Negotiating Due Diligence: An Example
We listed a small, older, run-down house, on a highly-desirable parcel. We got at least one offer every day it was listed. After about ten days, we accepted the highest and best offer. Now, because we understood the situation, we had priced the property rather high. And this offer was substantially over our listed price.
Now the North Carolina standard form contract is an “as-is” contract, and during negotiations, we made it clear to all potential buyers, that the sellers would not be making any repairs. This was fine with everyone, because the house was clearly a tear-down and buyers would be purchasing the property for the location of the parcel.
So we go under contract with this high offer. But as is our practice when we represent sellers, we secured a high Due Diligence Fee. And when I say high, what I mean is, quite a bit higher than is typical in our market. The buyers did want a Due Diligence Period for financing purposes, and we had no objection.
But during the Due Diligence Period, the buyers had a property inspection and an appraisal. Needless to say, the property did not appraise anywhere near the negotiated Purchase Price. The buyers then come back to us and request a price reduction to the appraised value plus a substantial credit for repairs. (Remember, the buyer can ask for anything). At this point their contention is that they have decided to rent out the house for some period of time, before proceeding with their development plans.
With me?
Now let me just ask: When negotiating the original contract, was the buyer acting in good faith? I just don’t think they were. I think the buyer never had any intention of fulfilling the terms as originally negotiated. They just wanted the property contracted to themselves knowing they would have an opportunity to get a better deal.
And what recourse does the typical seller have? The buyer thought that we would capitulate to their demands because, if not, we would be forced to disclose all of the material facts (the problems) with the house to any other potential buyers. And of course, these were deal-breakers. The buyers really thought they had us over a barrel.
But we did have multiple interested buyers and multiple offers. And like I said, all buyers had been informed that the sellers would not make repairs. So sure, we disclose all new material facts, but no one cared. Our policy in these situations is to simply turn over the Inspection Report to any other interested buyers. So the sellers were willing to let the buyers terminate, if they so chose, and then sell the property to another buyer.
But what if this had not been the case? What if, these dishonest (bad faith anyway) buyers had submitted the only offer? If we had accepted a nominal amount as a Due Diligence Fee, they might very well have gotten away with these shenanigans. Total jeopardy would have been on the seller, as our top producer admonished back in Chapter 17.
But these buyers had paid the sellers a substantial Due Diligence Fee, which the sellers were keeping regardless. The seller told the buyer, it’s the original deal or nothing.
Here the buyers started a gunfight, but they were represented by a rhinestone cowboy completely out of his depth. I use a similar story of a high Due Diligence Fee in Chapter 54 on Better Than Expected Offers.