(A speech to the Clatsop Association of Realtors in 2005)
By: Charles A. Hillestad
I get to see a lot of real estate contracts. Unfortunately, it is usually after something has gone wrong and one or more of the people involved is seriously angry, often far too angry at that point to quickly agree to any sort of inexpensive solution. If you want to avoid the time, expense, not to mention the wear and tear on your stomach lining that such problems invariably involve, the best advice I can give is to pay very close attention when initially drafting the contract. What follows are typical mistakes, some of which are relatively easy to make, but quite costly to undo. They are not uncommon. As a matter of fact, almost every one of those highlighted here are actual errors spotted on executed purchase contracts written by local licensees within just the past few years.
Fortunately, the errors are also easy to prevent. If you merely become conscious of the potential dangers of these particular drafting issues, that goes a long way toward preventing them in the first place. Watching out for them each and every time you sit down to fill in the blanks on a contract should help keep you from ever being forced to employ an attorney to defend yourself later.
That is the purpose of this article and the ones that follow on the same subject of drafting contracts. If you are willing to invest ten minutes or so reading each article as they become available, you will have gotten a short course on “Preventive Law.”
It is focused around the latest Residential Real Estate Sale Agreement form offered by Oregon Real Estate Forms, LLC. Any references below to specific page or line numbers refer to that particular form, OREF 001-1 01/05, but much of the information is generally applicable to any contract form used.
The Agency
(lines 1-12, 244-255, 296-304 and 321-327)
It is sometimes easy to forget that a significant percentage of buyers, particularly first time ones, simply do not understand the rules of agency. Listing licensee, selling licensee, selling firm, buyer agency, subagency, disclosed limited agent, in-company transaction, dual agency, all mystify them for the most part. An assumption is sometimes made by agents that if the buyers or sellers do not ask any questions, they must know what is going on. That is not necessarily true though.
Keep in mind that while you have had the benefit of various classes, a test on the applicable law and years of familiarity with the concepts, your clients have not. It is a problem nationwide. Buyers recognize sellers have their own agent representing them. But, whenever the person the buyers have personal contact with is a different face than the one speaking for the sellers, then far too often buyers leap to the conclusion that they now have their own “hired gun” who is looking out for the buyers’ interests exclusively.
They persistently believe that even when the two agents are in the same office and even if the official agency disclosure form required by the State which states to the contrary is placed in front of them. Unfortunately, it just seems intuitive to buyers that when there is more than one agent involved in the deal, one of them must be representing the buyers. Anything else somehow seems a “conflict of interest” in their opinion, whether it is legally so or not.
Of course, you could just say that is the buyers’ problem once the form has been shoved in front of them and they sign it. You might even get away with that. I have to tell you though the bias of judges, juries and arbitrators is to tend to side with the inexperienced private citizen in need of outside protection, rather than the professional if that misunderstanding by either buyer or seller happens to erupt into a dispute.
If a genuine “buyer agency” as that has been defined by State law with all the restrictions applicable to it has been set up in writing with full disclosure and consent of all parties, well and good; however, pure buyer agency relationships tend to be the exception, rather than the norm. Consequently, it is imperative that you become convinced your clients and customers really do understand what is going on and what the respective responsibilities are, because in a substantial majority of cases in which brokerages are sued, an allegation that an agency relationship was violated is a significant part of the claims.
It is not a minor matter. You cannot afford to be casual about “X-ing” all the correct boxes on the forms. Failure to properly handle the agency disclosure issue in the contract can subject the licensees to recission of the contract, surrender of the commission (even if there is not recission), damages or, arguably, all the above, plus, of course, the possibility of disciplinary action from the State and/or the trade association.
Litigators love it if you fail to properly fill out the form because it is just the sort of objective, unanswerable argument that bolsters their case. Remember, “weasel words” are permitted. You either properly disclosed or you did not.
If you did not, in addition to out of pocket costs, you also suddenly have the interest of the State Real Estate Agency. That licensing body makes it abundantly clear in its Manual that there is an affirmative duty on your part to make not one, but two, disclosures at a minimum. The first is at the initial substantive contact and the second is when you are drafting the earnest money contract. It is mandated and woe unto the unlucky agent and/or broker who forgot or did it wrong.
In light of that, protect yourself. This cannot be emphasized enough. Do not assume the parties understand. Sometimes your customers and clients would rather remain ignorant than appear so by asking what they think might be a stupid question. Worse, sometimes they think they do understand, but are wrong. Sometimes they are just so intimidated by the whole trauma of buying a home that they are afraid to ask. Either way, give them the answers to important questions like this whether they have been specifically asked or not. Make it part of your standard procedure to have a supplemental explanation of what it means when initially making contact with them and once again when presenting the contract for their review. Better yet, have prepared in advance a fuller explanation in writing. Give that to them and have them sign a copy for your files showing that they received it. Some of you already have that. That is great. But, some of you do not.
Even if you do have a written more detailed explanation, preferably one prepared by an attorney, just having the parties sign the requisite paperwork may not be enough in all circumstances. Besides, even if you know you can win, why be dragged into litigation or controversy at all when a minute or two of extra time will greatly reduce any risk of that happening?
Whatever you do, make sure at a rock bottom minimum the real estate sale agreement sections regarding Final Agency Acknowledgment is completely filled out with every appropriate box checked and fully executed. A failure to do so can put the agent and the brokerage in a very vulnerable position if there is ever a dispute later on anything, even as to things unrelated to agency.
The Parties
(lines 13-27, 282-290 and 296-320)
Be sure to get the right parties named on the contract. It does not do much good to have the wrong people signing. That sounds like an obvious point and certainly no one savvy enough to pass the licensing exams would ever do it wrong on purpose. It is surprising though how often none of the licensees involved in particular transactions ever bother to actually check on precisely who should be named.
Thankfully, things do not go wrong too often, but when they do, the price tag to rectify the error can be significant. Therefore, do not totally rely on just the last deed merely because it happened to be handy when you were drafting the first version of the contract. After all, other documents might have been recorded since then such as a transfer to a “living trust.” Ask in-depth questions of the sellers or the seller’s agent as appropriate. Ask to see a copy of the latest property tax report and order one of the “freebie” title reports available on short notice from the title companies.
Do not rely completely on any of those trios however. Remember, they are not “guaranteed” in any way. They are okay for a starting point, but always check against later received information as for example the actual title insurance “binder” for a policy. While that can be wrong too, at least it is backed by the financial strength of the company that issued it and might protect you in the process.
Be sure to get all the important parties named on the contract. A typical issue comes up in the divorce situation where husband and wife have split, but the title is not changed yet. Ask the question.
Once everyone has been named, get everyone to actually sign. A real mess can develop if, for example, a seller accepts a contract in which there are two buyers, one of which signs and one of which does not. That arguably might be a valid contract binding on the one buyer who signed, but who might not be able to close without the other buyer. Consequently, consider getting all of one side to sign off before submitting to the other side.
Also, get full signatures on the appropriate lines. Beware of name changes. Watch out for initials and nicknames. It is a minor point, but why ask for trouble?
Get the parties to initial on each page as well. That way, there cannot be any doubt that all the parties agreed on all the pages to the contract. Don’t forget the addendums or exhibits when initialing.
By the way, if an error is subsequently spotted regarding agency or parties or anything else in a contract, immediately work to have an amendment made to the contract. Get it signed. The sooner, the better if you want to minimize the chances of something going wrong. People die, go bankrupt, become legally incompetent, all of which could hinder completing the transaction if the mistake is not noted and corrected before that happens.
The Real Property
(lines 28-32, 67-70 and 279-281)
Get the right property description. Preferably use a full description, such as a metes and bounds one or a lot and block one if appropriate. Use at least a street address and definitely the appropriate county tax identification number if known.
Do not just insert the words “to be agreed upon” in the blanks as licensees occasionally do. Anytime you say “to be agreed upon,” it is an almost surefire opportunity to get into controversies. Arguably, there might not even be an unforceable contract. If not, kiss the commission goodbye.
If you do not know the fuller legal description, you could insert whatever is presently known (assuming it has minimum adequacy) and make it a formal specified “contingency” to enforcement of the contract that the exact full legal will be agreed upon within a certain date a few days later.
If you do not make it a formal contingency, arguably you might have created what is known as an “illusory contract,” hence unenforceable resulting not only in no commission, but conceivably even a malpractice claim if someone was relying on the deal going through.
Keep in mind that even if you do set up the legal description as a formal contingency to the contract, you should try to have a specific “cut off date” or a defined period of time to satisfy the contingency. If not, in certain circumstances, it is possible you might learn what the “Rule Against Perpetuities” means. It will not be a cheap lesson.
Deeds, title binders, tax statements and other documents all contain legal descriptions. They are written descriptions. You can use them. Often however, surveys are better yet. They are visual descriptions combined with written ones. If a survey is or can be made available, maybe it might be appropriate to attach it as an exhibit to the contract. By the way, if you reduce the size of the survey, make sure that fact is noted on the reduced version so that no one mistakenly relies on the inch/foot conversion scale that was also reduced in the copier machine.
If you are lucky enough to locate a survey later or a new one is ordered, if nothing else, at least use the opportunity to compare its descriptions word for word against each legal description in other title related work, especially whatever you used for drafting the contract. Proofread it closely. Any discrepancies between documents are automatic “red flags.” Follow up and find out why there are any discrepancies.
A useful technique in proofreading long legal descriptions is to read the typed paragraph backwards. That way, i.e. without the context influencing your eyes, you will be less likely to be fooled into reading words which are not really there. Unfortunately, this is a definite risk whenever you have read this same long string of words several times on different documents. Your mind can play tricks on you.
Another suggestion is to take a full day between preparing a contract and proofing it if you have the luxury of that much time. A sleep cycle tends to allow you to proofread it better. If you do not have the time, let someone else proof it. A fresh set of eyes is more likely to catch potential errors that way. This is no doubt at least one of the reasons the Real Estate Agency insists upon agents submitting all contracts to the managing brokers for the office.
Make sure too that whatever legal description is used actually “closes the circle.” If it is a metes and bounds legal description, sit down and try using the words to actually draw it out on a piece of paper. Take the following simplified example of property described as:
"Starting at the NE1/4 of Section 6, Township 3N 65E, proceed NW 82.5', thence SE 55', thence 82.5' SW, thence 55' SE to the true point of beginning."
It sounds fine until you diagram it. You will get a question mark if you draw it out, not a rectangle.
Sadly, typos are incredibly easy to make when transcribing such descriptions. Sometimes entire lines out of a long legal description can either be typed twice or omitted altogether. It makes for a most unusual looking parcel when drawn if that happens.
Do not assume the person who prepared the legal description that you are using to draft the contract proofed their own work. Surveyors, title companies and even attorneys can make mistakes just like everyone else. Do it for them by closely checking to see if the description makes common sense.
Similarly, watch for “gaps” as for example if the second 55' in the example four paragraphs above had been 53'. That would have left a gap even if the compass directions had been correct. Cases like this often seem to happen where there are pure linear distances given.
This was a bigger problem back when the surveying equipment was not as sophisticated as it is today, but it can still happen and it can involve big bucks on, say, a “zero lot line” commercial building property where it is dangerously easy to build something over the line.
In drafting, one of the better ways to handle this is to insure linear directions are tied or “anchored” to a well established specific monument such as a publically dedicated country road or a section line. An example would read “39.2 feet to the southern boundary of Dawes street.” That arguably helps smooth out possible little discrepancies.
I cannot tell you the number of times where, for instance, the description of a private road or easement necessary to access a lot being sold failed to describe lines long enough physically to reach the public road. It might have only been an inch difference, but that is as good as a mile as far as the law of property is concerned. It means someone else owns the missing inch and might have to be paid to obtain it. It becomes a particularly difficult problem to solve when the excess inch is owned by some third party.
It is true there are a variety of techniques that lawyers later attempting to have such “scrivener errors” ignored. Do you really want though to pay an attorney to have to go to court and argue prescriptive easement, quiet title, promissory estoppel or other theories that might be applicable? Even if you win, you lose in terms of productive time.
You might argue you were merely relying on the representations of others when drafting the property description. Merely because you relied on the information from others however does not render you impervious from suit. Anyone can start a suit with only a hundred dollars or so. Once started and you are named, it will not go away automatically. Therefore, your liability insurance carrier, if no one else, will appreciate your “due diligence” detail orientation in initially drafting contracts.
Also be worried about street or alley “vacations” when drafting legal description language on contracts. When a roadway is vacated, normally the adjacent property owners each end up with half of the roadway. Failure to mention that can end up with a portion of a parcel not being conveyed. To prevent such omissions from happening, after the normal legal descriptions, you could add the words “including any vacated streets or alleys.” That goes a long way toward eliminating unknown situations.
What side issues regarding affirmative representations are raised if the square footage is included in the legal description you draft? Sometimes it is done simply because the last description in the chain of title did it. That is the lazy approach. See if it really needs to be included. If not, do not include it merely because predecessors did.
If size of the lot is put in rather than just the lot designation number, arguably that fact is important and will be enforced if it turns out to be wrong. It is a “black letter” principle of judicial interpretation of documents that if you put something into a contract, you must have done so for a purpose.
Sometimes of course it is necessary to indicate square footage. Perhaps the parties want the square footage listed. If so, it would be helpful to specify the square footage is “approximate” even though you are probably covered by the exculpatory language in Section 40. The problem is that if the footage stated proves to be wrong, you can see where squabbles might result. Sometimes the buyer insists on a minimum square footage and does not want them referred to as an“approximation.” That can occur if the local building codes require certain minimum “footprints.” If so, make sure the seller understands the potential consequences.
Are gas & water taps to be acquired separately? What about mineral, coal, oil, gas and water rights? Included? Excluded? It should be part of the legal description when appropriate.
What about encroachments? This is another reason surveys are nice to have. If encroachments are mentioned and fully disclosed, the buyer can hardly complain later. Besides, there is now a surveying company to share the blame if something goes wrong.
Do not automatically assume however that a survey issued to the seller entitles the buyer to rights under it directly against the surveyor. They are useful for many purposes anyway, but if the buyer wants a survey, it is a good idea to have one issued directly to the buyer.
Of course, there is the question of who pays for it. That is negotiable.
Don’t forget that surveys are only good as of the date made. If it has been a while since it was done, it might be outdated. Read the survey and the survey notes to find out the details.
What about easements? You are aware not every easement is recorded. There might be unrecorded ones such as utility lines. There might be paths created across lots which are now enforceable easements through long established adverse possession. If so, either mention them or expect potential heated arguments later.
Be observant when you are on site looking at the physical layout of the land. If you see something that raises a question in your mind, ask about it.
What about usage “licenses” that may impact parcels? These are similar in concept to easements, but not as permanent. Are they needed for the buyer? If so, are they assignable? Is a contingency needed to take care of insuring any applicable third party’s consent?
Obviously, there is not enough space on the earnest money standard form for everything. That is what exhibits or addendum are for. Take all the space you need by mentioning on the form “See Addendum ___, attached hereto and incorporated herein by reference.” Then go ahead an prepare an appropriate exhibit.
The Personal Property
(lines 71-77)
What exactly is a “fixture” and what should be listed as part of the assets being sold when in doubt? A typical controversy erupts regarding things like mirrors, stained glass windows, sometimes even antique staircases. If nailed, screwed, glued or otherwise permanently attached to the property, they are probably part of the real estate and must remain for the buyer unless specifically excluded.
Occasionally though, sellers do not fully understand that and have been known to remove them prior to moving out. A wise drafter might decide to mention valuable items like that in the contract so there can be no possibility of contention later. Better a few extra unnecessary words covering the issue than a lawsuit or, at a minimum, smoldering anger later.
Sometimes the agent uses the real estate earnest money form to sell a business. That may prove to be a mistake. The real property purchase forms are simply not designed to be used for purchases of purely personal property. Why? It is due to things such as the issue of UCC searches vs title insurance which are not mentioned in the standard form at all, the issue of bulk sale procedures, the issue of allocating purchase price when personal property is part of the purchase to name but a few potential ambiguities and confusions when attempting to transform a real estate form into a personal property one.
Even allocations among the real property portion might be needed. For example, what is deemed to be land and what is improvements. This can make a big difference for tax purposes if it is a commercial property as opposed to a residential property. Sometimes the property has some of both. A bed & breakfast inn for example has owners quarters.
Purchasing an ongoing business raises other drafting issues too such as how to handle sale of client lists, telephone numbers, web sites, post office boxes, e-mail addresses, prorations of outstanding gift certificates, unredeemed coupons, trade names, trademarks, logos, artwork, patents, trade secrets, continuing advertising contracts, training of the buyers, covenants not to compete, utility deposits, business licenses, customer notifications, good will, etc., etc. There is too much to explain here. Just be aware that you should not be using an “off the rack” form for a “custom fit” matter.
You are taking a risk in drafting that yourself anyway. Encourage the client or customer to seek independent counsel to prepare the document so you do not have the liability load. Or, seek in house counsel yourself.
The Earnest Money
(lines 33-40, 172-180, 257-269 and 296-305)
It is a small thing, but when space allows it in the contract form, try to spell out the amounts recited at various places in the contract as well as give them in arabic numerals. In other words, just like on the personal checks you write, it is useful to designate amounts both ways such as “One Hundred Thousand ($100,000.00) Dollars” or “ten (10%) percent” or “five (5) days.” That goes a long way toward eliminating confusion resulting from misplaced decimal points, poor penmanship, scrivner’s errors, etc. If you write the same information out in two different ways, then it is less likely that such drafting errors will occur or at least that they will be easier to resolve.
The first material issue to deal with on price is the earnest money deposit. There needs to be earnest money of some sort actually paid or the contract might not be enforceable. Contracts require consideration. A mere recital that it was paid is not enough. Something more than the contract itself must change hands. How much earnest money? The law doesn’t care how little it is. Even Ten Dollars would possibly be adequate for legal purposes as a minimum even on a million dollar house. Mutual promises can even be sufficient. Better yet, it could be “Ten Dollars and other valuable consideration, the receipt and adequacy of which is hereby acknowledged.” Or, it could be “Ten Dollars and the mutual promises contained herein.”
In any case though, the cash portion of the earnest money should be actually paid. The fact that it is recited as paid is merely evidence, not conclusive proof. Better would be a check that got cashed by the buyer or the broker or the escrow agent. That is much stronger proof.
If one of the parties does not want to spend a lot of cash immediately, the answer sometimes is to give an earnest money note initially when the contract is offered to the seller. Such a note is a promise to redeem the note in cash later upon a specific day or upon perhaps satisfaction of one or more contingencies. That is fine, but the date for conversion of the promissory note to cash should be sometime before closing. It does not do much good, at least from the seller’s perspective, to wait until closing to create an actual earnest money deposit that the buyer might be reluctant to abandon.
It was indicated that the amount of earnest money could be as low as perhaps Ten Dollars. Of course, that probably would not be adequate from the seller’s perspective. The seller generally wants a sufficient amount to show that the buyer is serious. At a minimum, the seller would like enough to insure that if the property is not purchased, the losses suffered by the seller from taking it off the market waiting for the buyer to perform will be reimbursed to the seller.
It cannot be too much however. The law does care about that. If it is so high that the courts would decree it is a “forfeiture”, the buyer will get it back. On public policy grounds, courts won’t enforce forfeitures. At what point it becomes a forfeiture however is a gray area. For example, a Fifty Thousand Dollar earnest money on a Hundred Thousand Dollar house stands a fairly high risk of being held to be a forfeiture, but the same amount on a Million Dollar house is an entirely different factual situation. The former is a 50% earnest money deposit. The latter is only 5%. There can still be an argument that Fifty Thousand is a forfeiture even on a Million Dollar property, but the buyer’s argument is much weaker.
One of the bigger sources of controversy between clients and licensees is return of the deposit on busted contracts. The seller wants to keep it and the buyer wants it back. What you need to alert each side about (and before the contract is first signed) are the practical realities involved. Typically, the earnest money is being held by the title company acting as an escrow agent and it will simply not release the earnest money deposit to either side unless all parties agree and in writing. If the parties will not agree, the title company can elect to pay the money into the registry of the court and wash its hands of the controversy.
The bottom line in such situations is that the money is not returned and both buyer and seller look angrily to the brokers unless it has been thoroughly explained in advance that such a circumstance might happen. Remember, even if one side egregiously has violated the contract terms and the other is entirely innocent, the earnest money can still be tied up in the short run. Therefore, neither side should count too heavily on getting the deposit immediately if something goes wrong. It behooves the licensees involved to insure the laymen involved understand all the possibilities.
It is true that the breaching party will likely lose ultimately, but it might require mediation, arbitration, lawsuit, or appeals before that happens with all their attendant costs and delays. Moreover, it is possible the property itself might be tied up in the meantime unable to be sold to anyone else. Certainly the buyer will not have use of those funds to make a deposit on something else. Consider having an explanation letter preprepared to hand to the parties as escrow is opened.
Sometimes, the words “non-refundable” are written in the contract regarding the earnest money in an attempt to short circuit the language discussed above regarding escrow agents. Do not count on those words as magic wands making the controversy go away without further difficulty. The escrow agent will still not release it to one side or another without consent of all the parties.
The only way to make the non-refundability of earnest money work as a practical matter is to leave it with the seller personally and not put it into escrow at all. Even then, the buyer can still dispute as to what the words really meant and whether it amounted to a forfeiture, but it makes the battle more of an uphill one for the buyer.
Smart buyers are reluctant to release funds directly to sellers before closing and understandably so. There is another potential approach. That might be to make the “earnest money” really the purchase of an option. If it is an option to purchase as apposed to an earnest money contract, the payment of funds up front is the taking of the property off the market for a period of time. Nothing further is left to do. The mere fact that it was taken off the market completes the purpose and the seller is entitled to the funds.
It is also possible to tie the two concepts together having part of the initial deposit as option money and part as earnest money to be applied to purchase price if closing finally occurs. You are getting pretty far afield however from just filling in the blanks on a standard form though. Wording becomes tricky and you do not want to become guilty of practicing law without a license. The risks are too great. It is recommended that you or your clients seek legal advice on precise wording if you want to try it.
Speaking of making sure they understand, if the licensees are to keep any portion of the earnest money as set forth in Section 41, it is particularly important that the seller be alerted to this as a result. Depending on the amount of the deposit, the seller could end up with nothing and the licensees have a nice payday. There are many reasons why such a result is perfectly fair. Nevertheless, without explanation to and comprehension by the seller, that result might not sit well unless it is expressly bargained for by the seller. Explanations help avoid hard feelings and do not count on the contract form to be self explanatory or even read by the seller before signing. Call it to their attention expressly if the licensee is to do any sharing of the earnest money on default.
Another thing to explain is that, unless something is said to the contrary in advance, the earnest money typically does not earn interest. Merely because you know that does not mean everyone does. Customers are accustomed to earning interest on their money. If that is not going to occur, they need to be alerted.
If the earnest money deposit is a substantial amount and the closing will not be for a month or two, it might be worthwhile asking that it be placed in an interest bearing account in the meantime. Be sure to confirm ahead of time that the escrow agent can do that and at what cost, if any. Also, be sure to indicate who gets any accumulated interest - the buyer or the seller.
The Purchase Price
(lines 33-40)
The earnest money and down payment portion of the purchase price are relatively easy for buyers and sellers to understand. What they typically find difficult to grasp is what line 37 means with its check boxes entitled “Deed” and “Contract” when there is an “owner carry” component of the purchase price. It starts getting even more difficult for novices to follow once words like trust deed, contract for sale, contract for deed and mortgage are added to the earnest money contract they are holding when the question comes up for discussion. Some of them sound similar, but they are very different legally.
These different terms should be carefully explained. Better yet, direct them to their independent legal or financial counselors so that you are not practicing law by advising the parties signing the contract. Direct their attention perhaps to line 19 which essentially suggests the same thing.
Okay, sometimes that is not practical or there is not time or they say “why should I pay someone else when I hired you as the real estate professional?” If that happens, make sure your liability premiums have been paid in full because there are significant different consequences depending on which box is checked.
The Deed option is probably the cheapest for the seller. It will result in seller conveying away title at closing and holding a note secured by a trust deed or mortgage and perhaps UCC financing statements and security agreements if personal property is involved.
Usually, title companies will prepare such documents without charge if they are the standardized ones. However, there are potential problems with the standardized forms both from the seller’s and the buyer’s perspectives. For instance, trust deeds typically have longer periods to foreclose and there are potentially important issues regarding redemptions and collecting deficiency judgments, if any. These are complex and beyond the scope of this article. Just make sure you are extremely cautious as to giving recommendations to the clients one way or the other. Each of the options has both advantages and disadvantages.
As to buyers, they will be surprised, to cite one unpleasant example, if there is a fire later and they discover the standardized wording of the trust deed form does not automatically allow a right for the insurance proceeds to be used to rebuild.
Rather than just spelling out that a trust deed will be used, mention the specific form to be used at closing to eliminate controversies. Is it to be the freely assignable form or the more restrictive “due on sale” one? Possibly cite by publisher and form number. Keep in mind that if the Contract box is checked and a contract of sale is desired, the title company will not prepare that for free. In fact, the closing agent will probably insist that someone’s attorney prepare it, an obvious extra expense for someone.
In addition, it does not help much to merely check the appropriate box on the earnest money agreement without spelling out the terms to be applied for the loan being given by the seller. How long is the owner going to carry? At what interest rate? How often and how much are payments to be? Is there a penalty if they are late? Is there is grace period? Must notice be given before invoking penalties? What type of notice, to whom and where? Is there a penalty for prepayments? That could easily have adverse tax consequences for the seller. What about real estate tax payments that are due during the loan period? Collection escrows? What about insurance coverage? Who pays? Should coverage be a specific dollar figure or full replacement? Flood or earth movement coverage endorsements? With what companies? Look into the Best Insurance Guide annual ratings of insurance companies. Perhaps set a standard for the company such as having a minimum rating of A. What about possibly restrictions on future construction until the loan is paid?
There is a provision in Section 23 to resolve such issues after the contract is executed. On the other hand, it might be better to at least have agreement on the general outline of the main provisions up front. Sometimes it is hard to extricate one side or the other from the agreement once it is signed.
Speaking of flood insurance, the current earnest money form, lines 48-49, do not make it a contingency. Buyers who have not ever had to pay for insurance of properties in a flood plain might be shocked at the prices. If the property might be in a flood area or any other hazard area, discuss that with the buyer and whether a contingency to insure that buyer can obtain (at a price acceptable to buyer) any needed or desired insurance of all the types that buyer might seek above and beyond just the ordinary. Give buyer a certain number of days to accomplish that as a contingency.
Loan Contingency
(lines 41-49
If it is to be the owner providing the loan, the seller might very well want to review the credit and financial condition of the buyer. If so, perhaps there should be an addendum specifying what will be provided for review, when it will be provided and how the seller will be able to verify the information. Keep in mind that financial institutions will tell nothing unless the buyer signs and delivers a consent form suitable to the lender. Give the buyer sufficient time to obtain the information needed. Some lenders are notoriously slow to respond to such requests.
If it is an outside lender rather than an owner carry that will provide the closing money, the seller would be well advised to insist upon greater detail as to what loan the buyer is seeking. One percent loans for 100% of the purchase price with no origination fees or discount points are simply not available no matter how much the buyer might want that.
Is satisfaction of the contingency to be in buyer’s absolute discretion? If nothing else, try to have a reasonability component injected into the wording. And, definitely have some early date for the buyer to at least provide a written statement from the lender that the buyer qualifies for the loan.
Please note that the form discusses new loans in the preprinted language, but not assumptions by buyers of existing loans. If that is contemplated by the parties, that should be treated as a contingency as well including discussions whether such assumed loan is to remain unchanged in its provisions.
If assumptions are in order, make sure the seller understands that merely because the outside lender has permitted the new buyer to assume does not mean the seller is released from obligations. Many bitter consequences can come about for the seller if the buyer does not perform.
Instant Collectability of Funds
(lines 38-43)
Perhaps here in Section 2 (or possibly in section 16 regarding closing), it should be specified that the funds required are not only in US currency, but also to be “good funds” immediately collectable such as cashiers check, certified funds or electronic funds transfers.
Other Contingencies
(Lines 63-66)
Overall, I would guess that the most frustrating problem to solve is the inadequately described contingency. Most of the contingencies preprinted in the OREF form have details such as the number of days, what happens if it fails, whether notice must be given, etc. Unfortunately, far too often, the agent in drafting the contract merely says something like: “Contingent upon sale of buyer’s home.” What does that mean exactly? Who gets to determine satisfaction and by what standard? Is it for the benefit of both parties or can buyer waive it? Is notice required or can buyer simply say later that it did not sell and demand the earnest money back?
Try to have more detail as to what home is to be sold. Possibly have some trigger dates. An example would be that it must be under contract by a date certain and closing funded by a second date. Is there a certain minimum amount for which it must sell? All of these and more are pertinent questions to both sides.
There are many other possible contingencies. Buyers might want to check with the local governmental authority as a contingency to confirm that the property has a certificate of occupancy if applicable, is in compliance with zoning, health, DEQ and building codes, and has the proper license which may continue (as for example Cannon Beach’s vacation rental licenses which terminate automatically upon sale). Failure to do this can also be a large source of subsequent complaints by buyers.
The Title
(lines 50-79)
The default type of deed automatically specified in most earnest money forms is a statutory warranty one. That might not be best for the seller, particularly if it is an estate sale or a sale after a foreclosure or even from property that has passed from a relative of the seller. Don’t automatically assume the seller wants to be providing warranties or even understands the difference between the various types of deeds. If there is to be any change to, say, a special warranty deed or a bargain and sale one, be sure to reference the change from that preprinted in Section 6 regarding the fulfillment deed at closing.
Even if the statutory form of deed is agreeable, from the seller’s perspective, it might not hurt to beef up the exclusions from warranties. For instance, in addition to the standard language, for various reasons, the seller might want to also mention easements and rights of way, if any, whether or not of record; unpatented mining claims and reservations, if any; reservations or leases of oil, gas and/or mineral rights, if any; encroachments, if any; water rights and claims of title to water, if any; rights of the public and governmental bodies in and to any portion of the property lying below the present or past high water mark of the navigable bodies of water, if any; changes in the boundaries of the bodies of water, if any, due to avulsive movement or accretions or similar changes, if any; not to mention, governmental rules, regulations, ordinances, statutes and other laws including, without limitation, claims of artists as to copyright or other claims regarding visual art on the Property, if any.
The buyers will take title to the property as set forth in Section 40 on line 282. Does the buyer understand the various ways that title can be held and the various advantages and disadvantages of each? It is not critical on the initial earnest money contract to have that finalized, but do encourage the buyer to discuss it with legal counsel before closing. Estate planning and other issues might be at stake.
Many buyers do not understand the preliminary title report if they read it at all. Encourage them not only to read it, but also ask the title company to provide the buyer a copy of each of the documents mentioned on the schedule B exclusions from coverage. Encourage the buyers to read those as well and ask questions so there are no misunderstandings later. For example, the buyers might be intending to create a vacation rental home but not be aware that there may be CC&Rs in place that prohibit it even if the city allows it. Better yet, encourage the buyer to have a lawyer explain what they mean. That way you are not giving legal advice.
At a minimum though, find out why the buyer wants the property and make it a contingency if it seems important. Don’t find that out later when the buyer is filing a complaint for your failure to point out that possibility.
Note that the current earnest money form does not mention either easements or leases as being subject to buyer’s approval. Perhaps that is assumed, but if you want to remove any ambiguity, make it clear that the buyer gets to read and approve everything mentioned as exclusions either by the title company or the seller.
Consider when appropriate adding a section for an optional updated survey contingency. Be sure to make it clear in the offer who pays and when it is to be provided. Keep in mind that, given the length of time it takes for surveyors, the contingency period ought to be, say, 30 days instead of the usual 5 or 10 elsewhere in the contract form. In any event, if every sale had an improvement survey, the number of post closing law suits would see a significant reduction.
Representations, Inspections and Disclosures
(lines 78-156, 159-165 and 270-274)
It is important to urge sellers to err on the side of fullest possible disclosure. Be sure to explain the state law that known hidden defects must be revealed even if the property is being sold “as is.” Sure, a disclosed problem may reduce the selling price and therefore the commission. However, the buyer ever uncovers a problem later, almost assuredly, it will be assumed both the seller and the brokerage knew about it and attempted to conceal it. Even if not true, the resulting expense to defend, not to mention the wear and tear on your stomach lining and time distracted from more productive activities, might cost more than the lower sales price would have been.
Consequently, strongly encourage the seller to not only disclose, but do so in detail. If so much as a burnt out refrigerator bulb exists, it should be disclosed. The burden is on buyers to prove that the seller knew about the undisclosed defect in advance of the sale, but there is probably an automatic suspicion on the part of most judges and juries that there was such pre-knowledge.
By the same token, strongly encourage the buyers to have a full home inspection. While that does not relive the seller of disclosure obligations, it at least reduces the chances of problems being a surprise later.
If a well exists, you might also want to explain to the buyer that the typical testing of the water does not include much more than coliform bacteria and nitrate concentrations. If the buyer has some special allegies or chemical sensitivities, then more extensive testing must be specifically requested.
Perhaps mention to the buyer that the Oregon Construction Contractors Board maintains a list of licensed inspectors in which the complaint histories regarding such inspectors can be investigated. The Better Business Bureau website might also be a source for such information. Obviously, that does not have to be part of the contract. It is merely to keep the parties informed as to recommendations.
When inserting time frames for various inspection periods, make sure they are practical. It doesn’t do any good to specify a five day septic system test if the local inspectors are so busy they cannot get to the test for two weeks.
Closing
(Lines 147-152)
In the past, there has often been some confusion as to whether there might be an automatic extension if the lender had not finished all the loan documentation. Do not make that assumption. Everything must be signed and in the hands of the escrow officer on or before close of business day on the date specified for closing. Be sure to inquire as to how the buyer will be providing funds and insure that there is sufficient time to obtain cashiers checks or electronic transfers if necessary.
Possession
(Line 153-165)
The ideal situation would be for possession and prorations to all take place the same day as closing. Anything else significantly complicates matters.
Try and avoid allowing the buyer to have possession prior to closing. Otherwise, landlord/tenant relationships might be deemed to have been created with all that entails including, but not limited to, being forced to go through the court eviction process if the deal falls through which will take one to two months at a minimum. In addition, seller might be deemed to have assumed all the other obligations of landlord from the necessity to have a working smoke detector to a fully habitable premises. Merely disclosing there is no hot water might not relieve the seller of the obligation to provide it once it is arguable that a tenancy has been created.
Even issues such as insurance are affected. The insurance carried by owner occupants and the premiums are very different from that needed for residential tenancies. Check with the seller’s insurance company to confirm a pre-closing buyer occupancy will even be allowed.
Everything is reversed, but still applicable if the buyer allows the seller to continue occupancy beyond the date of closing.
That brings us to the issue of what happens if the seller does not timely deliver possession when promises. Section19 only discusses a per diem rent if there is an agreed upon extension period. What if the seller overstays without consent or leaves something behind? It might be best to specify that the per diem applies as a liquidated damage amount to all circumstances where the seller fails to timely vacate.
General Suggestions
a. Make sure everything discussed verbally is covered in the contract including things expressly excluded. Make sure it is all in writing and signed by all.
b. Use amendments to the contract when discrepancies discovered or extensions needed.
c. Make sure everyone involved read it all and understood what is written.
d. Make sure you understand precisely what it all means. Among other things, watch out for ambiguity in language.
e. Watch out for assumptions as to facts.
f. Try to avoid giving legal advice. Recommend they get independent counsel so it is not all on your neck. Recommend they seek real estate law specialists, not the person who handles their traffic tickets or divorces.
g. Make sure they understand the limits to your agency relationship for them.
h. Take copious notes and keep them in the permanent file. It is called a “paper trail.”
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