Bidding wars are back, and many sellers flooded with multiple offers are responding in kind--accepting more than one offer and instructing attorneys like me to send out multiple contracts.
For sellers, two are better than one. There is never a guarantee that the buyer’s accepted offer will ultimately result in a signed contract, as neither party is bound until fully signed contracts have been delivered. In the meantime, the buyers may find another apartment they like better, or decide against signing after learning something during due diligence. If the deal doesn’t go through and another contract is out, presumably it will take less time to finalize a ‘backup’ buyer.
For buyers in a multiple contract situation, it's a race to the finish line—one they’re sometimes not even aware they are in. Many are upset when they find out. But do they have a right to be?
Here’s the deal.
1. It’s perfectly legal for a seller to send out multiple contracts
When a seller accepts an offer on an apartment, the verbal acceptance is not legally binding; it’s merely a prelude to the possibility of signed contracts. This accepted offer may be contingent on various events occurring, like a satisfactory diligence review.
Generally, a deal is not a deal until a contract has been signed by both buyer and seller. Until then, there is no legal obligation between buyer and seller, and no one is bound by anything.
A seller isn’t even legally obligated to tell buyers that there is more than one accepted offer or that contract negotiations are proceeding simultaneously.
Strategically speaking, in fact, it is probably not in the seller’s best interest to be upfront, as many buyers walk away from situations like that. They may have no interest in continuing to pay their lawyer to conduct due diligence and negotiate the contract and incur other expenses if they know the seller is pursuing other buyers.
2. …so is it fair?
The answer to this question depends on your own moral compass.
Most buyers understand that before a contract is signed, a deal can hit the rocks over anything from financing contingencies to the closing date to some previously unknown defect in the apartment. However, most buyers also believe that while an accepted bid is not binding, it is an agreement to proceed in good faith toward a fully executed contract.
Perhaps most upsetting, from a buyer’s point of view, is when sellers fail to disclose the fact that they’re still playing the field after a bid is accepted. It’s not only an issue of trust and fair play, it’s one of finances. A buyer may have incurred expenses—like hiring a lawyer and a property inspector—they may have chosen not to if they had known otherwise.
Sympathetic to this point of view, some sellers I have worked with compensate disappointed buyers for these types of costs and consider that a fair compromise. Others suffer no qualms at all. They feel that until a contract is signed, they really don’t know if the buyer is serious about making the deal happen. If a signed contract comes back from someone else first, so be it.
3. What to keep in mind if you decide to play
Plenty of buyers walk away when they learn that the seller has sent out multiple contracts. Plenty of others stay. If that includes you, make sure your attorney knows that your deal needs to take priority and time is of the essence—because the first signed contract wins. Also, ask yourself what you can do to improve your offer. Raise your bid? Waive a mortgage contingency? Accept the seller’s demand for a specific closing date? Allow the seller to rent back for a short period of time if the seller needs to?
As for sellers, fairness issues aside, there is a real risk of losing buyers over this. Make sure you are confident that if you lost them all, you would have more buyers offering more money the next day.
While it is generally legal for sellers to entertain multiple offers and send out several contracts at once, it may not suit every seller's moral considerations. Either way, the market will usually dictate what each side can get away with. As always, it suits sellers (and buyers) well to be well prepared and informed ahead of time.
Real estate attorney Adam H. Stone, Esq., has been representing buyers and sellers of NYC property for over 15 years. He is a partner in the law firm Regosin, Edwards, Stone & Feder.
Also by Adam Stone:
What's included--and what's not--when you buy a NYC apartment
3 questions you (and your lawyer) should ask before buying a NYC apartment in a post-Sandy world
12 tips for buying new construction with confidence
Why you might want to buy your next place under an LLC--even if you're not famous
Sellers: Here are 6 tips for crafting an (almost) airtight deal
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