By Michael J. “Mick” McGirr, Esq. | Phocus Law
This past week I had the great pleasure of teaching a class about contracts with AZREIA’s fearless (and great) leader, Mike Del Prete. In my preparation for that class, one theme rang clear for me. That theme is that the market is changing – and so should your contracts. To explain further, this article aims to shed some light on how the real estate market slowdown should be reflected in your real estate transaction documents.
First, let’s look at the impact of the exceptionally hot market of ’20, ’21, and the beginning of ’22 on the buyer and seller dynamic. We all know someone with a tale from that timeframe that goes something like, “I missed out on three straight properties so finally made an offer of $50k over asking and with the inspection period waived.” While I’m certain that many people ended up in bad positions as a result of the hyper-competitive market that existed, if you were trying to get into a property then you had to play along to some extent.
Good news for those looking to buy now – those incredibly seller-friendly conditions no longer exist. With interest rates that have gone to the moon and spending slowed, there is now a return to equity between buyer and seller. Therefore, make sure that your buyer-side contracts reflect that.
Many sellers will now feel a bit more desperation to move on from their properties, allowing investors to negotiate much more favorable terms. I recommend that you as the buyer sharpen up your contracts by considering some of the following tweaks:
- Financing Contingencies – You owe it to yourself to maximize your margins. With interest rates where they are, and especially considering their volatility trending upwards, it would be wise to consider financing contingencies that ensure that you are not required to buy if you’re unable to get a rate that works within your margins.
- Eliminating Leftover ‘Boom Time’ Language – Review your contracts and make sure that you don’t have any remaining habits that reflect the ‘bad habits’ that may have been necessary during the boom such as stricter provisions regarding the return of earnest funds, shortened inspection periods, etc.
- Some Favorable Throw-aways – Consider adding in a few ‘wish-list’ items that you don’t mind standing down on if the Seller rejects them. This will skew the negotiation in your favor as, rather than the Seller removing items that matter a lot to you in an effort to feel like they’re ‘winning’ the deal, you’ll be able to give up a few of those wish-list items that would have been great, but that were not items you were relying upon for the deal to work.
During that same AZREIA contracts class, the question was asked, “Why not just use the standard Arizona contract for all of your deals?” The simple answer is that the AAR contract is intended to be used for almost any ordinary transaction where a consumer is purchasing a residence. The fact that you are reading this means that you are not an ‘ordinary’ homebuyer, and the transactions you and I are thinking of are not consumer purchases. Simply put, your unique needs as an investor should be reflected by a unique contract.
The Phocus Law team has been responsible for the documentation of real estate transactions with a total combined value exceeding $100 million. Because of that, we have seen many unique and effective real estate contract iterations. If you would like to have us fine-tune your contract package to reflect your needs, please don’t hesitate to reach out. I can be reached by email at Mick@PhocusCompanies.com or by phone at 602-457-2191.