Critical Contract Clauses

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Question: We have just arrived in the Washington area, and want to buy a house while interest rates are still low. We are very confused about the different procedures that are used here in this area, and would like to know what we should include in the real estate contract that we sign with the seller.

Answer: Real estate practices differ widely throughout this country. Local customs and local legislation often dictate what your rights are. For all practical purposes, the Latin phrase “caveat emptor” — let the buyer beware — should be your guide.

Keep in mind that the buyer generally presents a written offer to the seller. The seller has three choices:

  1. The offer can be accepted in its entirety;
  2. The offer can be rejected in its entirety, or
  3. The offer can be 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 the minimum threshold of what should be included in any real estate contract. Addenda are usually added, whereby the specific and individual needs of the buyer and seller are incorporated into the final real estate contract.

In the Washington metropolitan area, the standard contract is known as the “regional sales contract.” However, since different jurisdictions have different rules and procedures, there are specific addenda (i.e. DC, Virginia, Rockville) which must be included in any final sales contract. If you are unsure of what forms to use, consult your real estate attorney before the contract is signed.

Keep in mind that in order to have a binding, valid contract, it must be in writing. Anything told to the buyer or the seller verbally will most likely 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, included as a part of the contract, 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:

Home Inspection Contingency: There are two kinds of contingency clauses. One is a general clause which says that if you are dissatisfied for any reason whatsoever with the home inspection, the contract is automatically null and void and you receive a return of your deposit. 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, at the buyers expense, 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.

The Regional Sales contract provides the buyer with both options. Give serious thought as to which option you want to be made a part of your sales contract.

In recent years, because of the real estate buying frenzy that we experienced, many real estate brokers were encouraging potential buyers not to include such a contingency in their offer. In my opinion — and based on the experience of many buyers in the past two-three years — this is a mistake and has been quite costly for homebuyers who — after closing — found many problems in the house.

Contingent on Financing: Unless you are paying all cash for the property, the contract must be contingent on your ability to obtain the necessary financing. Most standard form contracts contain such a contingency. However, you should read it 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 refunded.

Property Condition: 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 occupy the property before the settlement, then the language should reflect this fact. 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 of “occupancy.”

Settlement: The buyer has the right to determine the location and time for closing. It should be noted that the word “settlement” is synonymous with the word “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. This is an important financial decision that you are making and you need someone to be on your side when you go to closing.

Termite: 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, lenders generally require an acceptable termite letter at settlement, and this has to be available before settlement. This is termite country; make sure that the house does not have termites — or termite damage.

Earnest Money Deposit: This is the deposit that you put down with the sales contract and will be held in an escrow account until settlement. Depending on how much time will elapse between the time the contract was ratified and settlement takes place, you might want to require that the deposit be placed in an interest-bearing account. 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.

Anything Else? Are there any specific items which should be included with the property. For example, lawn furniture, window 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.

Written by Benny L. Kass

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