Big Mistake #7: Failing to Understand the Significance of the Purchase Contract or the Meaning of All of Its Provisions
A real estate purchase contract must be in writing and signed by all of the proper parties in order to be enforceable. It must contain all of the essential elements of a contract and should reflect all of the agreements between the parties. Any oral agreements that are not reflected in the written contract may not be enforceable.
It is important to realize that, when you sign a purchase contract, you become obligated not only to buy the subject property but also to do it exactly in accordance with the specific terms of that contract. Very minor, almost unnoticeable changes in the wording of the contract can have tremendous consequences in shifting costs and risks between buyer and seller. If you do not understand every word in that contract but you sign it anyway, you are making a Big Mistake.
If you realize that you do not understand everything in the contract, whom should you go to for help? Well, think for a minute about where the contract comes from and why it is written the way it is.
The “standard form” printed contracts that are used by most real estate offices are drafted primarily to protect the interests of the sellers and their real estate agents. This is a fundamentally important fact that manifests itself in every important section of the typical form contract. In addition, the real estate agent is not an attorney and, therefore, is not qualified to give legal advice on the legal meaning or consequence of contract terminology. Further, the agent normally represents the seller and not you and, finally, if you do not sign that contract exactly as it is presented to you by the real estate agent, he or she may not be able to make the sale and may, therefore, lose the commission on the transaction.
Now, in light of all of these realities, why in the world would a buyer ever rely upon the real estate agent to interpret, advise upon or, even worse, to negotiate the terms of his or her purchase contract?
If you are not able to consult with an attorney before signing a purchase contract, at least put a provision in the contract that makes it contingent upon review and approval by your attorney. Include a reasonable time limit. If the real estate agent advises against that or if the seller will not agree to it, then do not sign the contract. No real estate agent or seller who is operating in good faith would refuse to accept such a contract provision.
In order to have an enforceable sale, all of the terms of the contract must be accepted in writing by all of the parties who have an interest in the property (excluding the lender whose loan will be paid off at settlement). Although it is primarily the real estate agent’s responsibility to determine who are all of the appropriate parties who must sign the listing agreement and the sales contract, the prudent purchaser will make some independent inquiry to determine whether or not there is more than one seller who has an interest in the property.
For example, when someone is separated, but not legally divorced, both spouses will normally have an interest in the real estate owned by either one of them, unless the spouses have entered into legally binding agreements transferring those interests from one spouse to the other. It may not matter whether both spouses were ever on the deed, itself, and there may be nothing in the land records to reflect the marital status of the seller.
Dealing with sellers who are aged or infirm may also present special problems if the seller dies or becomes incapacitated prior to settlement. Properly completing the transfer of title from a dead or incapacitated person can be very difficult, time consuming and expensive.
Although residential real estate is usually owned by individuals and not partnerships or companies, where those types of entities are involved in a sale, it is essential to confirm the authority of the person who signs the sales contract on behalf of the seller entity.
Depending upon how the title paragraph of the purchase agreement is drafted, a buyer may be locked into a difficult situation for several months where questions are raised about the power and/or authority of the seller to convey good title (see Big Mistake #14).
Big Mistake #9: Failing to Describe Adequately in the Contract Which Items of Property Are to Be Conveyed with the Home.
References in the contract to the “property” or to “the purchase property” are intended to encompass all of the property to be conveyed as part of the sale of the home. It is important for both the purchaser and the seller to understand what is and what is not normally included within those terms.
A little legal background is needed to understand the problem. With respect to the sale of a home, there are three types of property that may be conveyed as part of the sale: real property, personal property and “fixtures.” Let’s look at each of these categories individually.
“Real property” includes the land, the house, the garage and all the elements which are permanent parts of the structure.
“Personal property” includes things like chairs, tables, beds, t.v. sets and similar items which are obviously not permanent parts of the structure and which are not normally made part of the sale unless specifically mentioned in the contract.
In summary, then, real property is normally included in the sale and personal property is not. Problems most frequently occur with respect to the third category of property (“fixtures”), because they have some of the characteristics of both real and personal property. Fixtures are things like plantings (flowers, bushes, shrubs, etc.), built-in shelves and bookcases, wall-to-wall carpet, window air conditioners that are “built-in,” chandeliers and other types of light fixtures and, in general, anything that is attached to the real estate by a plug, screw, nail, adhesive or the like.
Do “fixtures” convey with the real estate? In general, the answer depends upon how “permanently” attached the item is to the real estate and how much damage, if any, would be caused to the real estate by the removal of the “fixture.” The more permanently affixed and the more damage caused by its removal, the more likely it would be that ownership of the item would be transferred by the contract for the sale of the home.
In all cases, however, the best policy is not to rely upon a probable court interpretation of what would or would not convey with the house. With respect to any item as to which there might be any question whatsoever, specify in the contract whether it does or does not convey.
Many checklists of potential problem items are available. In fact, many contract forms actually include a checklist within the contract itself, usually on the front page.
Nowadays, it is fairly unusual to find a contract description of the home, itself, which is so deficient that it is not possible to tell which home is being sold. On occasion, however, mistakes still do happen, particularly with respect to inconsistencies between the street address and the legal description and with respect to conveyances of parking spaces which are sold with a home. If a parking space or other similar right or interest is supposed to convey with the sale, be sure to describe it accurately and with specificity in both the contract and the deed.
Big Mistake #11: Failing to Make the Purchase Contract Contingent Upon Receipt of Satisfactory Professional Home Inspections
If you are not a professional home inspector, hire one. Make the contract contingent upon receipt of a satisfactory report. Whether new or used, any home may have a wide variety of physical problems that go way beyond obviously faulty construction.
Do not overlook potential problems like radon, fire retardant treated (FRT) plywood (which may decompose prematurely), asbestos and lead based paint. You might want to ask your inspector(s) to test for these conditions.
In addition to making the contract contingent upon receipt of satisfactory reports from various types of home inspectors, a smart purchaser can make modifications to the standard contract form that will provide additional protections concerning the condition of the home. For example, require the seller to warrant and represent, in the contract, that the roof and basement are free of water leaks and that all of the equipment and systems in the home (plumbing, heating, air conditioning, etc.) are in proper operating condition.
Also, every competently drafted real estate purchase contract includes a termite inspection clause. Make sure that it requires the seller to treat and repair both present infestation and prior damage if any is found. Also, make sure it covers additional structures, like garages, and not just the house itself.
Before leaving the subject of the physical condition of the home, it might be worthwhile to make an observation or two about professional home warranty programs. There are several companies that offer various types of home warranties. No two of these are exactly the same in terms of either the cost or scope of coverage. From my experience, few of these programs are worth what they cost because, typically, whenever a claim arises, the company issuing the warranty attempts, in every conceivable way, to avoid any liability under the warranty.
Since home warranties are nothing more than a particular type of insurance contract, you should examine carefully what is (and what is not) covered by the warranty and check out the reputation of the company offering it. Most importantly, try to find out whether or not the company ever pays any claims.
Big Mistake #12: Failing to Identify and Review All of the Land Use Regulations Affecting the Property
There is a wide variety of land use regulations that may affect the home you are thinking about buying. These regulations include, but are not limited to, public regulations (like zoning laws) as well as private regulations (like easements, covenants and restrictions) which may control the ways in which you are permitted to use your property. Obviously, these same types of laws and regulations may also affect surrounding land uses.
Real estate agents in your state may or may not be obligated to tell you information which they know or should know concerning land use regulations which affect the property you are thinking about buying. Different states have different rules concerning the agent’s responsibility to obtain and/or disclose such information.
Suppose a firehouse is planned for the vacant lot next door? Or a highway is planned to take the place of the woods behind the house? Or there is an easement across the back half of the lot for a bike path or a tot lot for the rest of the subdivision? Would a judge or jury consider this information to be important? What would be the extent of the agent’s responsibility to the purchaser to know and to disclose such information? Maybe none.
It is noteworthy that these types of problems are prevalent enough that many of the contract forms used by real estate agents specifically disclaim any responsibility on the part of the real estate agent for advising the purchaser concerning such matters.
The biggest problem in all of these areas is that the typical purchaser does not even know what questions to ask until after he has bought a home and realizes that he has a problem. Only then does he belatedly seek the advice of an attorney who must explain to him or her the meaning of the term “caveat emptor.”
If the seller and the real estate agent(s) are not willing to represent to the buyer that they have disclosed all of the land use regulations affecting the property, the careful purchaser will make the contract contingent for a reasonable period of time sufficient to allow her to make her own independent investigation. There is no other way to protect against unknown and undesirable land use regulations. And, believe me, there are some out there.
The breach or violation of any provision in the contract may be considered a default. There are usually specific provisions in the contract which define certain events of default and the consequences that follow. Default provisions in the typical residential real estate sales contract are almost always heavily weighted in favor of the seller. For example, they usually provide for payment of attorney’s fees and costs to the seller if the seller prevails in an action against a defaulting buyer but rarely do they provide equal protection for the purchaser who successfully sues a defaulting seller.
Many form contracts allow the seller to forfeit the purchaser’s deposit in situations where settlement does not occur through no fault of the buyer but simply because unexpected events occur after the execution of the contract. For example, one contract form widely in use provides that the purchaser will be in default if the purchaser “fails to comply with the lender’s requirements in a timely manner” or “does not have the funds to settle as provided in this contract at the time of settlement”. This contract form says nothing about the reasonableness of the lender’s requirements nor the reason for the purchaser’s failure to comply with them nor the reason why the purchaser does not have the funds to settle. Suppose that the purchaser loses his job or is transferred to another city or that he or his family is struck by unexpected illness or some other type of family emergency. In all of these cases, a strict interpretation of the default provisions of the contract would allow the seller and the agent to take the purchaser’s deposit or sue the purchaser for additional damages for the purchaser’s failure to complete the contract.
No real estate agent is going to warn the purchaser of the dangers inherent in such provisions. Indeed, it would probably be a violation of the agent’s duty to the seller to do so. These provisions shift the risk of loss from the seller to the buyer and it would probably violate the agent’s duty to the seller for the agent to assist the buyer in shifting that burden back onto the seller.
Big Mistake #18: Failing to Understand Other Potentially Problematical Provisions in the Purchase Contract
Good Faith Deposit. Any time you give money to anyone, you should know where the money is going. As a general proposition, when you put down a deposit on a contract to buy a home, your money is more likely to be safe in the hands of a licensed real estate agent than if you turn the money over to a seller (or worse, a builder/seller. See Big Mistake #19).
Try to negotiate an arrangement whereby the agent simply clips your check to the contract and does not deposit it. If it is understood that your check will be deposited, put a provision in the contract entitling you to interest on the deposit until settlement. This is especially important where the deposit amount is large and/or there is likely to be a substantial passage of time between the making of the deposit and settlement on the sale.
Make sure the contract includes a provision for the return of your deposit, plus any accrued interest, if the purchase fails to go through (and you are not in default under the contract, of course).
Contingencies. Whenever contingencies are added to a contract, it greatly increases the possibility of the contract being unenforceable due to the defective manner in which the contingency provision is probably drafted.
There are as many possible contingencies as the creative minds of buyers, sellers and agents can devise. Even where the contingencies are of a type that occur frequently (such as the contingency on the sale of an existing home by a purchaser or the contingency for a professional home inspection), it presents a challenge to the parties, their agents, and their attorneys to draft the contingency in clear and unequivocal terms. For example, take the commonplace contingency for the sale of the purchaser’s existing home. The language used frequently fails to distinguish between the purchaser obtaining a contract for the sale of his existing home versus the settlement on that sale. In other words, who bears the risk if the purchaser obtains a contract on the sale of his existing home but that contract later falls through? To protect herself in such a situation, the wise purchaser needs to make sure that the contingency in the contract for the new home makes it clear that the contingency is satisfied only by settlement on the sale of the purchaser’s existing home. Drafting unambiguous contingency provisions for less common situations provides even greater drafting challenges.
With any contingency, it is essential to draft carefully and precisely (1) the event(s) and timing upon which the contingency is based; (2) the event(s) which will satisfy the contingency or cause it to fail; (3) the manner in which notice is to be given of the satisfaction or failure of the contingency; and (4) the consequences of the satisfaction or failure of the contingency.
Drafting an unambiguous (and enforceable) contingency provision for a contract is one of the most difficult tasks that a draftsman is called upon to perform. Whenever a contingency is involved in a purchase contract, the purchaser would be well advised to have it drafted – or at least reviewed – by a knowledgeable real estate attorney who has had experience in drafting contingency provisions that can be relied upon and enforced.
Before leaving the subject of contingencies, do not forget the most important one: if you are unable to have an attorney review the contract before you sign it, put a provision in the contract making it contingent upon later review and approval by your attorney. If the seller asks for it, put a reasonable time limit on that contingency. Two or three business days is normally enough, but get five, if you can, just to be safe. Then, of course, get the contract to your attorney right away.
Integration and Merger Clauses. Most contract forms will include integration and merger clauses. An integration clause says, basically, that the written contract contains the final and entire agreement of the parties and that the parties are not bound by anything not stated in the contract. What this means to the buyer is that, if you want to rely on something said to you by the agent or the seller, make sure that it is expressed in the written contract.
Integration clauses may also exclude from the contract other types of important information upon which the purchaser has relied. Consider, for example, things like representations in ads, pamphlets, brochures or other sales materials given out by real estate agents or sellers, especially builder sellers. An integration clause might result in excluding these materials from evidence if it became necessary for the purchaser to sue to enforce the contract. In order to make sure that the seller will be obligated to comply with any representations contained in any marketing materials, incorporate them by reference into the contract. (This is only important, of course, where these other materials contain significant information that is not already reflected in the contract.)
Merger clauses state that the terms of the contract do not survive the delivery of the deed, but that they are merged into the deed. What this means is that, once the deed has been executed and delivered at settlement, the provisions of the contract cease to exist. This is a very dangerous proposition for the purchaser since there may be many provisions of the contract which the purchaser would like to be able to rely upon even after settlement has occurred. For the purchaser’s protection, every contract should state that the provisions of the contract survive delivery of the deed and are not merged into it.
Time Limits. For both legal and psychological purposes, it is usually a good idea to put a time limit into any offer you submit. Psychologically it puts a little pressure on the seller to consider and decide on your offer promptly. Also, however, it prevents the seller from having too much time to “shop” your contract with other potential buyers who may be interested in the property. It also helps to prevent you from getting caught by a belated acceptance of your contract at a time when you may have moved on to other properties or other circumstances have changed which might cause you to wish that you had canceled your offer before the seller accepted it.