A Verbal Agreement, Is Not An Agreement

This should not come as a surprise to anybody.

But time and time again, and especially through these unrealistic real estate TV shows, I see verbal offers and verbal negotiations resulting in verbal agreements, which are NOT agreements!

Sure, it might come together in the end, and you might not get burned.

But remember that old adage, “Fool me once, shame on you, fool me twice shame on me….”

VerbalMouthGirl

The idea for this post came while watching an episode of “Million Dollar Listing: New York,” where the character, Ryan, sells a multi-million dollar property, verbally.

He “negotiates” (I put that in quotations because they make negotiating seem foolish on these TV shows) over the phone with the cooperating agent, going back and forth, verbally, on price, and then they finally reach an agreement.

The next day, the cooperating agent calls Ryan to tell him that the buyer will not be proceeding with the deal.  Even though they had a “deal” the day before, the contract was never physically signed.

Disappointed, and frustrated, Ryan says to the buyer’s agent on the phone, “You can’t do this to me!  This can’t happen!”

Two things I want to say to Ryan here:

1) He didn’t do it to you.  You did this to yourself.

2) It can happen, and it will continue to happen, if you continue to use your tongue instead of a pen.

I’d like to delve into ancient history for a moment: my university curriculum, that is…

The most interesting and insightful course I ever took was one on “Contract Law,” and the instructor, who was a lawyer, used to put us through the ringer with examples of what is a contract, and what isn’t; what is an offer, and what isn’t.  His theatrics were overdone, to some people, but to me, it demonstrated just how complicated contract law can be.

He used to hold up a textbook and say, “I’ll buy your textbook for ten dollars.”

Then he’d ask if that was an offer, or a statement.

If somebody said, “Okay, deal,” he wondered aloud if they had a binding agreement.

“I’ll buy your textbook for ten dollars,” could be a statement, he would explain, as if to say, “I would buy your textbook for ten dollars, if criteria A, B, and C are met.  “I’ll buy your textbook for ten dollars,” could also be an offer, if you had ten dollars in your hand, and were extending it, while reaching for the textbook with the other.

Imagine four months of theatrics, examples, and picking apart each and every word.

And in the end, it all came down to three simple words: Statute of Frauds.

The Statute of Frauds is part of the first known Act to be passed in modern civilization that dealt with the enforcement of contracts. In 1677, in the Parliament of England, something called the “An Act for Prevention of Frauds and Perjuries” was passed.  The basic premise of this Act, and every subsequent act after it: an enforceable contract must be in writing.

There are exceptions to the rule, of course.

There are many cases where a contract does not have to be in writing.

But maybe the childish saying “better safe, than sorry” has to be brought up here as well.

A “handshake” agreement is binding, legally speaking, in many jurisdictions.  But if one party backs out, there’s a legal mountain to climb in order to prove that a verbal contract was agreed upon.

Here’s an interesting case study that I found online:

“Oral contracts, when made correctly before witnesses, can be enforced. For example, in 1984, after Getty Oil was sold to Pennzoil in a handshake deal, which is legally binding under New York law, Texaco made a higher offer, and the company was sold to Texaco. (Even though the case was tried in Texas, New York law applied.) Pennzoil filed a lawsuit alleging tortious interference with the oral contract, which the court upheld and awarded $11.1 billion in damages, later reduced to $9.1 billion (but increased again by interest and penalties).” (Source: Wikipedia)

There are always exceptions to the rule, and the Internet is full of case studies like this.

But for the sale of real property, the contract must be in writing.

One of the first things I was ever told in real estate by my mentor a decade ago was, “Don’t ever negotiate verbally.”

Having said that, people in my business do it all the time.

Sometimes you do it because it’s to your advantage, and other times you do it because it’s a time-saver.

But I believe that the seriousness of a person’s offer or counter-offer can be determined by whether they are negotiating verbally, or on paper.

The basic tenets of contract law tell us that if Party-A submits an offer on a property, and it is counter-signed or “signed-back” by Party-B, then the original offer that Party-A submitted is null and void.  For example, a buyer offers $350,000 on a condo, and the seller signs back at $360,000.  This means that the seller has rejected the original offer of $350,000, and could not legally accept that offer after the fact.

This is how you can often gage the seriousness of an offer.

If an agent calls me and says, “We want $360,000 for the property, and we’re not going any lower,” it’s meaningless to me until they physically sign back at $360,000.  Until I receive paper, my original offer stands.  Why would I start negotiating against myself?

If the agent signs back at $360,000, then I know they’re serious.  They have rejected our original offer, and they’ve done so knowing that they can’t get that offer back.

When it comes to making an agreement in the trade of real estate, the contract must be written, and acceptance must be on paper before any “deal” is struck.

Once again, however, we see events to the contrary all the time.

When an agent calls and says, “Congrats, we’ve got a deal,” it means nothing until the Agreement of Purchase & Sale is signed, and delivered.

This happens all the time, and I caution any agent, new or experienced, to take a cooperating agent at their word.

I’ll be honest – if I know the agent, and I have worked with them before, and they say, “Hey David, we just signed it up, I’ll email you the accepted copy shortly,” then I’ll tell my clients, “Congrats, we have a deal – I’m just waiting on the paperwork to make it official.”

But if I’m dealing with somebody I don’t know, I tread very, very carefully…

When I was younger, I got burned in this area pretty badly.

I was dealing with a very well-known agent (a fridge-magnet king…), who told me on the phone, “We’ve got a deal, but I can’t get it signed until tomorrow morning.  You have my word, this deal is accepted,” he said.

I told my buyer-client we had a deal, figuring that this well-known agent was trustworthy, only to get a call the next morning whereby the agent said that the seller wanted the deposit increased from 5% to 10%, and wanted to insert a bizarre clause about the deposit monies going directly to the seller in the case of default (which contravenes the Real Estate & Business Broker’s Act, but that’s another story…).

The deal fell apart, and I was left wondering why I was so foolish.

Bottom line: a deal is not a deal, until the paper is signed.

I don’t care who you are, who you know, and who you’re dealing with.

There is no such thing as a “verbal agreement” in the sale of real estate.

Real estate television shows on HGTV, Women’s, Slice, and the like, have to be seen as little more than “entertainment,” otherwise you’re going to pick up some very nasty habits.

Maybe these shows edit out the nitty-gritty, but maybe they also skip entire steps.  Or maybe, just maybe, they’re about as “real” as The Hills and other completely scripted features that are showcased as instructional instead of fiction.

A lawyer might argue with me, and point out a scenario in which a verbal agreement for the purchase and sale of real property could be binding, but I’d be quick to ask, “What legal hoops have to be jumped through in order for the buyer or seller to be remedied?”

Would you spend three years and $100,000 in legal fees chasing a $20,000 deposit cheque?  I didn’t think so.

The naive and disappointed person who complains, “…..but I thought we had a deal,” need only look to him or herself for the reason the deal fell apart.

Get it in writing.

And the next time you watch “Million Dollar Listing,” just remember that this isn’t how real estate is really sold.

For real…

2 Comments

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  1. Craig says:

    What if a verbal offer was accepted the following day from the seller in a text message clearly stating that the offer of x amount of dollars would be accepted? Would this not be offer excepted in writing/

  2. Jeremy says:

    My friend sold his house in the Hollywood Hills on Million Dollar Listing LA recently (via Josh Altman). I’ll have to ask him how real the show is.

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