KASS: Essential elements for real estate contracts

DEAR BENNY: We are first time homebuyers. Is there anything we should include in the real estate sales contract that will protect us? The contract prepared by our real estate agent appears to be one-sided and protective of the agent and not in our best interests. – Sabina

DEAR SABINA: When dealing with real estate matters, the law is clear: Everything has to be in writing. Thus, you will need a sales contract, which will spell out all of the terms, conditions and special requirements which you need and want in order to go to closing, or settlement.

If no real estate agent is involved, your attorney should be able to assist you in preparing the contract offer. In your case, since there is a real estate agent, you can get a form sales contract from the agent. In fact, the agent should be able to assist you in preparing the document for presentation to the seller, although your attorney should review it before you sign.

Typically, the buyer makes a written offer to the seller. The seller has three alternatives:

*The contract can be accepted.

*The contract can be rejected in its entirety.

*The contract offer will be countered, with different terms.

In most cases, the potential buyer will receive a counter-offer. Then, the buyer has the same three alternatives.

There are certain provisions which, in my opinion, must be included in any real estate sales contract.

1. The property must be clearly identified, preferably by street address.

2. Unless you are paying all cash – which doesn’t often make sense – the contract must be contingent upon your obtaining financing. You should allow yourself some time – usually 30-45 days – in which to make application from a mortgage lender and get a written commitment that you have been approved for the loan. Under the new settlement rules promulgated by the Consumer Financial Protection Bureau (CFPB) it now will take a little longer to go to closing.

3. Unless you are an experienced contractor, you should make the contract contingent on obtaining a satisfactory home inspection. You should give yourself five to seven days after the contract is signed to have the property inspected. If you are not satisfied for any reason after you receive a written report from the inspector, you should have the right to terminate the contract and have your earnest money deposit refunded immediately.

4. How much earnest money should you put up when you sign the sales contract? When you sign a contract, in order to make it a valid, legal document, the buyer should put up some money as a good-faith earnest money deposit. These funds will be held by the real estate broker or the settlement attorney until settlement takes place or until either the buyer is entitled to a return of the deposit (because the contingencies cannot be met) or the buyer is in breach of the contract, in which case the money would go to the seller.

Brokers usually ask the buyer to put up 10 percent of the purchase price as the earnest money deposit. However, buyers can put up more or less, so long as the seller agrees with the amount. Indeed, in many contracts, the deposit consists only of a promissory note signed by the buyer, to be redeemed at the settlement itself.

Buyers should understand that although everything in real estate is negotiable, the earnest money should be large enough to convince the seller you are seriously interested in going forward with the purchase. I usually recommend at least 5 percent of the purchase price.

5. Finally, unless the property is a condominium, the contract should be contingent upon the buyer obtaining – no later than the date of settlement – a “termite” letter. This is a report from a licensed pest-inspection company indicating that the house, and garage if applicable, is free and clear of termites and other wood-boring infestation. Some contracts require the seller to obtain and pay for this report; other contracts put the burden on the purchaser. Either way, this is a critical report which all buyers should receive and carefully review before settlement is completed.

Many of these contingencies are time-sensitive. You, as buyer, have so many days in which to get financing and so many days in which to complete the home inspection. Mark your calendar with these due dates, and make sure you act on these contingencies before the time has expired. Otherwise, it will be too late and you will be legally bound to comply with the terms of the contract and proceed to settlement.

Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: [email protected].