Complicated Condition Of Sale

[Reviewer 99]

A property owner (grantor) was approached by a developer/middle man for a national retailer (grantee), without advertising his site for sale . The grantee offered to purchase the vacant site for $120,000 and the grantor countered with $155,000. According to the grantor they accepted the counter offer and went to contract.

After contract was signed the grantor discovered a clause in the contract that stipulated a 10% payback to the grantee. The grantor couldn’t recall the exact nature of the clause, but thought he remembered it being related the developer having a real estate broker’s license, which is typical and makes sense.

After discovering the clause the grantor wanted to and attempted to get out of the contract, but under threat of legal action he conceded and accepted the net payment of $140,000 (he said $140,000). Math would calculate to $139,500.


To me this one seems clear as mud and wanted to get other opinions.

The problems as I see it are:

1. Were buyer and sellers acting knowledgably?
   
   
2. Does the 10% represent a concession?
   

Although it lacks exposure to the market I don’t think that’s a factor as the purchase price indicates a sale toward the top end of prices for similar sites in the area.

Given that there was not a true unquestionable meeting of the minds what figure should be used, when using this as a comparable, for estimation of market value?

 

[Terrel L. Shields]

10% is not a normal Realtor charge here, 6% is. The seller should read any such contract closely. Uninformed seller and not well advised. But it is not a concession, rather is mispricing by the seller.

Net to owner is a $140,000 - that is the sale price. Whether market value or not, is determined by what other sales in the area are selling for. Unless I just did not have any other sales to hang my hat on, that is a sale I would not likely ever use as a proxy for "market value", say in determining the land value in a cost approach.

 

[J Grant]

The buyer (grantee ) sounds slick and the seller sounds not well informed or well advised, since he did not even realize there was a clause in contract where he was giving 10% back to the buyer.

The price was inflated by 15% sounds like, I'd list the price at what it closed for ( 155k) and to the extent 10k inflated price above over similar sales , that is what I would deduct for terms of sale

 

[Michigan CG]

Although it lacks exposure to the market I don’t think that’s a factor as the purchase price indicates a sale toward the top end of prices for similar sites in the area.

I assume you are referring to Arm's Length in this sentence. Arm's Length has nothing to do with exposure.

 

[Reviewer 99]

I assume you are referring to Arm's Length in this sentence. Arm's Length has nothing to do with exposure.

My statement relating to the exposure to the market was not referring to whether the transaction was between Arm's length parties. The parties are not related in any association before this or outside of this transaction.

When I matched the circumstance of this sale against the definition of market value, one of the factors that diverged was that it was not exposed to the open market.

If this site sold for a premium independent of being exposed to an open market, what difference would there be whether it was exposed to the market or not. Therefore given that this property was not listed or notoriously known to be available for sale, this factor doesn't seem to be part of what complicates this transaction.

 

[Peter LeQuire]

The seller failed to read the sales agreement. Sounds like he wasn't well informed or well advised.

I would be interested to see how that "10%" payback was worded. It the buyer is a licensed real estate agent, would he not have to plainly disclose, prior to getting the agreement signed, that he was taking what is, in effect, a commission from the sale?

There are many circumstances in which properties are sold when they are not "exposed" to the market. In verifying sales that are in MLS showing "0" or "1" as the days on market, I ask what the circumstances are. One broker said she walked to her car after getting the listing agreement signed, and was removing her yard sign from the trunk when someone stopped and asked about the property. She left the sign in the car, took the prospect on a tour of the house, and the offer was inked before she got back to her office. Had it been exposed? Would the sale pass the test appraisers try to apply to determine which comps are "good" and which are not.

Or - Farmer Dan wants to buy Forest's house, but he and Forest don't know what the price ought to be. They agree to split the cost of Mich's appraisal, and agree that Mich's value is the sales price. Had it been exposed? Would this be a "good" comp?

WalMart finds a site and negotiates its purchase with Farmer Dan: the property hadn't been exposed - is this sale a "good" comp?

 

[Reviewer 99]

The seller failed to read the sales agreement. Sounds like he wasn't well informed or well advised.

I would be interested to see how that "10%" payback was worded. It the buyer is a licensed real estate agent, would he not have to plainly disclose, prior to getting the agreement signed, that he was taking what is, in effect, a commission from the sale?

There are many circumstances in which properties are sold when they are not "exposed" to the market. In verifying sales that are in MLS showing "0" or "1" as the days on market, I ask what the circumstances are. One broker said she walked to her car after getting the listing agreement signed, and was removing her yard sign from the trunk when someone stopped and asked about the property. She left the sign in the car, took the prospect on a tour of the house, and the offer was inked before she got back to her office. Had it been exposed? Would the sale pass the test appraisers try to apply to determine which comps are "good" and which are not.

Or - Farmer Dan wants to buy Forest's house, but he and Forest don't know what the price ought to be. They agree to split the cost of Mich's appraisal, and agree that Mich's value is the sales price. Had it been exposed? Would this be a "good" comp?

WalMart finds a site and negotiates its purchase with Farmer Dan: the property hadn't been exposed - is this sale a "good" comp?

I agree, I don't think the lack of exposure is a factor here.

 

[J Grant]

Lack of open market exposure does not complicate a transaction, but it can impact the price.

 

[Reviewer 99]

In considering this transaction and matching it against the definition of market value the divergence seemed to take place in the exposure time, well informed participants and if the price difference was a concession.

The two important issues being how informed the participants were and the seller conceding on price.

Expanded explanation of these:


There was a gap between where "Both parties are well informed or well advised, and acting in what they consider their best interests;"

The grantor missed the clause, and whether derelict to caution or a mistake by a seasoned investor the seller was not well informed.



and "The price represents the normal consideration for the property sold unaffected by ... sales concessions granted by anyone associated with the sale..."

In the end the seller was cornered (grantee threatened legal action) to concede on the price, which by definition is a concession. Not your typical concession as it lacked intention to attract or induce sale, but a cost benefit decision as to the extent of the concession vs. cost of legal action and/or judgment in favor or the grantee.

 

[Peter LeQuire]

....except that agents/facilitators (or whoever puts such deals together) takes fees for their efforts. We don't treat a Realtor's commission as a concession - it's a fee for service.