FINE PRINT

3 reasons why real-estate deals fail

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Posted on Feb 25 2020

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Many real-estate deals are discussed. But few reach the finish line. That’s because each deal involves a series of hurdles, any one of which can upend an otherwise promising deal. Below are a few common scenarios that either derail a deal before it’s signed or blow it up after the ink has dried.

Not adapting to changing market conditions

The tide rises and falls. The economy heats up and cools down. And the real-estate market ebbs and flows. A few years ago, for example, the real-estate market was blazing. Now it’s lukewarm, thanks to a series of short-term challenges, the most recent being the coronavirus cratering tourist travel from China. When demand is high, prices soar. When demand is low, prices plummet.

Because of these vicissitudes, sellers who don’t reduce their price when the market cools will have trouble selling their property. And buyers who don’t open up their wallets during hot markets will struggle to get any new properties.

On Saipan, the issue plays out more commonly on the seller’s side. Some sellers act is if the market is always booming. And they price their property according to sunny rumors of improbable prices received by others. Or they follow a neighbor’s unrealistic asking price even though the neighbor will likely never sell at anywhere near that price.

Of course, there’s nothing wrong with trying to get top dollar. In fact, that should be the goal. But if the number is too disconnected from the market, sellers may have to wait years or decades to find that rare buyer willing to overpay. For many sellers though, the point is to convert their land into cash now, not years or decades later. These people need to price their land according to the current market, not rumors.

Letting emotions run the negotiation

When we buy land, it’s a commodity. We look at the cost. We analyze the benefit. And then we calculate a price. When we sell land, it’s a brand. We think about our memories and how it makes us feel. And then we set a price.

The divide is significant. Buyers act like consumers wandering the aisles of Walmart seeking the best value. Sellers think like shoppers strolling through a Louis Vuitton store expecting to pay a premium for the emotion and experience of owning an LV bag.

As a result, buyers and sellers view transactions from different vantage points. Buyers want to pay based on impersonal factors like location and how much rental income a property can generate. Sellers, meanwhile, want a premium for the emotion and memories they’ve associated with the land.

How this disconnect plays out depends on the market. In a seller’s market, sellers can move their property at a premium because demand is high. In a buyer’s market though, sellers will struggle to sell because demand is low.

Failing to disclose material facts

We’ve just covered two common causes for why parties fail to agree on a price. Now let’s talk about a frequent factor for deals that implode after the contract has been signed—failure to disclose material facts.

As a general rule, sellers need to disclose important information about their property to a buyer—even if the buyer doesn’t ask. Unlike the military’s old don’t-ask-don’t-tell policy, sellers need to err on the side of disclosure. The failure to do so breeds disputes and opens sellers up to charges of fraud.

What kind of things must you affirmatively disclose? Anything material, which is legal speak for any facts that would have a noticeable effect on the sales price if both sides knew about it.

Let’s look at three examples.

Example 1: You are selling a house with plumbing issues that would not turn up during a casual inspection. Do you need to disclose it? Yes. Plumbing is important. And it would be hard for the buyer to uncover the problem until after they bought the house.

Example 2: You are selling empty land, and the road leading to your property runs over someone else’s land. Do you need to disclose it? Yes. Getting to and from a piece of property without trespassing on someone else’s land is one of the fundamental rights that a buyer is acquiring.

These kind of access issues pop up frequently with family lots where the family allows each other access over each other’s land. But once an outsider owns a piece of the family land, they may not get the same deal.

Example 3: You own an apartment building, and the key tenant is late on payments or threatening to leave. Do you need to disclose it? Yes. Rental income from that tenant is an essential factor in the sales price. So, if there’s a chance that the rental income will dry up, it would reduce the sales price.

Want to learn more?

Real-estate transactions can be complicated. There’s a lot to know. And plenty riding on getting it right. But, fortunately, if you want to improve your chances of being in the group who gets it right, you’re in luck. I, and several other speakers, will discuss some of what you need to know during a free informational seminar this Saturday, Feb. 29, from 9am to 11am at the Joeten Kiyu Public Library. It will cover common real-estate issues in addition to probate and estate planning. Come check it out.

This column is for informational purposes only and is not intended to be taken as legal advice. For your specific case, consult a lawyer.

Jordan Sundell | Author
Jordan Sundell is a lawyer primarily practicing business, real-estate, estate-planning, and asset-protection law. He formerly worked for the CNMI Supreme Court and Bridge Capital and is now general counsel for several real-estate companies, including JZ Group. His columns—focused mainly on real estate, small business, and estate planning—are published every other Tuesday. Be sure to like the Fine Print on Facebook! Contact Sundell via this newspaper at editor@saipantribune.com or 235-6397/235-2440.

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