Furthermore, it may give buyers the upper hand.

Once sellers know of a structural problem, they must disclose it to all buyers, so it's likely they won't balk on fixing it unless they think someone will buy it as is, Mr. Reilly says. But the cost to repair structural problems is generally in the $20,000 to $40,000 range, he says, noting that at least it should get factored into the price.

Buyers should also include other contingencies in the contract, Mr. Reilly says. Most buyers are keeping the financing contingency, he says.

But Tony Devol, a settlement attorney and chairman of the Contract and Forms Committee of the Greater Capital Area Association of Realtors, which serves both the District and Montgomery County, disagrees.

He says that many buyers are not putting in contingencies for financing. They are assuming the risk to put forth the strongest offer to the seller, Mr. Devol says.

But if the financing doesn't come through, there are costly consequences, stipulated in the contract. Normally, the buyers lose their earnest money deposit. But sellers may be able to pursue other legal consequences, depending on the contract.

In addition to assuming risk, many purchasers are putting in escalation clauses in anticipation of multiple bids, says Mr. Devol. These clauses stipulate that if they are not the highest bidder, they will offer X amount of dollars over the highest offer, up to a maximum of Y dollars.

"You want to put a cap on that," Mr. Devol warns.

While sellers are getting multiple bids, real estate agents say they won't get involved with buyers who want to make multiple bids in hopes of increasing their chances of getting just one offer accepted. In fact, it's their job to advise a buyer against getting into such a situation.

"A buyer who has two offers out at one time definitely has exposed themselves to a potential [legal] problem," Mr. Reilly says. If both offers are accepted before one's withdrawn in writing, the buyer has " •ontracted to buy two properties," Mr. Reilly says.

"[The legal consequences] would depend on how the contract is written," he says. The buyer would potentially forfeit his earnest money deposit, he says. In addition, the seller could try to sue for other things, he says.

Sellers worried about default should look for large earnest money deposits. The larger the default consequence, the less likely the buyer is to default, Mr. Reilly says.

What strategies can competitive buyers use?

"You've got to try to find out what the seller really wants, what's important to him timing, money, his draperies?," Mrs. Taylor says, "and try to be the most flexible buyer."

"The seller needs a loan approval letter," Mrs. Taylor says. "Twenty percent down gives you a real edge," she adds.

Bidding the full asking price is another strategy. Under a traditional listing agreement, if a bid is full price and has no contingencies, the seller must accept it, Mr. Reilly says. But, he notes, "under general contract law they're not required to accept any offer."

Some sellers wait for a second and third contract now, so Mrs. Taylor says she tries to get contracts in a little late. Sellers, on the other hand, are in a good position because they can sit back and accept the best offer.

"That's pretty much the way it's been happening, and I think that's why the bidding war goes on," Mr. Reilly says. Sellers can tell their agent to ask the bidders to raise their bids, he says. Sellers are also in a good legal position, says Mr. Reilly.

But even in this market, there are next-day regrets. Not all buyers end up wanting the house after their bid has been accepted, and not all sellers want to sell.

"Sometimes, people wake up in the morning and decide they hate the house," Mrs. Taylor says.

There are ways to get out of a contract. In the old Northern Virginia sales contract, which is still in use, a home inspection with need for repairs that the seller won't fix provides an out. In the new contract, buyers can void the contract essentially without cause after receiving the home inspection results.

In addition, if the buyers don't approve the association or condominium documents after inspecting them, they can cancel the contract, Mr. Reilly says. But none of these are good ways out if you sign more than one contract, he stresses. "Before making a second offer, buyers should revoke the first one in writing," he says.

Sometimes, sellers want to get out of the contract, Mrs. Taylor says.

"Maybe there's a change in circumstance [or they didn't have a place to go or they didn't want to move]," she says. Many sellers think they can void a contract if they get a better offer, but they can't, Mrs. Taylor says.

For the seller there appear to be no consequences no losing a deposit but a buyer can sue for specific performances and damages, Mrs. Taylor says. "I like people to be real sure before they do something," she says. "But the problem is that the market is moving so fast there's not always time."

Even if the buyer or seller agrees to cancel the contract, there's still the issue of paying the real estate agents' commissions.

"I don't think people realize that when they sign a real estate agreement, that it's a binding contract," Mrs. Taylor says.

Moreover, many people don't read sales contracts, Mr. Reilly says. Therefore, it's a good idea to have an attorney review the contract before signing on the dotted line, even if it's only to explain it, he says.

The Northern Virginia sales contract is a balanced contract, Mr. Reilly says. But "builder contracts are prepared by the builder's attorney most of the time, and they are prepared for the benefit of the builder," he notes.

Buyers get their information from the agent, who represents the builder, he points out. Plus, he says, people tend to buy new homes without agents representing them, "and if there's anywhere you need an agent, it's when buying a new home," he says.

The settlement attorney should not be the one who reviews the contract because they can't represent either party's interest. They cannot explain anything or give advice, Mr. Reilly says. They represent the transaction.

Despite the fury to get a ratified contract, buyers should take a moment to make sure they are bidding on the home they really want, that their bid is affordable, and that they are protected by the contract to prevent regrets later down the road.

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