What Are the Dynamics That Lead To Potential Property Buyers Cancelling An Offer to Purchase?
Category News
Buying a property is a very serious, long term commitment and requires a legal contract to be
signed by both the buyer, who offers to purchase the said property, and the seller, who in turn agrees that indeed he/she is selling the property. This agreement of sale is called an Offer to Purchase, commonly referred to as the OTP.
DOES AN OFFER TO PURCHASE DIFFER BETWEEN A COMMERCIAL AND RESIDENTIAL PROPERTY?
There is a difference but the main thing is that they are both agreements to purchase property. For instance, in a commercial OTP, the purchaser is usually given a chance to do due diligence, and fact check in order to ensure or see the sustainability of the commercial business. For instance, there could be a problem with lifts in a building, and if repairing these is costly, the seller may be forced to reduce the price or the purchaser could cancel. Also, in commercial sales there's more time allocated depending on the complexity of the business and what may be required to be investigated regarding the property. For residential properties, the normal financial institutions may give a 100% mortgage bond, but with commercial properties, the funders would require a deposit because the amounts are usually quite high and some commitment is required from the purchaser. Therefore, without a deposit the sale could fall through even after many months, and unfortunately suing the purchaser could drag and cause more financial distress for the seller.
WHAT ARE SOME OF THE LEGAL IMPLICATIONS ENTAILED WHEN ONE CANCELS AN OFFER TO PURCHASE?
As we know, the Offer to Purchase is a legally binding contract and a very important document at that. Therefore, it's crucial that the purchaser should ensure that when they sign it they know what they are signing for, that they should make sure that they are aware of all the defects in the property, which the property practitioner is obliged to disclose, especially since the new Property Practitioner's Act came into effect on 1st February 2022. Most of the time it is the purchasers who tend to cancel, and when they signed the OTP, the agent would have explained the breach clause and the implications should the sale be cancelled. If the purchaser has paid the deposit, this deposit could be used to pay any claims by the affected parties due to wasted time by the purchaser, especially if the purchaser may have played cat and mouse games with other stakeholders.
SOME OF THE INSTANCES WHERE AS A REAL ESTATE PRACTITIONER I HAVE WITNESSED AN INDIVIDUAL CANCELLING AN OFFER TO PURCHASE.
Many years ago, when I was still naive as a young estate agent, I had a purchaser who signed an OTP, I got the seller to also sign, then the client was going to pay cash, but we wanted proof of funds at the time because we did not want to just get going without the necessary checks and balance. So after a while, the buyer said the money was still stuck in investments, but a proof of payment will be sent as soon as it was available. At this stage we were starting to consider other buyers because our client, the seller, was getting jittery and also did not understand this story. Then the buyer offered to pay occupational rent for 3 months upfront, and the seller, at the time being a bit desperate for income, agreed to the arrangement, moved out, and the 'purchaser' moved in. A short lease was signed as the money would be out soon. As you know, when you are busy, 3 months is very short, and it was over, and a new story came. The purchasers claimed there were ghosts in the property that threatened to kill them if they continued staying there, so they wanted to cleanse the house. We all get duped sometimes right? So there was no option at the time but to allow them to 'cleanse' the house, after all, they would be living there, plus, they would have paid cash, the full amount the seller wanted, and we did not smell the rat and as such there was no way this transaction was going to proceed, and after several unsuccessful trips to the property, the occupants disappeared, without a trace. We were fortunate that they did not damage the property badly, but they were professional scammers.
THE REASONS FOR THESE INSTANCES WHERE PEOPLE CANCEL AN OFFER TO PURCHASE.
There are many reasons why the OTP may be terminated:
1. Seller removes some of the fixtures in the house that the buyer saw when they came to view and nothing was said about the removal. These could even be furniture, which may have seemed like it's fixed to the wall.
2. If the seller does not agree to the offer presented
3. Perhaps one of the parties passes on before the transaction is completed.
4. Buyers in a sectional title complex may not have read the conduct rules upfront, or just realized the amount of levies which they are not willing to pay. This would usually be the agent's fault.
5. Many times, there's a buyer's remorse, and these days buyers are given a few days to accept a bank's offer, which other buyers use to sneak away.
6. When verbal agreements were never written down, and there's a dispute about the property and no one wants to take accountability.
7. The interest charged by the financial institution, based on the client's credit rating and other unknown reasons, can also make the buyer cancel.
8. Deceased estates tend to take much longer to complete, and therefore some buyers could try to cancel especially if the OTP is not tight enough.
9. Some buyers can cancel after a thorough inspection of the house and feel it was a misrepresentation.
10. There was a buyer who cancelled because of the agent.
HOW MUCH OF AN IMPACT DOES EDUCATION PLAY FROM A REAL ESTATE PRACTITIONER'S PERSPECTIVE IN GUIDING A CLIENT IN ORDER TO AVOID CANCELLING AN OFFER TO PURCHASE?
Most of us definitely want to have successful sales every month, however, when one is desperate they do not think straight and make mistakes. Such mistakes are where the buyer or even the seller is not fully informed about all the specs of the sale, and they feel let down. It is therefore incumbent upon the property practitioner, to not assume that the client understands everything, but to do the sale in such a way that it is not just about clinching the deal but also imparting knowledge, because it's their expertise. There are many facets in a property transfer transaction, and the Offer To Purchase plays a big role in finalizing all initial agreements to the sale. The responsibility of the property practitioner is to explain thoroughly all the terms of the agreement, and the responsibility of the client is to ask as many questions as possible, and for all verbal agreements to be put to paper.
THE IMPORTANCE OF A CONSTANT LINK BETWEEN REAL ESTATE PRACTITIONERS AND PROPERTY ATTORNEYS IN MITIGATING SUCH INCIDENTS.
I cannot stress this enough. There must always be constant communication and the property practitioner should lead in facilitating this information sharing. The office of the attorney and the real estate agency office administration can do only up to a certain point, and the property practitioner or their assistant, must ensure that both the buyer and the seller are well informed throughout the transaction. Most cancellations can be averted, even if the transaction takes long to complete, because all parties would understand why there are delays or long periods of waiting.
CONCLUDING REMARKS/ADVICE ON THE CANCELLATION OF AN OFFER TO PURCHASE AND WHAT POTENTIAL PROPERTY BUYERS SHOULD BE ON THE LOOKOUT FOR.
For Buyers it is important that they understand all the costs involved, sometimes it is a sectional title, and this means over and above the monthly loan repayment, the buyer must have sufficient money for monthly costs. I also want to repeat the importance of writing things down, especially if these have the potential to negatively impact the sale. Buyers must also understand the area, their neighbours, amenities etc, so that they do not go back to the property and see things they did not anticipate, and then try to withdraw from the sale, cancellation for these reasons could render the buyer liable for wasted costs and other possible claims. We trust that now with the mandatory Disclosure Document, most buyers will be more alert to things they might not have been able to normally think about or detect upfront. So the document will help stretch the mind about what other questions to ask.
Author: Matseleng Mogodi