Real Estate Contracts ...Picket Fence

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Across the Picket Fence

Real Estate Contracts

Q: When it comes time to draw up a contract, do I need to have the Purchase/Sales agreement notarized or witnessed if a lawyer or real estate agent isn't present?

Lawyer: No. You could simply write on a piece of paper, "I (your name) want to sell my house to so-and-so," and you both (buyer an seller) sign it, and that would be a legally binding contract. You don't need a fancy contract; you just need to have it in writing. There are good standard contracts out there that make it easy though. They usually cost about one dollar -- and you can get them at the Chamber, office supply stores, or the Real Estate Association.

Q: What happens if the buyer's financing doesn't come through in time for the closing? Is the contract still legal?

Lawyer: Yes. Unless you put "time is of the essence" on the contract, the closing date is not considered to be of importance by the court.

Q: Buyer: What is a reasonable amount of time to give sellers to accept our offer?

12 to 24 hours is reasonable, since the sellers will probably want to review the contract with their lawyer before signing. You want to avoid giving the sellers too much time, as this allows them to "shop the bid" to see if they can get a better offer, or another offer may come in during the interim. It's a good idea to specify the actual time that the offer expires also.

Q: What happens if the buyer's financing doesn't come through in time for the closing? Is the contract still legal?

Lawyer: Yes. Unless you put "time is of the essence" on the contract, the closing date is not considered to be of importance by the court.

Q: If the buyer's financing fails...if he can't get a loan... what happenss to the deposit? -- Peter L., Jericho, Vt

Lawyer: If that's a term in the contract that has to be met (contingent upon the buyer obtaining financing), and the buyer can't get financing, the deposit has to be returned to the buyer.

Q: Is it legal for us to sell our own home, plus have a broker...if the broker agrees to it?

Lawyer: If the broker agrees to it. There are such things as exclusive listing agreements with brokers; if you have one of those, you cannot sell it yourself. However, if you have specified ahead of time with the realtor that if so-and-so purchases the property (someone who looked at the property before you listed it with the realtor) that they aren't entitled to a commission, that's different. It all depends on what agreement you make with (the real estate company).

Seller: Our house inspection didn't go well, and now the buyers want to buy the house for less (which we've agreed to). The problem is that there's a buyer broker involved, and in the original contract the broker wrote in a dollar amount for her commission fee, rather than 3%. Now that the sale is less, isn't she entitled to less?

Lawyer: Perhaps. How is it worded in your current sales contract?

Seller: It just says the dollar amount. Basically, we just used the original contract and crossed out the old sales price, put in the new, and both initialed it. However, when my wife realized that we were paying the broker too much and brought it to her attention, she said she wouldn't renegotiate her fee and that she had a legal contract signed by us.

Lawyer: Ouch. In this instance, a new contract should have been prepared to replace the previous, now null and void, contract. By modifying the original you unwittingly set yourselves up to signing an agreement based upon all the previous terms, including the dollar fee stated for the broker's fee. Sorry.

Buyer: What is a first right of refusal clause and how is it used?

Commonly buyers need to sell their existing home first in order to buy a new one, yet many sellers are reluctant to take their property off the market while waiting for the buyer's property to sell -- especially since there is no guarantee that the buyer's property will, indeed, sell. The first right of refusal clause, sometimes referred to as a 72 hour clause, is ideal for this situation. When written into your sales contract, this clause allows the seller to continue marketing the home and accept other offers subject to the rights of the first buyer. If the seller does receive an offer from a second buyer, then written notice is given to the first buyer. Buyer #1 would now have 72 hours to remove the contingency regarding the sale of his existing home or the contract will terminate. Buyer #2 would then move into first position. If you accept a second contract, you would want that buyer to be well-qualified financially and not have any home to sell. The attorney will be able to provide the specific legalese for the clause. There are also numerous ways to modify the clause to satisy both the buyer and seller.

Seller: I noticed the contract you (United States FSBO) provided us doesn't say "this is a legally binding contract" on it. Is it a true legal contract?

Lawyer: Yes! In fact, you could simply write on a piece of paper, "I (your name) want to sell my house to so-and-so," and both you and your buyer sign it, and that would be a legally binding contract; you just need to have it in writing. The reason real estate contracts are typically more elaborate than this is because there usually are a number of contingencies to the agreement, or contract, such as the buyer receiving financing from a lender or the property passing a satisfactory house inspection. The purpose of a contract is to make it clear what is being sold with the property, to whom, and for how much, as well as under which circumstances either party can be released from the contract.

Buyer: What happens if I don't receive notification from the bank in time for the closing date on the contract? Do I lose my right to buy this property?

Lawyer: No. Unless "time is of the essence" is written into the contract next to the closing date, the date is not considered to be of importance by the court.

Buyer: One of your advertisers accepted our offer verbally over the phone. Then, while we were having our lawyer draft a contract, they accepted another offer and already signed a contract. This doesn't seem right to me!

I agree that the seller should have let you know they received a better offer so you would have a chance to counter-offer. However, what they did was not illegal, as I'm sure your lawyer has told you. In real estate, all agreements must be in writing to be considered legal. By the way, why didn't you use the Purchase & Sales Agreement contract that the seller had? This would have saved you valuable time.

Seller: Do I need Errors and Omissions Insurance? I was told by a real estate agent that it would be a good idea to get this if I'm selling my own property.

We checked with a local insurance angencies , who checked with their insurance company providers. Errors and Omissions insurance is not available for a private individual; it is meant for professionals who represent others. The agent is incorrect.

Lawyer: Perhaps. How is it worded in your current sales contract?

Seller: Can I still show my property after I have a contract on it?

Yes, you can still show it, however you can't accept another offer on it as long as you remain under contract with the first party. Also, you should disclose that you are under contract to the prospective buyer before setting up an appointment for a showing. What you will find is that most buyers won't want to waste their time looking at a property that is not currently available, and would rather just leave their name and phone number in the event that the contract falls through.

Buyer: Who should the deposit be made out to?

It is in your best interest to have the deposit held in a lawyer's escrow account until the closing (this can be either the seller's or buyer's lawyer). An escrow account is essentially a trust fund set up by the law firm. The attorney holding the deposit is considered a neutral escrow agent, and in this regard, not representing either buyer or seller. (If a dispute should occur concerning the return of the deposit, the attorney may decide to have the court hold the deposit until the dispute is resolved to avoid any conflict of interest.)

While it is okay to make the deposit check out to the seller, you just want to make sure that the seller deposits it into an escrow account.

The exception to this is when the deposit is meant to be non-refundable. In this case the funds should be held by the seller.

Seller: Would it make sense for us to offer a seller's rebate to allow for renovations the buyer wants to make? We have had a recent appraisal done ($250K), and would sell it for the appraisal amount, but give the buyer $16,000 back at closing to pay for an addition they wish to put on.

Mortgage lender: It used to be that banks/ mortgage companies would allow for decorating or maintenance expense seller rebates, but this has changed. In general, the guidelines are as follows: if the borrower is putting less than 10% down payment on the property, the bank will allow the seller to contribute up to 3% of the sale amount for closing costs only (renovation expenses and down payment amounts cannot be included as a closing cost). If the downpayment is greater than 10%, the bank will accept up to a 6% seller rebate - again, for closing costs only. So you really can't offer a specific rebate amount until you know more about the buyer's financing.
The other criteria that will affect you is this: the bank will deduct the amount of the rebate from the sales price that exceeds the amount allowed, which affects the amount of money they will lend the borrower. (A bank will lend 95% of the property's appraisal value OR the sale amount, whichever is lower.) In your case, if you are selling for $250K, the bank will allow a seller's concession of up to $15K (6%) if the borrower is putting at least 10% down and if this does not exceed the actual allowable closing costs.