What to Expect in Your Real Estate Contract

If you haven’t hired your real estate attorney, you’ll need to do so once you have an accepted offer. Your attorney will review a draft of the real estate contract prepared by the seller’s attorney, negotiate legal terms, and guide you through to the closing.

Now it’s time to hire an attorney to help you through the rest of the transactional process. Strangely enough, most parts of the country do not use attorneys in the real estate transactional process. Instead, real estate agents make offers on actual legal contracts that are approved by the local bar and get them signed by buyers and sellers. Attorneys do not generally even take part in closings, which happen in an escrow office with all transactional matters handled by a clerk. In our region, of course, real estate attorneys generally handle the drafting and reviewing of real estate contracts, perhaps because the practice of real estate in New York and New Jersey is particularly complex.

Hiring an Attorney

Because of that complexity, we strongly recommend that you hire an experienced real estate practitioner familiar with the local customs. Although any licensed attorney is legally competent to assist you in the purchase of your home, we have seen time and again attorneys who are not experienced at real estate undermine a transaction or cost the buyer money at the closing table. To give you an idea, one of the owners of Better Homes and Gardens Rand Realty is an attorney and real estate broker, but does not handle his own real estate closings because he defers to the expertise of lawyers who do that for a living.

So consider that a good real estate attorney can be retained for a reasonable fee and more than make up for it when you get offers from a friend, family member, colleague, or family attorney who is willing to do you a favor and represent you for your transaction. You may save a little money, but it can ultimately cost you. You can get a list of experienced, well-regarded real estate attorneys from your agent.

Common Contractual Issues

Most real estate contracts are common form contracts that go through small changes in the negotiation between the attorneys. The main material terms – price, down payment, closing date – are all negotiated, of course, but the standard protections given to buyers and sellers in the transaction are fairly common in most real estate contract forms. Thus, you are likely to see the seller’s attorney make small changes to a form contact, and your attorney write what’s called a “rider” that supplements the main provisions. We defer to the judgment of your attorney on contractual issues.

Although we are not representing you as legal counsel, we did want to highlight three common transactional issues that you should understand about your real estate contract.

1. Closing Dates

Closing dates in standard real estate contracts are not deadlines, they’re aspirational. If the contract states that the closing is to take place “on or about” September 1, all that means is that the parties are aiming in good faith for a closing on that date. The closing date itself will be set by the attorneys on a mutually convenient date once the title report is generated and the bank has made a mortgage commitment to fund your loan.

So what happens if one side is ready to close on September 1, and the other side is not? Usually, nothing. If the parties are working in good faith for a closing, the attorneys will simply set a new date for the closing, which will also be aspirational. But if, say, you are ready to close and the seller is not, and you and your attorney suspect the seller may be acting in bad faith to delay, your attorney can issue a demand for a closing within 30 days of the letter. If the seller does not close within the 30 days, it can give you ground to terminate the contract and get back your deposit, or give rise to a claim for whatever damages you incur from the delay. Usually, that’s not necessary.

Occasionally, contracts of sale will have what’s called a “time of the essence” provision that requires both sides to be ready to close as of the date in the contract. In that case, failure to be ready to close could render the unprepared party in default. A “time of the essence” clause is very rare in residential transactions, simply because neither party want penalties attached to the obligation to close on a particular date.

You should absolutely keep in mind, though, that closing dates in a contract are aspirational, so that you do not make plans to move until you are certain that the closing is going to happen. We see buyers who have been severely inconvenienced by a delayed closing, with their personal items in storage while they live in a hotel waiting for last-minute items to clear up. Talk to your attorney about whether the closing will happen on a particular date, and don’t make plans that could render you homeless if the closing does not happen on time.

2. Contingencies

Sales contracts often have contingencies that can allow one side or the other to void the contract without any repercussions. You may think that the deal is final, but a contingency in the contract, if properly exercised, can undo the deal. The most common contingency, of course, is the mortgage contingency, which allows you to terminate a contract and retain your deposit if you are turned down for a mortgage. Buyers getting financing usually demand to protect themselves against the possibility of losing their down payment if they are unable to get financing. In most cases, a mortgage contingency is not an unreasonable request for the buyer to make, but some sellers will not accept a conditional offer.

Other relatively common contingencies are “sale” contingencies, in which, for example, the buyer retains the right to terminate the contract without repercussions if the buyer is unable to sell her current home. This has become a little more common in a slower market, because buyers want to be able to protect themselves if they cannot sell their home. These types of contingencies are rare, because most attorneys disfavor them. Again, this is something you should discuss with your attorney, but do not be surprised if the seller rejects any offer contingent on the sale of your current home.

Similarly, a seller might demand a contingency allowing the seller to delay closing, or not close at all, if the seller cannot find a new home by the closing date. This is also relatively rare, and attorneys disfavor them because they give sellers too much flexibility in delaying a closing just by asserting that they have not yet found the perfect new home. Again, if this comes up, you can discuss it with your attorney.

3. Fixtures

It is very important that you discuss fixtures with your attorney. Fixtures are pieces of personal property that are attached to the real estate property, such as light fixtures, appliances , window treatments, and the like. Generally speaking, you have the right to acquire all fixtures upon purchase of the property. You don’t have the right to any personal property (i.e., the seller’s clothes, books, pictures hanging on a wall, etc.), but you do have the right to anything semi­ permanently attached to the real estate. Problems with fixtures come up more often than you would think, often involving very expensive light fixtures that the seller never intended to include in the deal, but which were not specifically excluded in the sales contract (hence, again, the need for an experienced real estate practitioner).

Generally, a seller who wishes to keep any of the fixtures in the home will make that clear in the listing, which puts you on notice that certain items are not included in the sale. Sometimes, the sellers or the sellers’ agent forgets to exclude those items in the MLS listing, but they exclude them in the contract of sale. At that point, if the contract is not yet signed, you do not have any legal rights to those fixtures, so you need to decide whether you want to bargain for them or demand that they be included in the price you offered on the assumption that they were included. If the seller does not discover the error, though, until after contracts are fully signed, you have the legal right to them and any removal would entitle you to an offset of the price.

Most importantly, if there are any fixtures that you particularly desire in the home, or furnishings that you think might be fixtures and want to make sure they are included, you should tell your agent when you make the offer. Don’t leave those issues up for chance if you can avoid it.

Conclusion

Most of the contracts used by our clients are standard form contracts, modified slightly for the particular circumstances of your transaction. Generally speaking, you won’t have much room for negotiation, since the boilerplate legal terms are fairly standardized. If you have other questions about your legal contract, talk with your attorney.

Posted on May 27, 2017 at 10:48 am
Vincent Abbatecola | Category: Rand Buyer Orientation Guide

Comments are closed.