[Music]
Hello everyone and Welcome to another
episode of Selling Greenville your
favorite real estate podcast here in
Greenville South Carolina I am your host
as always Stan McCune realtor here in the
upstate of South Carolina and you can
find all of my contact information in
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show and so you guys can play a small
role in doing that and I would
appreciate it so very much today we're
going to be talking about the contract
change that happened in the state of
South Carolina in the middle of June I'm
recording this in the middle is of
August and so I've now had two months of
this new contract under my belt belt
and we did an episode we've actually
done a few episodes on thisin the
leadup to the contract going live but
the long story short is if you in case
you didn't listen to those I'm just
going to summarize real fast here we
switched recently to a do diligence only
contract what this means there used to
be multiple options that buyers had for
an inspection period and now they don't
have multiple options they have a due
diligence period and the time period
of the due diligence period how long it
class it can vary it can change
depending on the actual the whatever
the the buyers and sellers actually
agree to do during that due diligence
period the buyer can back out for any
reason but the buyer has to surrender a
termination fee if they back out during
that due diligence period what is the
termination fee how much is it well
that's also up for negotiation just like
the length of the due diligence period
is up for negotiation
and so this has now this has caused a
a lot of I don't want to say headache
but it's caused a lot of Realtors to
have to to change the way they think and
and buyers and sellers have to change
the way they think about looking at
offers and it has had a major ripple
effect because in in the past basically
sellers had to they were obligated under
what we called the repair procedure to
make any kind of major repairs that were
discovered so if there were any
structural issues with the house if
there were any issues with the Plumbing
Systems or electrical systems there were
nine categories any issues with any
of those things the seller was obligated
to address those now under due diligence
that's changed the buyer can back out
for any reason if they forfeit their
termination fee but also the seller is
not obligated to perform any repairs and
that can be scary to buyers in this
market they're just like well what
happens if if we discover that the
houses is about to fall down well you
back out and you lose your termination
fee and so that becomes a major
important point of as a buyer how you
structure your offer and as a seller how
you evaluate the offersthat you may
or may not have so now that we have I
have a couple of months under my belt
both representing buyers and
representing sellers under this new D
diligent system how's it going let's
check in let's talk about what I am
seeing now my first point that I want to
make the the first thing that comes to
mind when I think about this is that
it's awfully confusing to explain to
people who haven't worked with it before
and it's even more confusing because
every state has like their own different
names for it in North Carolina they they
call it due diligence but it works
differently than it does in South
CarolinaI've heard some states refer
to as an option period it's just like I
and I don't do I don't practice real
estate in these other states so it's
like I can't if people are like well is
it like like you know the option period
that we have in our state I'm just like
I have no idea all I can do is explain
what it is here in South Carolina and
you can tell me whether or not it's
comparable to what it is in your state
but it's confusing for people coming
out of state it's confusing for people
here in South Carolina that are just
doing a normal real estate transaction
it's like okay so there's earnest money
that the buyer has to pay UPF front but
then they don't have they don't get
their earnest money back unless they
terminate during the due diligence
period but then if they terminate during
the due diligence period then then
they have to pay a termination fee and
it's just
confusing but that being said repair
procedure was also very confusing it was
it was confusing to people to try to
explain the nine categories that sellers
were obligated to repair and then how
there would then be debates over whether
you know is a broken Outlet does that
mean that the electrical system is is
completely you know in need of repair
you know there were just so many key
words in that repair procedure section
that ended up creating really more
headache in the end for for all parties
so it's always kind of these
inspection and repair related parts of
of the contract in South Carolina have
been confusing for a while now and so
that hasn't necessarily changed it's
just a different type of conversation
than what it was before very different
type of conversation I'm having now it's
focused more on money and when you might
lose it or when you might get it back
versus in the past it was mostly focused
on what are the sellers obligations
under this contract well now there are
no seller obligations outside of
conveying the home with a with a clear
title so that's something that
immediately comes to mind when I think
about this is that I've had to
completely change you know when I'm
talking to a buyer or seller for the
first time I have to completely change
how I approach that conversation trying
to explain what is going to happen
under the due diligence period now
one thing that I've been tracking very
closely is what are we seeing what have
we seen these past two two months and
change as far as like what buyers are
offering for their termination fee
because again that's the rub right when
you're in your due diligence period if
you back out during that period of time
you have to forfeit your termination fee
now for earnest money which is the
one that you you pretty much buyers
pretty much always get back their
earnest money unless they just
completely default on on the contract in
some way or another but in the state
of South Carolina it's pretty pretty
buyer friendly on the earnest money
front just in my experience with
earnest money our standard is about 1%
of the purchase price so for a $300,000
home standard standard earnest money
would be
$3,000 with the due diligence
termination fee there isn't a standard
yet but it seems like most buyers are
offering less than the earnest money so
most buyers are offering less than 1%
and I predicted this if you go back and
and listen to my previousdue
diligence episodes I anticipated that
buyers would start with being more
conservative because that's money that
you're on the hook for and unlike the
earnest money which is pretty easy for a
buyer to get back even if they
completely default I don't want to say
it's easy for them to get back if they
completely default but it's a
possibility at least that they could get
it back this termination fee the way
this contract is structured you aren't
getting it back the the way the language
is you you have to pay the full amount
there is no negotiating it is you were
saying I will pay this amount if I back
out during my due diligence
period so there is not yet a standard
for how much that amount is and what
I'm seeing mostly is buyers putting 1%
for the earnest money and something less
maybe a half a percent or something like
that for the termination fee now what
about sellers how are sellers responding
to this I'm seeing on the flip side that
sellers are putting a ton of weight on
the amount of the termination fee this
is becoming a major major point of
assessing offers like it's it's really
right up there now I think with the
purchase price the purchase price is
always going to be number one and
then you know the appraisal contingency
is up there as well the termination fee
is right up there too so now I feel like
these are the three things that sellers
are really zeroing in on purchase price
whether there's an appraisal contingency
or not and what the termination fee is
for the due diligence period because it
shows you how much skin those three
things tell you how much skin the buyer
has in the game now on a recent
listing to give an example I had four
offers that came in one of them was
dramatically higher than the other but
remember the appraisal and the
termination fee are important it had a
full appraisal contingency and this home
would not have appraised for the price
that that they had under contract for it
would not have appraised but the
other so so that was a difficult sell
but then the the real death now for the
offer was that it then it had z turn a
fee the buyer could back out during
their due diligence period for any
reason and and so so it only had one
of the three those three things were
attractive it needed to have at least
two of the three things be attractive
but really A Z termination fee in in
this market that's still a seller Market
that's just those offers are just not
going to get accepted in multiple offer
situations now if that had been the only
offer maybe maybe it could have been
accepted I would have countered and
tried to get them to have some skin of
the game tried to get them to have at
least some sort of termination fee but
ultimately the seller went with a lower
offer that had an acceptable termination
fee it still had the appraisal
contingency but it hada termination
fee that was more acceptable on the
buy side I just had a client that
recently went under contract that did a
large termination fee so it was a
roughly $500,000 house so they money was
in the $5,000 range and they went with a
they really wanted the house and the
house was in good condition so they went
with a
$110,000 due diligence termination fee
and here's what's really interesting
it happened so it was a multiple offer
situation which was why they they wanted
to go so
aggressive it ended up that a cash offer
came in for a really high amount okay it
wasabout 20 $1,000 above what the
house was listed for but that cash
offer I don't know what the amount was
but the termination fee was
substantially less than
$110,000 and so the listing agent
actually called me up and they said hey
we've got a a cash offer in hand for
this amount which is higher than your
offer but my client likes that your
termination fee is much higher than
theirs they're they're very cautious
they want them they want this to be more
or less a done deal if your client is
willing to go up even though their offer
is financed if they are willing to go up
and by the way they had to wave their
appraisal contingencies so again they
they had two of two of the things that
we needed the the high termination fee
and waving the appraisal contingency
because they had enough money in the
bank that they could do that and and
this listing agent said they will accept
your client's offer if they match the
price of the cash offer that we have in
hand now I don't know if that
resonates with you but let me say this
never in my career have I seen someone
accept a financed offer of the same
price over a cash offer I have never
seen that and the termination fee ended
up being a major equalizer and of course
again coupled with waving the appraisal
contingency I don't know if this would
have happened if if they had required an
appraisal contingency as it was it was
the it was the right move because the
lender didn't end up even requiring an
appraisal so it was perfect but they
they ended up being able to do something
that I have never seen in my career beat
out an equal cash offer on the basis of
their termination fee and so I think
that that's awesome it's another tool in
the toolbx for buyers trying to win out
in a multiple offer
situation and for both my buyer and
seller clients what what I'm trying to
help them to understand is really we
need to consider the risk reward of
offers and of your your termination fee
and due diligence period and all of that
based on the the condition of the home
the condition of the home really plays a
huge role in in my opinion into what
buyers and sellers should be considering
when they're making offers or looking at
offers so for instance is a home not in
great condition if I'm a seller selling
a home that's not in very good condition
condition I want a higher termination
fee like I'm that's that becomes a very
big deal to me because I want to make
sure that the chance of a contract
falling apart on the basis of its
condition is really really minimal
and if it does fall apart at least you
get something out of it and you know
again the homes that typically end up
falling out they end up not get into
closing tend to be homes it's it's a
much higher rate with homes that aren't
in good condition so if I'm a seller I'm
really taking that into consideration
and looking for those higher termination
fees and putting substantially more
value on contracts that have higher due
diligence termination fees than those
that
don't if I'm a buyer looking at a
home that's not in good condition
obviously the ideal is to do a lower
termination fee although that may mean
you get out bid by someone else willing
to take more of a risk and so this is
a very important detail that that I've
alluded to but not said as explicit ly
in competitive offer situations a
buyer can now get out bid in multiple
ways earnest money the 1% has kind of
been the standard and even buyers going
like well above that that hasn't
traditionally like really moved the
needle very much for sellers because
like I like I've said a few times
usually buyers are able to get all or at
least part of their earnest money back
and they can hold up a transaction on
the base of the earnest money there
there's a lot that that can go into that
but the the termination fee does move
the dial because that that is something
that the buyer is going to Forfeit if
they terminate the contract during their
due diligence period And so now you
can get out bid both on the price and on
the termination fee or you can be the
one outbidding others on the price and
the termination fee so there are now two
numbers that are really really important
whereas in the past there was really one
because the earnest money we just always
kind of assumed it was just going to be
roughly that 1% and and we will continue
to operate under that it appears that
the market is continuing to to operate
under thatmoving forward and so
to to go back to if I'm a buyer looking
at a home that's not not in great
condition I I you need to be careful
you need to be careful with that
termination fee you might end up with a
home that needs to just be torn down or
has some major issues and now you're on
the hook for several thousand
that you don't want to have to pay
because it's like the seller they they
need to be a they need to address these
things but the seller might not be
willing to do that and so that's you
have to weigh the risk and the reward I
think my clients that are more
knowledgeable about construction and
home conditions and whatnot that have
you know a lot of experience maybe
flipping houses or or buying and selling
houses I feel more comfortable with them
going higher on a termination fee for a
home that needs work than I do for
clients that are first-time home buyers
also a major consideration is obviously
how much money do they have in the bank
I've had some first-time home buyers
that are like having to to use up just
about all of their Savings in order to
make a home purchase which you might
say well they shouldn't do that well
I'll say that I'm not a financial
adviser and I don't pretend to be one
but that is something that when I have a
client that does that I know doesn't
have a lot of money in the bank I'm I'm
going to to say you know hey are you
sure that you want to put yourself at
risk for losing you know3 $4,000 during
your due diligence period how
comfortable are you doing that and so
these are all things to consider and
again this is a big shift from the past
because the termination fee is very
clearly being weighed higher than
earnest money by sellers at this point
andand and so in these multiple
offer situations that termination fee is
really really important how does the
strategy change with with a home that's
in good condition right we've been
talking about homes that aren't in good
condition what about the ones that are
in good condition well the strategy
certainly can change in these instances
on the sell side if I'm a seller
if I'm a listing agent and I'm confident
about the home's condition I'm less
concerned about accepting an offer with
the highest termination fee because the
the likelihood of people backing out for
a home that's in very good condition is
much lower when you're talking about a
home that is in good condition right
and hopefully there won't be a whole lot
of things that show up on an inspection
report maybe some small things if
they ask for repairs hopefully it won't
be a very extensive list and and so
having a a higher termination fee might
not be as important with a home that is
already in good condition that being
said do I feel comfortable with a$ z
termination fee on an offer no we still
want to have buyers have some skin in
the game this is still a sellers Market
buyers need to Pony up and be willing to
take some risks they have to and and if
you get an offer with a buyer that's not
willing to take the riskthat they're
not willing to go to put any due
diligence down or or it's just a very
small termination fee I would be very
skeptical about that buyer might be an
investor that's just looking for a way
to potentially wiggle out or try to
renegotiate the price after they do
inspections who knows but the
termination fee is still important in
these situations where home is in a good
condition but if we have multiple offers
that come in and one of them is a
substantially higher price but the
termination fee isn't the highest I I
wouldn't be as concerned about that as
as some others might be as was the
case with my client thatthat was
able to get the house under contract
because they put a higher termination
fee now I don't know what the cash
offers termination fee was like if it
was like $500 or a th000 or something
like that then that would have caused
some major red flags for me but let's
say their termination fee was like3 or
$4,000 that house was Immaculate and I
would not have as a seller been
concerned about only having a three or
$4,000 termination feein comparison
to a $10,000 one so I I'd like to
know at some point I'll probably ask the
agent once we're past thisonce we've
actually closed on it I'll probably ask
hey what was what was a termination fee
on that cash offer are you willing to
share that with me because that would
be pretty interesting data now on the
flip side if I'm a buyer and a home
appears to be in good condition that
gives me confidence to go with a higher
termination fee potentially potentially
and again as a buyer's agent as a
listing agent I try to mirror the energy
of my clients and I try to mirror the
concerns of my clients if if my clients
are very conservative and and they want
to do XYZ on the termination fee because
they're conservative or if they're more
aggressive they want to do XYZ on the
termination fee all I do is I explain
the pros and cons and they have to make
the decision at the end of the day I
can't I'm not going to tell them you
need to do this termination fee not
going to do it I at the end of the
day they have to make the decision but I
will explain the pros and cons of the
various decision that they'll make so
I feel better if I'm buying a property
going with a higher termination fee if I
already have a pretty good sense that
the home has been kept in good condition
now the devil is in the details here
because some homes can look like they're
in good condition but then have old
roofs AC units that are working but
are are near the end of their lifespan
problems in the crawl space etc etc and
so this is why I go out of my way to
look at all these things when doing a
showing I try to help my clients to see
the roof to see the AC units to to
glance in the crawl space I'm not an
inspector but sometimes I'm able to
identify problems before we even make
the offer I have an eye for it I used to
be an insurance adjuster so I do have
some sort of of an eye for some of these
things and I think that that's very
important that helps the buyer then to
be more confident okay we're good you
know we can move forward without a lot
of concern that there's going to be
major things flag that will just come as
a big shock to us age of the home is
also an important detail here so in the
instance of my client that offered the
$110,000 termination fee that home was
only 5 years old so we know that
everything the home was only 5 years old
at the end an older home even if it's
been remodeled is just at a much higher
risk of having issues that you won't
immediately notied during a showing not
to mention that all the code related
things will be outdated just there's
just a whole lot more that goes into an
older home a lot more risk when buying
an older home than when buying a newer
one a 5-year-old home not a whole lot is
going to is likely to be wrong with it
as long as it's been kept in good
condition now what's interesting is
we actually did findtermites active
termites at at the house now was my
client on the hook for that during their
due diligence period ah great question
thank you for asking that question
there is a separate contingency it it
was separate before and it's still
separate in the South Carolina contract
that deals with wood infestation it's
what we call the cl00 that is the form
that thethat the inspector fills out
that states whether there is some kind
of active wood infestation and so I
never recommend to any of my clients to
ever wave the CL 100 that we have
problems with termites and moisture in
the state of South Carolina
particularly on homes that are on a
crawl space but even slab homes even
though there's almost no risk on a home
that's built on a slab Foundation of
termite or moisture issues I still
always recommend to my clients get that
inspection done it's like a hundred
bucks it doesn't cost very much money
you need to get it done and so I had
clients that they they caught that
they're that the that even in just a
5-year-old home that there were termites
now they hadn't caused any structural
damage yet they hadn't they hadn't
gotten up to that point yet which is
great but they were covered even outside
of that due diligence they would not
have if they had tried to find a way to
back out on the basis of their being
termites in the crawl space we probably
could have found a way to do that on the
basis of the CL 100 thankfully they
didn't they just they agreed that the
seller needed to treat the problem the
seller did and all is
good and and
that actually transitions right into
some of the downstream things that i'
that I've noticed here as far as
how things have changed from the
standpoint of then negotiating repairs
right this has been a big part ofof
real estate in South Carolina for a long
time is the repair negotiation and under
repair procedure there would sometimes
be a lot of back and forth that would
happen I had somesometimes Buyer
Agents would send me likeyou know
five or six pages of repairs that needed
to be done that they thought needed to
be done on the basis of repair procedure
and that was a joke you know it was like
come on we're not going to are we really
going to are you really going to trust
the seller to do five pages worth of
repairs like that's not even a good idea
at that point you just need to to try
to get back out if you think that that
much work needs to be done to the house
but all that to be said that has
really at least from my
experience from what I've seen that
has changed pretty dramatically now
under this due diligence contract buyers
are asking for fewer repairs in general
they're focused on the items that are
really important to them and just asking
for a handful of items not not asking
for five pages of repairs just asking
for here's here's three or four things
that we want to have done and then the
sellers don't have to do those things
but what I'm seeing is that sellers are
being reasonable that they're generally
speaking agreeing to some or perhaps
even all the repairs and so we're kind
of going back to at least with the
sellers while we're in the sellers
Market a bit of an honor System but the
sellers that I have dealt with so far
have been Honorable in that honor System
they've been willing to address things
as long as they're not Ticky Tac they've
been willing to address things that are
important and that's been nice to see I
hope to continue that energy I know
thatprobably sooner than later I'm
going to run into a seller that isn't
willing to do that that is hard to work
with I have had that in the past that
will continue to happen in the future
but for now it's seeming like sellers
are being reasonable they're they're not
just using all of their leverage and
just saying you know even in in that
case with the $10,000 termination fee
like the only leverage that my buyer
client had to you know if a seller
wasn't willing to make any repairs with
the exception of the termite related
stuff the only leverage that that they
had was to back out and forfeit
$10,000 but the s still agreed to do the
repairs that we asked so it that just
makes a big difference in a
transaction I'm recommending to all of
my Sellers hey be reasonable if the
buyer is reasonable it's a good idea for
you to be reasonable for my buyer client
same thing I'm recommending to them
let's be reasonable in these repair
requests because if we ask for 20 thing
for them to do 20 things but really only
three or four of them are important to
you the likelihood that the seller is
going to agree to all of these is pretty
minimal and there's a good chance that
they're going to agree to five or six of
these and that might only include one or
two of the ones that are important to
you maybe not maybe not any of the ones
that are important to you so why don't
we just ask for the ones that are
important generally speaking it's not a
good idea to have a seller doing a bunch
of repairs anyway as I've already
alluded to because they're not going to
do a very good job they're on their way
out of the home they right they're on
their way out so they're they're not
going to treat these repairs as well as
they would If This Were a home that they
were actually living in and repairing
for themselves so all of that is
something to consider I think the ideal
transaction both parties are reasonable
and things just stay on track and we
don't run into any drama with
potentially having to back out or do
anything like that and that is the ideal
so all in all I have been happy with
howthis due diligence system has
worked I'll continue toto monitor
the the situation as I've said in the
previous podcast about this the whether
due diligence is buyer friendly or
seller friendly it it all depends on the
market and a seller's market it's seller
friendly in a buyer's market it's buyer
friendly if we at some point shift to a
buyer's market I think that seeing Z
termination fees could become the norm
right now in the sellers Market
having higher termination fees are
really important in order to win in a
multiple offer situation and and in you
know even in a buyer's market there will
still be multiple offer situations and
that termination fee will continue to to
to be an an important number but
during a sell market like we have right
now these multiple offer situations are
very very common and so being
aggressive with that termination fee is
going to be very important for buyers
moving forward to get the homes that
they want so that's all for today's
episode I hope you guys enjoyed it as
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