Acceptance Period (aka Inspection Period) Tips and Warnings
Acceptance Period – Can a Few Hours Make a Difference?
The Acceptance Period (Inspection Period) on a Purchase and Sales Contract is there for a couple of reasons. Primarily it gives the potential buyer a sense of urgency to sign the contract or pass on it. This gives the seller the opportunity to accept another contract if the original buyer can’t make his mind up. It also covers if the buyer is toying with the seller in order to resell the property himself before he actually obligates himself to the contract.
We recently had a situation where the Student (seller) gave a contract to a very motivated buyer for a property worth over $500,000. The seller gave the perspective buyer a contract with the agreed to terms but with an Acceptance Period of only a couple of hours. I am not sure why this time period was chosen but it later turned out to be a critical mistake. The contract was signed and returned to the Student. All seemed well especially when the EMD of 10% ($50,000+) came into the closing/escrow agent as planned.
However, things started to go wrong before the end of the short acceptance period. The property had two parcels (with different folio numbers). The Student wanted to sell the second parcel separately that was raw land to the buyer. The buyer didn’t want to pay for it but wanted it to be included in his original purchase price. This conflict was brewing as the end of the acceptance period was looming. The buyer was just not satisfied with the result.
Finally the buyer said he cancelled the contract. However, he did so after the acceptance period was over therefore technically forfeiting his large deposit. The Student had the correct clauses in his contract. The clause allowed the escrow agent to automatically release the EMD to the Student without written approval from the buyer. The Student authorized the escrow agent to release the EMD. The agent agreed because of the contract clauses.
The buyer threatened to file a lis pendens against the Student’s contract. However, this contract was a B – C contract and the Student was not yet in title so this would be a waste of time and money for the buyer. The buyer then tried a different tactic by saying that the contract was invalid because it was signed after the Acceptance Period had lapsed.
This is a rather weak attempt but the buyer tried it and threatened the escrow agent with a law suit which scared him. What should have happened was the EMD should have been paid to the Student and the buyer and Student go to court to resolve the issue. What happened is the Student, buyer and closing agent agreed to close the transaction with the Student giving a price reduction by the closing agent reducing their fees. The buyer came away with the best part of the deal and all because of verbal intimidation, not legal grounds. The second parcel was not included in the deal and will be sold by the Student in the future which will become the profit on this deal.
What was not mentioned was that the Student would have been responsible for a $30,000 EMD to the original seller of the property. This was because he exceeded his acceptance period because he believed his end-buyer would close or he would keep the end-buyer’s deposit if he didn’t close. He did not have the money for this deposit and that was part of his decision to fold to the end-buyer’s demands.
In summary, your contract is very important to your investing career. Learn what the various clauses mean and how to protect yourself from things going bad before the acceptance period is over, after it is over and even at the closing. A little pre-planning can make an incredible difference when you need it the most – in contract disputes. Knowledge will keep you from being bluffed out of a deal and maybe give you the edge in bluffing your buyer/seller if the opportunity presents itself.
I believe the better way to handle this problematic issue is to send the contract to the perspective buyer but DO NOT SIGN the contract. Wait until the contract comes back signed and with the Earnest Money Deposit (EMD). The contract may stipulate that the buyer can have a number of days to put up the EMD. However to protect yourself, the EMD should be wired into your escrow agent.
Once you have the EMD and the signed contract by the perspective buyer, then and only then should you sign the contract. The inspection period will start when the last party to the contract signs. This is unless you stipulate it starts at a different time in the contract clauses in your contract.
To your limitless success,
Real Estate Mentor Program Founder