This article discusses the effects estimates, postdated checks, creditworthiness and document alterations have on the validity of documents.

Closing costs to be estimated in good faith

A broker and his sales agents must avoid inducing any buyer or seller to make or accept an offer to purchase or sell real estate by giving them an underestimate of the probable closing costs on the transaction.

For example, a buyer may rely on the representations of his broker for the amount of funds needed to close escrow on the purchase agreement negotiated by the broker.

When a buyer makes an offer, the financial consequences of the seller’s acceptance (and resulting binding agreement) and the completion of the purchase on close of escrow are presented to the buyer in the form of a cost sheet. [See first tuesday Form 311]

With the use of a cost sheet , the purchase price and all transactional closing costs to be borne by the buyer, as well as the buyer’s source of funds, is clearly and completely disclosed by the buyer’s broker.

As for sellers, a seller’s net sheet is prepared by the seller’s broker and reviewed with the seller to accurately produce the financial “bottom line” – the net proceeds he will receive on closing the transaction – should the seller decide to list the property for sale or accept an offer. [See first tuesday Form 310]

The seller’s net sheet is prepared and delivered to the seller on:

  • the presentation of a listing agreement; and
  • the submission of a purchase agreement offer for acceptance.

Sellers are greatly influenced to sell property by their broker’s representation of the net proceeds they will receive from a proposed transaction and what form the proceeds will take – cash, paper or an exchange of equities.

The figures entered on the seller’s net sheet must be as accurate as reasonably possible. A resourceful agent will be able to produce close estimates.

When the accuracy of a figure entered on a disclosure statement is an estimate, such as the cost of a termite clearance, the words “approximation” or “approximately” should highlight the uncertainty.

Estimates are required to be made in good faith to eliminate an agent’s temptation to guess. Also, an estimation cannot be given if the actual amount is already known.

Good faith deposit disclosure

Brokers who accept a good faith deposit with a purchase offer must make sufficient disclosures to sellers about the deposit to avoid deceiving the seller as to the form, amount, handling or ownership of the buyer’s good faith deposit.

For example, a buyer gives his broker a good faith deposit in the form of a personal check and signs an offer to purchase property.

The check is postdated. The buyer does not have sufficient funds on deposit to cover the check.

The purchase agreement states the check for the good faith deposit is to be deposited when the offer is accepted. The purchase agreement does not disclose the check is postdated. Specifically, nothing written, except the check, states the check is not of the same date as the purchase agreement.

The purchase agreement offer is presented to the seller. However, the seller is not handed a copy of the check nor otherwise informed that the check for the good faith deposit is postdated.

The buyer’s offer to purchase the property is accepted by the seller and delivered to the buyer.

Later, the seller discovers the check is postdated. The seller then withdraws his acceptance and refuses to sell, claiming the postdated check is a promissory note.

The buyer and the broker seek to recover their losses, claiming the seller breached by cancelling the transaction.

However, a postdated check is not the same as a check. A check is payable on demand. Conversely, a postdated check is merely a promise to pay on or after the date on the check. Thus, the broker’s failure to disclose important facts regarding the good faith deposit accompanying the buyer’s offer is a misrepresentation charged to the broker and the buyer.

An agreement is voidable and may be cancelled by the seller when acceptance is obtained through a misrepresentation of the buyer or the other party’s broker. [Calif. Civil Code §1689(b)(2)]

Thus, the seller can cancel the agreement. The broker failed to disclose the check evidencing the good faith deposit was a postdated check. Accordingly, neither the buyer nor the broker can collect money losses for the seller’s refusal to perform – the agreement was voidable due to the nondisclosure of the check as a promissory note.

The predated condition should have been entered in the receipt of deposit section of the purchase agreement and a copy of the postdated check handed to the seller. The broker would retain the check as trust funds. [Wilson v. Lewis (1980) 106 CA3d 802]

Buyer’s ability to pay a carryback note

A broker and his agents will not misrepresent to a carryback seller a buyer’s financial ability to perform the terms and conditions of the carryback note and trust deed.

For example, a listing broker locates a buyer willing to purchase his seller’s property.

The broker advises the seller that the buyer is financially qualified to make the large cash down payment that the seller requires before he will provide carryback financing for the remainder of the purchase price.

Relying on the broker’s representations as to the buyer’s financial qualifications, the seller agrees to carry back paper to facilitate the sale.

Before escrow closes, the buyer advises the broker he does not have the downpayment money and will need to obtain a loan to fund the closing.

The broker does not advise the seller of the buyer’s lack of downpayment funds. Further, the broker makes the buyer the loan necessary to fund the down payment.

Escrow closes and the buyer takes title to the property. Soon the buyer defaults on his payments on the carryback note held by the seller.

The seller then discovers the buyer obtained a loan from the broker for the down payment and that the broker knew the buyer was financially unstable due to a lack of funds prior to closing.

Here, the broker is liable for the seller’s losses on the carryback note. The broker failed to disclose the buyer’s adverse financial status to the seller prior to closing the sale. The seller’s broker has an agency duty to advise the seller about the buyer’s financial capability (net worth) and the likelihood he will timely pay on the carryback note (credit analysis). [Ziswasser v. Cole (1985) 164 CA3d 417]

A seller willing to carry paper needs to know if the prospective buyer has an incentive to protect his equity and is able to make the payments. A buyer’s willingness and ability to make future payments is of great concern to carryback sellers, especially since carryback financing is most prevalent during a falling real estate market (just the market which produces more unqualified buyers).

The seller’s broker has a duty to accurately provide a carryback seller with any credit information he possesses on the buyer, and to either further investigate or advise the seller to further investigate the buyer’s creditworthiness under a further-approval contingency.

More specifically, brokers have an affirmative duty to make a written financial disclosure to the carryback seller about the buyer’s creditworthiness on the sale of one-to-four unit residential property. [See first tuesday Form 300]

The credit disclosure is mandated on all sales of one-to-four unit residential property when the seller is to carry back any part of the sales price. [CC §2956 et seq.]

A broker’s misrepresentation or omission of a buyer’s future ability and willingness to meet the terms and conditions of a seller carryback note not only subjects the broker to money damages, but to the possible suspension or revocation of his license as well. [Calif. Business and Professions Code §§10176, 10177(c),(g),(j)]

Defacing a previously signed document

A broker or sales agent must not alter a document once it is signed without that party’s prior consent.

Consider a broker who submits a buyer’s signed offer to a seller. The seller will not accept all the terms contained in the offer, but will sell if the buyer agrees to some “minor” changes, including a larger down payment and a shorter escrow period.

The broker strikes out the downpayment amount and the escrow period provisions by crossing them out on the purchase agreement form signed by the buyer, an activity called defacing. The seller’s changes are then entered by interlineation to replace the original entries. The seller signs the acceptance provision on the form, and initials and dates all the changes.

The original offer as altered on its face is then presented to the buyer for his approval by also initialing and dating the changes.

The altering of a signed document is wrong. The broker should have prepared, and the seller should have signed, a separate counteroffer form containing the changes. The counteroffer would then be presented to the buyer for acceptance.

Here, “acceptance” by the seller of the buyer’s offer was not an acceptance at all. The alterations written on the buyer’s offer constituted a rejection of the offer, by way of a counteroffer using an improper technique called change-and-initial.

The counteroffer creates a new offer that good brokerage practice requires be presented on a separate form. By using a separate counteroffer form, the broker promotes clarity for interpreting the contract should a dispute arise. More importantly, the defacing of a signed document has been avoided. [See first tuesday Form 180 accompanying this article]

The “change-and-initial” method of creating a counteroffer often leaves uncertainty as to when and who placed which terms in the contract. Also, the contract will be interpreted against the individual creating the uncertainty, typically the seller who countered by first defacing and then initialing a signed original document – all with the broker’s unethical assistance. [CC §1654]

Analyzing the counteroffer form

A counteroffer may be made when the offer submitted is not acceptable and must be rejected or allowed to expire unaccepted.

A rejection can occur by a written rejection which states no counteroffer will be forthcoming, or by submitting an alternative offer, called a counteroffer . After a rejection, the original offer can no longer be accepted to automatically form a binding agreement. [See first tuesday Form 184]

A rejection by presenting a counteroffer occurs in one of two ways:

  1. An incorporation in a new offer of all the terms in the offer submitted which are then modified by alternative or additional provisions entered on the counteroffer form.

or

  1. A preparation of an entirely new offer on a fresh purchase agreement form (or exchange form, etc.) which is then submitted as a counteroffer.

The counteroffer form has four sections, each with a separate purpose explained as follows:

  1. Reference to prior offer : The purpose of a counteroffer form is to reference a prior written offer and state the terms and conditions contrary to or in addition to those in the prior offer which are agreeable to the person making the counteroffer. Thus, the prior offer is identified by the type of agreement it is, its date and the property in question.
  2. The agreement offered: The offer submitted and rejected by a counteroffer has all its terms and conditions “incorporated” into the counteroffer. Terms which are additional to or in conflict with those of the prior offer are then entered on the counteroffer form to create the terms and conditions of the new offer. Any terms in conflict with the terms of the prior offer override and become the terms of the counteroffer.
  3. Time for acceptance : The counteroffer expires at the time and on the date stated for expiration. If no specific date is given, a reasonable time to accept is permitted, unless the counteroffer is first withdrawn.
  4. Signatures : The party making the counteroffer signs and dates the offer. The brokers sign the counteroffer only to acknowledge their participation in the negotiations since they are not parties to the offer or its acceptance.

Preparing the counteroffer

Identification: Enter the date and the place the counteroffer is prepared. This is the date used to reference the counteroffer.
Facts:
1. Prior offer: Check the box that identifies the type of agreement which was submitted and rejected by the counteroffer.
1.1 Identification date of prior offer: Enter the identification date from the submitted offer which is being countered.
1.2 Maker of prior offer: Enter the name of the party who made the offer that will be terminated by the counteroffer.
1.3 Property identification: Enter the legal, common description or assessor’s parcel number of the property involved in the transaction.
Agreement:
2. Counteroffer to terms and conditions : This clause accepts all terms of the prior offer or counteroffer, subject to the modifications desired. Enter the additional and alternative terms desired. When signed and submitted, the counteroffer constitutes a rejection of the referenced offer and is a new offer on an alternative set of terms.CAUTION: Some purchase agreements fail to include the brokerage fee in the terms of the offer. When the brokerage fee is set out beneath the buyer’s signature in an offer, include the brokerage fee in the counteroffer and do not sign the acceptance provision of the original offer – it has been rejected. first tuesday’s forms include the brokerage fee in the buyer’s offer, so any counteroffer referencing the prior offer automatically includes the brokerage fee.
3. Time for acceptance: Enter the date and time period for expiration of the counteroffer.
Signatures:
Buyer’s broker identification: Enter the name of the buyer’s broker, address, telephone number and the agent acting on the broker’s behalf. Seller’s broker identification: Enter the name of the seller’s broker, address, telephone number and the agent acting on the broker’s behalf.Buyer’s signature: Enter the date, name, address, telephone number and fax number of the buyer. Obtain the buyer’s signature.

Seller’s signature: Enter the date, name, address, telephone number and fax number of the seller. Obtain the seller’s signature.