Residential Real Estate Contracts
Author: Eric Hall, Esq.
Overview
Real Estate contracts set the stage for personal and business ownership. They range from vacant land to personal home buying to investments. The most important item to remember is that these contracts are often legal and binding when performed correctly. This means that a valid offer, acceptance, and consideration has formed between two or more parties. If any party to the agreement fails to meet his/her/its part of the bargain then any party harmed may assert a claim for breach of contract or simply withdraw, making the contract invalid. Below we will focus on key contract areas, their supporting documents, and more importantly, when to use them.
“As Is” Residential Contract for Sale and Purchase
Many real contracts are residential in nature as they relate to one’s ability to shelter themselves and their loved ones. This document includes two things at the highest levels: 1) parameters and 2) price. The latter, while important, is simply the amount of money that will change hands upon all parameters being met to the satisfaction of all parties involved. The former comprises the base contract which includes parties, property descriptions, key dates to perform specific activities, financing and inspection requirements, which party is responsible for closing cost and fees, disclosures, who will maintain escrow and title closing, default and dispute resolution, and more. As one can imagine, the process of home ownership requires the support and collaboration of many persons and systems. This is your source to becoming more comfortable and knowledgeable about the home buying and selling process.
Addenda
Addendums disclose additional terms and conditions that are not inherent in the general “AS IS” agreement. Failure to disclose certain property statuses or additional terms may put the contract or party at risk.
Condominium Rider
One or more riders (i.e., document addresses additional details, terms and conditions of a contract) that can augment the Contract for Sale and Purchase and bind the new buyer. This applies to Timeshares and Mobile Homes as well.
Homeowners’ Association/Community Disclosure
Community specific rules and regulations that must be followed, barring conflicts with local, state, or federal laws. Failure to provide buyer with this document gives buyer the right to cancel as a buyer must have three (3) days to review the document. However, upon closing the buyer’s right to void the contract for sale and purchase terminates.
Seller Financing (PMM; Security Agreement to Seller)
Seller’s right to financing may either allow for the use of the Seller Financing, if one or two exceptions are met (i.e., rules supporting a one or three property exclusion.) If not Seller must meet the same requirements as a loan originator per the Dodd-Frank Act promulgated in 2014.
Mortgage Assumption
Buyer assumes all loans and encumbrances associated with the property and must have Seller’s full disclosure or right to access pertinent information. The mortgagee must approve the Buyer or either party has the right to rescind the agreement.
FHA/VA Financing
Additional parameters that require Seller adherence to FHA or VA requirements which perform their own independent inspections and denote appraisal repair requirements. Seller may cap the amount one is willing to spend. If all parties agree to move, then this becomes part of the contract.
Appraisal Contingency
Condition that requires the property to appraise at a minimum amount in order to bind the Buyer to the original contract. If appraisal is less than the amount stipulated in the contingency agreement, then within three (3) days, Buyer must notify Seller of intent to 1) rescind or 2) waive contingency.
Short Sale
Seller’s Lender approves a Purchase Price which is typically less than the outstanding balance. While seller is relieved of incremental debt, Seller still maintains a tax liability as the deficiency is observed as ordinary income.
Homeowners/Flood Insurance
If Buyer is unable to obtain Homeowners and/or Flood insurance at a rate ceiling or percentage of home price ceiling with an agreed upon time then Buyer may terminate contract and be refunded any deposit amount.
Mold Inspection
Buyer, at one’s own expense, may have an inspection completed. If the expense of repair and remediation exceeds an amount that Buyer is willing to spend, then Buyer may cancel contract by delivering written notice to Seller.
Interest-Bearing Account
All deposits must be held by an Escrow Agent. If held in an interest-bearing account then all accrued interest must be paid out to the designated party.
“As Is”
Seller acknowledges lack of awareness about violations and does not warrant the physical condition of the property. This does not hold harmless Seller if known latent defects are not disclosed to Buyer. Buyer has the right to inspect property and if not acceptable, then can terminate the contract within a prescribed period. Seller must maintain the property in its normal state less wear and tear until closing.
Right to Inspect and Right to Cancel
Buyer has the right to inspect property and if not acceptable, then can terminate the contract within a prescribed period. Failure to terminate the contract within the prescribed period will waive Buyer’s right to terminate the contract.
Defective Drywall
Drywall manufactured in China used during times when there were material building material shortages must be availed by the Seller. Buyer has the right to inspect for defective material at one’s own expense or waive said rights.
Coastal Construction Control Line
If property is subject to coastal erosion that are government regulated to include, but not limited to, control lines, rigid coastal protection structures, beach nourishment, and marine turtle protection the Buyer should request an affidavit from Seller which evinces title or waive one’s right becoming responsible.
Insulation Disclosure
For new residences, this discloses the type of insulation that will be installed.
Lead Paint Disclosure (Pre 1978)
Seller’s must disclose lead that may be poisonous to young children which may cause permanents disorders or disabilities. Buyer has an opportunity inspect or waive said rights.
Housing for Older Persons
Buyer acknowledges that owner’s association, developer, or other housing provider intends property to accommodate either age 55 or older or age 62 or older.
Rezoning
Buyer’s obligations to purchase is contingent upon Buyer applying for and obtaining rezoning of a land use change under the Comprehensive Land User Plan (“CLUP”) amendments. Deadlines must be established with flexibility for public hearings, if applicable.
Lease Purchase/Lease Option
A contingency that the Lease comes with an Option to Purchase within a prescribed period.
Pre-Closing Occupancy
Buyer is allowed to occupy property before closing. Specifics must be agreed upon to include, but not limited to, maintenance, rental amount, and assuming responsibility for damages.
Post-Closing Occupancy
Seller is allowed to occupy property after closing based on specific parameters as to who(m) will be responsible for maintaining rental amounts and assuming responsibility for damages.
Sales of Buyer’s Property
Contract is contingent upon closing of Buyer’s property.
Back-up Contract
This contract takes precedence if an existing contract is terminated moving the back-up contract into first position.
Kick-out Clause
Seller maintains the right to continue showing a property under contract to solicit bona fide backup contracts. Seller must furnish backup contracts to Buyer upon which time Buyer must make an additional deposit into Escrow to solidify one’s first position.
Seller’s Attorney Approval
Contract is contingent upon Seller’s attorney approval.
Buyer’s Attorney Approval
Contract is contingent upon Buyer’s attorney approval.
Licensee Property Interest
Licensee must disclose a personal interest in Property (e.g., directly related to Seller or is an owner)
Binding Arbitration
Agreement between parties to settle any disputes through binding arbitration unless another alternative is mutually agreed upon. Discovery per the FRCP is allowed.
Seasonal/Vacation Rentals
Property may be subject to seasonal or short-term vacation rental(s) for occupancy.
PACE Disclosure
Property Assessed Clean Energy (PACE) programs for renewable energy that have ongoing financing must be disclosed by Seller to Buyer, as a non-ad valorem assessment has been levied as a result of an unpaid balance due.
Other Disclosures
Escalation Addendum to Contract
Buyer agrees to increase purchase price by a prescribed amount which establishes a ceiling of which Buyer agrees to pay to maintain first position. Disclosure of “competing offers” must be supplied to the Buyer.
Wire Fraud Prevention Notice
Wire Fraud can be avoided or reduced by establishing a contact medium at the inception of the real estate contracting process with one’s agent, lender, and title company. By initiating this step, you will have a defined a trusted channel of communication with those in key areas that may bind or represent money changing proverbial hands. By abstaining from responding to emails or phone calls that request sensitive information outside of those approved channels that were vetted early in the process through direct conversations or face-to-face meetings. Lastly, before Buyer or Seller wires any funds to any party (including Buyer or Seller’s attorney, title agent, mortgage broker, or real estate broker) personally call them to confirm the information is legitimate (i.e., confirm the ABA routing number or SWIFT code and credit account number).
The information you obtain on this website is not, nor is it intended to be, legal advice. You should consult with an attorney for individual advice regarding your own situation.