The Binding Agreement
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When all parties agree on all the terms of a contract and sign to confirm that agreement, you have a binding contract. You can have multiple counter-offers back and forth between Buyer and Seller, but the last and final version of the offer signed by both parties is, by law, what makes the contract binding.
The date of the Binding Agreement is critical in real estate.
Once you’ve got a Binding Agreement, a whole series of events is set off and a two clocks begin to tick: one is ticking down the time remaining in your “Due Diligence” period and the other is ticking down to your closing date.
Due Diligence is Really an Option
If you, like most Buyers, selected ‘Due Diligence’ as opposed to ‘As Is’ when making your offer, you have technically created an ‘Option Contract.” An option contract is one where the Buyer is purchasing the right to buy during a specified period of time but is not legally required to do so. During this time, the Seller cannot sell to anyone other than the person with the option to buy. Does this make sense? The reason this Due Diligence is an option contract is because for however many days you may have asked for Due Diligence, you have the right to walk away from your offer for any reason at all. You are not obligated to buy.
Now, during this time period, you have the right to inspect the property, poke and prod it all you want. During this period, you must do everything you can to make sure this is the right home for you. If this means calling in every member of your family for their opinion… well, then knock yourself out. If this means calling in your feng shui master to make sure the chi in the house is good, well, go right ahead. The main thing you would want to do is get a home inspection. This is also the time to get an appraisal, a new survey, a structural engineer’s report and anything else that you may want done in the way of examination of the property.
It is not just about the soundness of the property that is at stake during this period. The soundness of your finances is also important. It is during this time period that you must take care of all your loan obligations by getting your loan processed as quickly as possible and ensuring the bank will approve you and have the funds available at closing. If you do not finalize your loan process during this due diligence and let the due diligence period lapse, you are now obligated to purchase this property regardless of whether or not the bank has approved you. Can you say breach of contract, default and loss of earnest money?
The Home Inspection
Nobody wants to buy a house with problems. Whether you are buying ‘As Is’ or ‘Subject to Due Diligence,’ you are allowed to conduct any inspections on the property you require. Under Paragraph 10 in the Purchase & Sale Agreement, the Seller agrees to allow you access for these inspections and to have all systems on an operable.
Now in Georgia, under our current GAR Contracts, the old way of Requesting Repairs has changed. Previous to 2008, Buyer could opt to purchase with Right to Request Repairs. Under this system, the Buyer had a professional home inspection. The inspector would identify ‘material defects’ which the Buyer could then request the Seller to repair. This would be a matter for negotiations between the parties. Ultimately, if the parties could not reach a mutual agreement, the Buyer could terminate. The Buyer was limited, however, to ONLY request repairs on actual defects of materials, nothing cosmetic, like chipped or broken tile. The conversation was ONLY about repairs… If the Seller agrees to make all requested repairs, but the Buyer has second thoughts about the house… the Buyer is still obligated to buy.
Today, that method is gone. You can inspect to your heart’s content… if you find anything objectionable with the property, you can request the Seller make repairs like before, but now, the Buyer can also request to renegotiate the purchase price… you can ask for cosmetic repairs, you can ask for anything… And the Seller has the right to agree or not agree to do these things…
During this time, remember, the Buyer has the right to terminate for ANY REASON.
If the Buyer decides to terminate, it is critical that the Notice to Terminate be delivered PRIOR to midnight on the last date of Due Diligence. Otherwise, the Buyer will be obligated to buy the property AS IS, if the Amendment to Address Concerns with Property was not already negotiated and signed. This is why it is so important to watch the clock and have someone else watching the clock with you. If you miss the time limits within due diligence, you may be obligated to purchase a house you don’t want – or can’t afford – as is! Make sure you have an Agent on your side and that your Agent is on top of the deadlines to protect your best interests!
