Changes in the OTP

We  live in interesting times.  I spent four hours in CE (Continuing Education) class this morning —  the mandatory update class on the new Offer to Purchase effective 01/01/11.  Realtors take 8 hours of CE every year; four hours update and any approved four hour elective.  The update always includes changes to forms but this year’s change is especially dramatic.  It changes how buyers make an offer, as well as  the obligations and expectations of both buyers and sellers.

When I began in real estate in North Carolina in 1997, the OTP was one piece of legal-sized paper, front and back.  Two long pages long.  Last year it was 8 letter-sized pages long.  This year it goes to 9 letter-sized pages long, though it’s actually gotten simpler.

For the past several years, there have been two ways to make an offer:  the usual way, called Alternative 1; or as an option contract, called Alternative 2. Now Alternative 1 has gone away, and what’s left is not Alternative 2 –it’s the only alternative!  It’s almost the same as Alternative 2, but the word “option” is no longer used.  Instead, it’s all about Due Diligence.

For a nonrefundable Due Diligence Fee the buyer can “purchase time.”  He gets a 4-6 weeks Due Diligence Period to investigate the property and secure financing.  Then, on a specified date the Due Diligence Period ends and the buyer either commits to the purchase or can walk away, “for any reason or no reason.”   As long as the buyer withdraws by that date, the earnest money is completely refundable. If the buyer withdraws after that date, he or she is in default and will lose the earnest money.

Many other states have been using this option-type contract for years.  It removes the seller’s obligation to “warrant that [everything in the home] is “performing the function for which intended and is not in need of immediate repair.”  That phrase allowed  for a whole lot of  honest disagreement, which led to deals falling apart, which led to disputes over earnest money.  Now buyers and sellers will still negotiate repairs, but there won’t be any fighting over the earnest money.   Before the drop-dead date it’s refundable to the buyer, and after the drop-dead date it goes to the seller if for any reason the buyer fails to close.

In the long term, this way of making offers will be better for everyone.  But in the short term, there’s going to be resistance from buyers, sellers, and agents.  2011 is going to be a very interesting year indeed!