The Negotiating Platform
Understand that residential real estate negotiating is different from most other negotiations. Whether the parties use the actual standard contract form or not, it is the platform on which the negotiation takes place.
And regardless of how the negotiation takes place, once the parties reach an agreement, they will reduce it to writing, almost always using the standard form. Therefore, for each party, a favorably executed contract form is the negotiating goal. So advanced knowledge and understanding of this form contract is a tremendous advantage.
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In North Carolina, the state association of REALTORS® and the state bar jointly operate a Forms Committee to create and update various forms used by buyers and sellers of real property in the state. The most important form they maintain is the Offer to Purchase and Contract. Buyers will typically use this form to make an offer. Then the seller may use the same form to make any counter-offer. And finally, when and if the two sides come to an agreement, both sign, and the same form becomes a contract.
I should point out, that in our state, as of this writing, this form is fourteen pages long.* It seems to grow a page every two or three years as the committee makes annual adjustments and updates to reflect ever changing market conditions. The point is, it includes many terms, beyond the Purchase Price, all of which the parties can negotiate.
It is also important to note that, use of this form is not required; buyers and sellers of real property are legally able to create their own offer and contract. So for example, many builders will use their own contracts. These are most often written by the builder’s attorney, and needless to say, favor the builder. And for commercial property, buyers and sellers will often use unique, attorney-drafted instruments. This is fine, but it is not cheap, and it is not immediate.
So there are several benefits of the form offer and contract for residential real estate. One, the form is party neutral, so both sides are comfortable using it. Two, it is standard, so buyers and sellers, do not need an attorney to draft a unique document each and every time they need to convey property. Three, therefore it is cheap to use and immediately available.
So for re-sale (non-new-construction), in 99 transactions out of 100, this is the form that the buyers and sellers use to document the agreement. Even if there is some non-standard item that the parties want to address in the contract, most often they still use the form and add an addendum.
Does any other business work like this? I mean, at least on such a large scale? Take our cousins on the commercial side of the business. Yes, they have similar forms available, which the parties often use for straightforward deals. But for transactions with any complexity, the parties will typically use the unique, attorney-drafted documents I mentioned.
So the negotiations for those deals are more open-ended. They start, not with a form, but literally with a blank sheet of paper. The parties negotiate and agree on terms, write them down on this blank sheet of paper, and label it a Letter of Intent. Then the attorney uses this to produce the unique contract.
Think about it, in most other substantive business negotiations, something similar takes place. And the result is the perfect instrument for the deal as conceived by the parties. But it is also expensive and time-consuming.
Too expensive and time-consuming for most residential real estate deals. So we have this very unique and peculiar negotiation process based on the Offer to Purchase and Contract. This form is the negotiating platform. Okay, okay, this is straightforward enough; why go on about it?
Command the platform, command the deal.
I don’t mean command as in order or to give an order. Rather, I mean knowledge and mastery. Perhaps it would be better put this way: Command of the platform is more likely to lead to command of the deal. You get the point.
As designed, the buyer will complete the form as he would like the contract to read, and send it along to the seller, who will then make and initial changes, as he would like the contract to read. And this goes back and forth until the two parties reach an agreement. Then both sign, and presto, we have a contract.
Now sure, that works, and we see that, not infrequently. But after the buyer sends the initial written offer, often times the next stages of back and forth happen on the phone. And the telephone conversations do not address each blank on all fourteen pages. Rather, the parties or their brokers, discuss the open items, where the two parties have yet to reach agreement. And there is a certain fluidity to this process, because as the parties reach agreement on one item, this may affect others. Think: We’ll give you this, but we will then want that.
Now if the buyer originally sent a written form offer, the two parties are typically referring to that document to have these telephone conversations. Right? Of course. The same is true if the back and forth happens via email. So whether the actual form goes back and forth with each iteration, it is the form that the parties are using to begin, narrow, and complete the negotiation process.
But that need not be true. In order to save time, savvy buyers may simply call or email with proposed terms. With no form in sight. Think: Will you take X price? Now it is usually the price and other major terms, other monies, dates, etc. But clearly, not fourteen pages of items, because then they would have simply used the form. Of course, the seller can add any term that he wants. If the buyer did not include a term, because perhaps it was not important to him, but it is important to the seller, be assured, the seller will add it to the back and forth, however that takes place.
But even here, these terms are all, generally found in the standard form. And as they are discussed and negotiated, a broker does so with the form in mind. He asks himself: How will I complete the form to accomplish that desired, or later agreed, item? And less often he might think: The form has no allowance for this desired item, and therefore, we will need something beyond the form. This thought process may go on in his head. Or, he might actually refer to a blank form.
Like I said at the top of this chapter, whether the parties use the actual form, or not, it is in fact the platform on which the negotiation takes place. Because sooner or later, the parties will complete that form to record their agreement.
So the standard form is the primary tool of the real estate negotiation process. And the more command you have over this tool, the more likely you are to achieve your goals or the goals of your principal.
Now sadly, it is not a simple form. And frankly, how it works is not immediately obvious. I think I can say without exaggeration, that most people, reading the form once or twice, will not understand it or the transactional effects of it.
So read it, think about, read it again, etc. Practice using it. Or…find someone who has.
As an aside: I hope you will agree with me, that my chapter on FSBOs was fairly supportive of sellers who wish to go down this route. But now let me point out where they often fail: They do not take the time to understand the contract, or get help understanding the contract. And as I put at the top of that chapter: Brokers and savvy buyers take advantage of their hubris. Yes I know, you thought I forgot.
Finally, this is not a book about any particular real estate contract. Each state form is different, and one would have to write fifty books. But before we leave the real estate contract completely, in our next chapter we will discuss the most important contractual element in terms of the negotiating process: Due Diligence.
Competent negotiation begins with command of your state’s standard form real estate contract.
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* Since expanded to over twenty pages.