By Linford Good, Senior Vice President - Brokerage Services, High Associates Ltd.
This is the tenth in an 11-part series of understanding the key ingredients in all successful real estate transactions.
After putting forth the necessary time and effort into building a trustworthy relationship and negotiating a deal, there is one document that is the most significant component of the entire transaction: The Agreement of Sale. Every conversation, discussion and negotiation leads up to this crucial step in securing an arrangement for the buying and selling of a property.
This document— often produced by the broker— holds the most weight and value of any document in the process, and therefore must be meticulously examined and carefully assembled in order to avoid conflict, error, and inconsistency within the deal. The Agreement of Sale must be assessed by legal experts to assure its accuracy and clarity, and to protect the interests of the parties involved. This step is called the Attorney Review. With this document being the spine of such a substantial agreement, it is crucial that the language is free of possible miscommunication or confusion on either side of the transaction.
Similarly to the Letter of Intent discussed in Step 9 of All Real Estate Transactions, the Agreement of Sale will carefully outline all of the details related to the sale. It will clearly define the dates, times, and schedule to take place during the settlement of the transaction in order for the brokers to monitor both parties and make sure they are keeping to their contract.
In order to secure a smooth transaction between buyer and seller, a broker must use effective Contract Language— and even down to a single word, one can never be too careful. Pull out your magnifying glass, because there is no room in this document for assumptions. The content needs to be assembled thoughtfully, with all issues clearly outlined. The agreement becomes the ‘final word’ of the transaction, and overpowers any previous verbal negotiations between the buyer and seller.
All involved parties must move through the document logically, deliberately and meticulously in order to prevent miscommunication. Daniel Kahneman, renowned psychologist and author of the New York Times bestseller Thinking, Fast and Slow explains the importance of ‘slow thinking’, especially in a corporate setting. He maintains that, in order to avoid glitches in understanding and comprehension, we must think in a way that is effortful and calculating rather than assumptive and automatic. His advice aligns with a well-done Agreement of Sale when he states, “if you care about being thought credible and intelligent, do not use complex language where simpler language will do”.
When a buyer and seller have reached the point of an Agreement of Sale, both parties have duties to fulfill before signing. It is the seller’s responsibility to disclose known defects on a property to a potential buyer, which can include physical defects, financial defects and legal defects. The buyer needs to make sure the Agreement of Sale provides for a due diligence period allowing the buyer to inspect the property prior to a final commitment to purchase. The buyer, after signing, then has the responsibility of performing his or her own due diligence, which is the process of researching the statements of facts and potential downfalls of the property at hand. Should the buyer find something wrong with the property during the due diligence period, he or she can go back and either attempt to renegotiate the contract or terminate the agreement.
The broker will oversee this research process by actively managing the buyer and seller in completion of the tasks outlined in the agreement’s contingencies. Orchestrating communication between all parties throughout the process of settling a transaction is the key component of the broker’s job— all involved parties must understand their responsibilities, assigned tasks, timelines for completion, and expected results. In order to be a successful broker, one must successfully supervise these details or items can easily be overlooked, resulting in the deal being suspended or terminated if the contingencies go unresolved.
All people who have legal interest in the property will sign, making it lawfully official with the Signatures of Principals. Once signed, the terms and conditions in this document are legally binding, and it crucial for these details to be completely clear to both the buyer and seller.
At this mature stage in a real estate agreement, the end is in sight, but a deal is more easily achieved with a diligent and effective broker. In order to complete the transaction, the broker must be active in overseeing the responsibilities of all involved parties. Only then come the handshakes, signatures, and the excitement of moving forward with a successful property sale.
This article is intended to be an overview of commercial and residential financing. It does not purport to give either legal or financial advice. Before taking any action, you should consult with with your attorney or real estate adviser.
Linford L. Good is Senior Vice President of Brokerage Services for High Associates Ltd. He is responsible for managing the brokerage activities of the sales/leasing team. The brokerage activities include selling or leasing industrial/commercial properties for corporations, private industries and individual investors.
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