Boston luxury condo buyers: Understanding contingencies & liquidated damages
When you submit an offer for a Boston luxury condo, your Offer and/or Purchase & Sale Agreement will most likely have some contingencies, which are conditions of the sale. These contingencies exist to ultimately protect your good faith deposit in the event that you discover, for example, unacceptable condo issues, or your appraised value is less than the amount you’re offering and suddenly you can’t obtain financing.
But let’s back up. When purchasing a Boston luxury condo, it’s required to include a deposit of generally of $1,000 when signing the Offer. After the offer is accepted, in about two weeks, you need to sign a Purchase & Sales Agreement which would include a deposit of three -twenty percent of your purchase price. This earnest money, via a wire or check is placed into an escrow account abd held by the listing broker. In the event you back out of the sale for a reason other than a specified contingency, the seller is technically entitled to retain that deposit for what is called “liquidated damages.”
The primary contingencies in the purchase agreement are typically that of the inspection, appraisal and loan. If you include these conditions and decide to back out due to one or more of them, the sale will be cancelled and the deposit rightfully returned.
Many Boston condo buyers are waiving these major contingencies in the current market in order to be competitive. If they’re doing that, it means that they hopefully fully understand that they need to be comfortable absorbing costs and repairs that may come up unexpectedly in the absence of inspections. Or they are extremely confident in their financing and have no doubt they will obtain their loan. (These Boston buyers typically have purchased condos before and are very savvy buyers/investors.) And finally, if their appraisal comes up short for the value they’re paying, they need to be OK covering the difference between the purchase price and appraised value.
If you’re not quite confident in all of that, it’s best to include the standard contingencies. Even three percent of the price of any Boston condo is a hefty amount, and you won’t be happy potentially losing it to a seller who seeks damages due to a sale cancellation.
The liquidated damages clause is a key home buyer protection. The funny things about it is that sometimes buyers are hesitant to initial the liquidated damages clause, which is optional. It is paragraph in the the Massachusetts Residential Purchase Agreement.
As a buyer, at first glance the liquidated damages clause may seem like you are agreeing to lose your deposit in the case that you should default. However, that is not the case, nor the focus of this clause. The buyer has actually already agreed to lose their deposit if the buyer does not complete the transaction once contingencies are removed because of fault of buyer. This is agreed to in clause regarding the effect of cancellation of escrow on the buyer’s deposit.
What the liquidated damages clause does, in most cases is limit the buyer’s liability at not more than the actually deposit of the purchase price, ion most cases. For this reason, the initial deposit is normally 5% of the purchase price. However, sometimes the deposit can be more, which is why the liquidated damages clause really is an effective buyer protection.
Imagine this…
Here’s a scenario when liquidated damages provides huge protection for a buyer is in the following example. Imagine an escrow for a $500,000 home where something goes terribly wrong and there is a dispute. For whatever reason, the dispute takes up to six months to resolve and the home is tied up in escrow during this entire time. During the course of the dispute the seller is paying property taxes, HOA fees if applicable, and utilities. Also, property values may have dropped during that time frame.
By the time the dispute is solved and the home is freed to go back on the market for another buyer, it is calculated that the seller has lost $40,000 in value and expenses. Liquidated damages clause prevents the seller from going after the buyer for that amount, which is called actual damages. Instead, the buyer’s liability is reduced to 3% of the purchase price, or $15,000.
Take the above example and now imagine that the home burned down during that time period. Now you can really see how much protection the liquidated damages clause provides the buyer with Boston houses for sale.
So by all means, do not hesitate to initial this clause, especially if you are a buyer. It is really in the best interest of sellers to initial the clause as well because it is not a sign of good faith not to do so. It can make a buyer cautious to deal with you because it will make you seem litigious and predatory.
Updated: 1st Quarter 2018