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Real estate contracts: Clauses that could scuttle a deal

Contract clauses on issues such as obtaining financing, payment of closing costs and disclosures are among the most troublesome.

November 18, 2012|By Lew Sichelman
  • Prospective buyer Maryann Perez, left, tours a home in a new community in Corona accompanied by sales manager Danielle Lorenz in 2011.
Prospective buyer Maryann Perez, left, tours a home in a new community in… (Irfan Khan, Los Angeles…)

The typical real estate sales contract includes not just a price and a closing date but also a number of clauses, any of which can trip up the buyer or seller and scuttle the deal.

Although contract language may vary from one place to another — not just state to state but also county to county, and sometimes even from one company to another — here's a quick rundown of some clauses or "conditions" that are likely to cause the most trouble:

Financing. Perhaps the most common contract condition makes the transaction contingent on the buyer obtaining either a mortgage or a written commitment in the amount required to complete the purchase within a certain time frame.

The timing aspect can be the most troublesome, real estate professionals say. The sooner the buyer can complete this condition, the better. If the deadline passes without a loan approval, the seller has the right to cancel the contract.

"Since financing contingencies can be complex and vary widely, they require strict attention to all timelines involved," said Sam DeBord of Coldwell Banker Danforth in Seattle.

But buyers should beware of using this clause to get out of the deal. They could find themselves in default if they fail to follow through on what they agreed to.

In Virginia, for example, making a substantive change — seeking a loan that far exceeds the amount specified in the contract, for example, or being unable to find a rate that's lower than what's stated in the contract — may put buyers' earnest money deposit in danger. In Minnesota, if the buyers' financing falls through after they have satisfied the financing contingency, the seller can keep all the earnest money as damages.

On the other hand, Florida contracts are "very one-sided" in favor of buyers, Liane Jamason of Smith & Associates in Tampa said. Twice in recent weeks, Jamason had to deal with upset sellers who mistakenly thought they were entitled to their buyers' deposits when their financing fell apart after months of waiting to close.

Closing costs. A poorly worded clause here can cost the buyer or seller a lot of money, depending on how it's written. Often the agent writes in the contract that the seller will pay X amount toward the buyer's closing costs, when what the buyer really wants is that X amount be paid toward closing costs, points, prepaid items, warranties, administrative costs and fees.

"Closing costs are really only those associated with closing the transaction and may be far less than the entire list of financing charges," said Jim Mellen of Re/Max Peninsula in Williamsburg, Va. "A buyer who shows up at the table planning to have $6,000 paid on his behalf will be awfully angry if he gets only $1,200 of his fees paid."

Another possible issue is how the closing cost contribution is stipulated. If it is given as a portion of the selling price, say $300,000, a 3% contribution could cost the seller $9,000. But if it is written as a part of the financed amount, say $240,000, the seller would be on the hook for just $7,200.

There are no do-overs if a mistake is made. "The written word on a contract will trump intentions all day long," Mellen said.

Disclosures. The different property disclosure clauses are "some of the more difficult to navigate," said Ralph Harbison of Re/Max Realty Brokers in Birmingham, Ala. Buyers tend to want "yes" or "no" disclosures, but sellers prefer something that says they are not aware of any issues. And that leaves buyers to wonder what's wrong with the place.

Writing certain inspection clauses — termite, radon, mold, lead-based paint, home — into the contract should go a long way toward removing the buyer's anxiety, but only if the buyer adheres to the contract's timelines.

In Florida, for example, the buyer typically has 10 days in which to obtain and review a home inspection. The buyer can cancel the contract during this period by providing a written notice to the seller, or he can ask for an extension. But issues arise when the buyer tries to negotiate repair credits or actual repairs and the inspection period expires.

"If the repair issues cannot be resolved during the initial inspection period, the buyer must execute the cancellation or extension," said Blair Damson of Coldwell Banker in Coral Springs, Fla.

In the Philadelphia area, as long as the buyer adheres to the time limit, he only has to notify the seller that he does not wish to proceed to get back his earnest money deposit. But Linda Williams, an attorney/agent with Sage Realty in Wayne, Pa., goes a step further by making sure the deposit is not payable to the seller until after the inspection period ends.

In Warren County, N.Y., broker Mark Bergman, president-elect of the local Multiple Listing Service, writes inspection clauses with specific repair cost limitation "to prevent frivolous renegotiation."

Dates. One more thing about timelines: Be explicit. Contract language should be clearly spelled out in either calendar days or banking days, said Magda Robles of Keller Williams Properties in Weston, Fla. "Number of days is not good enough," she said. "Specify the specific month, day and year."

"As is." This clause can be a double-edged sword, said David Welch, a broker in Orlando, Fla. Although the seller is not obligated to make any repairs found necessary during an independent home inspection under the as-is clause, the buyer can cancel for any reason if he does not like what the exam has revealed.

Short sales. Buyers need to be leery when a "seller" in a short sale commits to paying closing costs. The bank is the seller, not the occupant, said Christy Walker of Re/Max Signature in Phoenix. As such, the bank has every right to renegotiate the fees or refuse to pay them at all.

lsichelman@aol.com

Distributed by Universal Uclick for United Feature Syndicate.

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