Question: We have just moved to the Washington area from California, and are looking to buy a house. The process here appears quite different from that of the West Coast, and we are very confused. Is there any language that should be included in the real estate contract that we may sign with the seller. Are there any important consumer protections which are applicable to real estate transactions.
Answer: Real estate practices differ widely throughout this country. Local customs and local legislation often dictate your rights. Unfortunately, there are very few real consumer protection laws which govern the purchase and sale of residential real estate. For all practical purposes, a buyer should keep in mind the Latin phrase "caveat emptor" -- let the buyer beware.
In the Washington, D.C. area, as an example, the buyer generally makes a written offer to the seller. The seller then has three options. The offer can be accepted in its entirety; the offer can be rejected in its entirety. More often than not, however, the offer is countered by the seller. This counter-offer then becomes a new offer to the buyer, who then has the same three choices.
Ultimately, we either reach a valid binding contract -- through a meeting of the minds -- or the negotiations are terminated and the buyer and the seller both go their separate ways.
There are standard real estate contracts available from real estate brokers or from stationary stores. By and large, these standard form contracts are acceptable, but they should be considered only as a minimum threshold of what should be included in any real estate contract.
Addenda are usually added, whereby the specific and individual needs and desires of the buyer and seller are incorporated into the final real estate contract.
In order to have a binding, valid contract, it must be in writing. Anything told to the buyer or the seller verbally will probably not be binding and will not become a part of the final contract. If the broker or one of the parties to the transaction makes certain representations, make sure that these are reduced to writing and signed by both seller and buyer.
Here are a few of the critical contract clauses which must be included in any real estate contract:
1. A home inspection contingency. There are two kinds of contingency clauses. One is a general clause which says that if the buyer is dissatisfied for any reason whatsoever with the home inspection, the contract can be declared null and void and the earnest money deposit will be returned to the buyer. The second type of clause is specific, whereby you have to advise the seller of your concerns within a certain period of time, and the seller has several days in which to decide whether or not to make the repairs.
My own preference is to use the general inspection clause. Such a clause would read as follows:
This contract is contingent upon the buyer having the right to engage a professional inspector to determine the structure and condition of the house. The inspection shall be conducted and the contingency concluded within five working days from the date of acceptance of this contract. The inspection report must be satisfactory to purchaser, or all deposit monies will be immediately refunded and all contract obligations considered null and void.
It should be noted that in recent years, the real estate industry in the Washington metropolitan area has started to use what is known as the Regional Sales Contract. One of the addenda forms to this new contract contains very good language regarding the home inspection contingency. It gives a buyer the choice of voiding the contract (i.e. the general inspection clause) or giving the seller the opportunity to make certain repairs (the specific clause). This addendum can be used for the inspection contingency.
2. Financing contingency: If the buyer needs to obtain a mortgage loan in order to purchase the property, the contract must contain language that the contract is contingent on the buyer obtaining the necessary financing. Most standard form contracts contain such a contingency. However, you should read the language carefully to make sure that if you are unable to get the necessary mortgage money after making a diligent effort to obtain financing, the contract can be voided by you (and not the seller) and your deposit will be immediately refunded.
It should be noted that the financing contingency language of the Regional Sales Contract is not a model of clarity, and buyers should make sure they fully understand the full impact of that language.
3. Property condition: Are you buying the property in as as is condition? If so, make sure you understand the timing of that condition. Is it "as is" of the day you signed the sales contract or "as is" on the day of settlement. There is a major difference. In my experience, I have encountered numerous hot water heaters, for example, that were fully operational when the contract was signed but on the day of settlement were not working.
Depending on the language of the sales contract, the buyer may not be able to require the seller to replace or repair that defective heater.
My preference is that every real estate contract should include the following language:
The plumbing, heating and electrical facilities (including any air conditioning units or systems) must be in working order at time of settlement.
If you are going to allow the seller to stay in the property for a period of time after settlement, then the contract should be modified to reflect that these items will be in working order at the time possession is given to the purchaser.
4. Settlement:The buyer has the right to determine the location and time for closing. The buyer has the absolute right to determine which title attorney or title company will conduct the settlement.
While you can get references from your real estate broker, keep in mind that you want someone who will be representing your interests, and not someone who is a "friend" of the seller or the broker.
For the benefit of our West Coast friends, they go to þescrowþ , while we here in the East go to þsettlementþ or þclosingþ .
5. Termite inspection: The seller must provide a letter from a reliable, licensed termite company that the property is free of active termite infestation and wood-boring insects. If termite damage is found, the seller will repair at his or her cost. If there is a garage or other structure in addition to the main house, make sure that the termite language covers all buildings on the property. It is to be noted that in some parts of the country the termite obligation falls on the buyer. In either event, many lenders will require an acceptable termite letter at settlement, and this has to be available before settlement.
It is my understanding that some lenders are no longer requiring a termite letter in order for a mortgage loan to be approved. That may be acceptable for a lender. In my opinion, it is not acceptable for a buyer. This is termite country, as are most places, and buyers should be satisfied that the house is free of active termite infestation.
6. Earnest money deposit: The earnest money deposit that you put down with the sales contract should be held in an interest-bearing, escrow (trust) account until settlement. If settlement takes place, the interest accrues for the benefit of the buyer.
The question is always raised as to how much is an acceptable earnest money deposit. Sellers obviously want as much as possible, since if the buyer defaults, the money would usually go to the seller.
Buyers, on the other hand, want to put down as little as possible.
A good rule of thumb is that the deposit should be at least five percent of the overall purchase price. If the broker is unwilling to put these funds in an interest-bearing account, the buyer should contact his or her lawyer, who can put the funds into an appropriate interest-bearing escrow account.
Under no circumstances should a buyer give the deposit directly to the seller to hold. If the title is inadequate, or if the buyer is unable to obtain financing, it may be very difficult to obtain a refund of the deposit, since presumably the seller may already have used those funds. An independent escrow account must be established for the earnest money deposit.
7. Items which do -- or do not -- convey: Are there any specific items which should be included with the property. For example, lawn furniture, air conditioning units, special lamp fixtures, ladders, or other such items. If there is something that the seller does not want to convey, it should be specifically written in the contract. Similarly, if there is something that the buyer wants to go with the house, it too should be reduced to writing. As indicated earlier, do not rely on verbal representations.
These are but a few of the important contract clauses which should be included in any real estate contract. Do not be pressured into signing the contract. You are committing yourself to a substantial investment, and you should be able to sit back and carefully review any legal document before it is signed. In fact, it is a good idea to have your own lawyer review the contract before it is finally signed.
For more articles by Benny Kass, please press here .
Copyright 2001 Benny Kass. Posted by Realty Times with permission.