The horror stories that result when real estate contracts aren’t sufficiently detailed could inspire a year of ghoulish flicks. Have we got some ideas for you, Steven Spielberg.
One couple, who prefer to remain anonymous, thought they were excluding their expensive dining room curtains from the sale of their suburban home, though their Realtor hadn’t specified such on the listing sheet. When a potential buyer presented a contract, it clearly stated that the curtains were to be included in the sale.
After great debate, the sellers decided they cared more about closing the transaction than nixing the deal. They bit their tongues, smiled and later yelled at their real estate agent.
A written real estate sales contract-be it for a house, condominium, cooperative or two-flat-represents a legally binding promise to buy and sell a specific property, for a specific dollar amount, within a specific time frame.
Attending to the details is the key in writing real estate contracts. Solid contracts leave as little as possible to chance and cover the most common scenarios that occur, such as buyer’s remorse-that dread feeling that overtakes some prospective owners after they’ve signed on the dotted line and had a fitful night’s sleep thinking about handing over their life’s savings.
The language of the contract in large part determines how satisfied the seller or buyer will be and whether they feel the other party gave and got as much as they did, says Chris Eigel, executive vice president of Koenig & Strey in Glenview.
These days both sides do a lot of giving. The residential real estate market may not be as robust as it was during the heady ’80s, when most buyers eagerly agreed to sellers’ requests, waived inspection rights and signed contracts on the hoods of Realtors’ cars, says Jim M. Kinney of Rubloff Inc. But the market today isn’t so dire that sellers feel pressed to agree to the first contract that comes their way, either, he adds.
Writing a contract that sufficiently accommodates both sides and ends in a closing-the ultimate goal-demands some basics: an ability to negotiate tactfully (telling the other side that the kitchen requires a redo won’t score points), an understanding of real estate lingo (how clean is “broom clean?”) and a realistic outlook about what’s reasonable (asking that a pet be left behind is not).
From the buyer’s perspective, a well-written contract would allow them to change their mind, get out of the deal and take back their earnest money. From the seller’s perspective, however, an ironclad contract would allow no out or at least force the buyer to pay a penalty. (Conversely, many sellers try to retain an out for themselves in case a better offer materializes.)
In either case, only a judge can decide the outcome, including who keeps the escrow, says Steven M. Elrod, a real estate attorney with Burke, Bosselman & Weaver and general counsel for the Chicago Association of Realtors.
Although there are variations in the contract forms real estate boards favor, most reflect at least one common trend. They’ve become more detailed so that fewer riders, or clauses, are attached and so that less is left to debate-and litigation. (Contracts have also expanded to cover changing laws and technology. Faxed contracts are acceptable if followed by a written version.)
They also have common clauses-areas that cause the most problems for both sides of a real estate transaction. The following are the most critical points to address in drawing up a real estate contract, according to attorneys, agents and homeowners.
Because each property and each buyer and seller is unique, a form contract will always require additions and deletions. The following points are not to be taken verbatim, but as guides to ensure a smooth transaction.
– Attorney approval. Some contracts, such as that used by the North Shore Board of Realtors, now include this request in its text. The clause allows attorneys to scrutinize the contract for form and substance during a set period, usually five to 10 days, Elrod says. “There are many issues an attorney can bring to a client’s attention, if given the proper time.”
– Price. Contracts generally contain a blank to fill in the purchase price, plus how much will be paid in cash and how much by a mortgage. In most cases, buyers try for the lowest acceptable price, though in tight markets many pay the asking price or more.
The contract also contains space for the amount of earnest money, which serves as a good-faith sign that a sale will occur. The money is placed in an interest-bearing account only if specified in the contract. Typically, $1,000 is delivered when a contract is accepted, then 10 percent of the sales price, minus the $1,000, is presented within 10 days, says Realtor Winston E. Kennedy of Century 21/Kennedy, Ryan, Monigal, Chicago.
– Timing. Both buyers and sellers need to insert several dates into a contract. In most cases, a buyer needs time to secure financing, but a deadline should be set. “Between 30 and 40 days is fair to both sides,” says Realtor Renee Bennett of Draper & Kramer, Chicago. “Of course, a seller wants as short a period as possible because if the buyer can’t get financing they want to be able to show the property again. If it’s too short, however, most buyers need an extension. Conversely, most buyers want as long a period as possible to get the best deal.”
A time frame also needs to be set for completion of the title search and correction of any judgments, Kennedy says.
In addition, the two sides need to agree on a date when the property changes hands, which may not prove easy because it often depends on other factors. The buyers may have to vacate their current property by one date, yet the sellers may not be able to move into their future home until a later date.
– Contingencies. Today most contracts contain some contingencies, including the right to an inspection by an engineer, architect and, sometimes, a termite expert (see below for more about inspections).
In some slow markets, buyers are able to extract the contingency of selling their home before closing on the new home. In such cases, attorneys representing a seller recommend that a set period be allowed and that during the waiting period the sellers be permitted to show their property in order not to lose out on other, perhaps “cleaner,” contracts, those without contingencies. If another buyer comes forward, the first has 24 hours or so to waive contingencies or risk losing out.
This tactic can backfire, Eigel cautions. “If there’s a lot of inventory on the market, some Realtors forgo showing properties with too many contingencies.”
Barbara Jacobs wants a slightly different contingency-enough time once she sells her Chicago condo to find a new abode in Evanston. “I don’t want to buy before I sell, but I also don’t want to have nowhere to go.”
Buyers of condos and cooperatives also need a contingency to cover approval from their new board.
Other less traditional contingencies are known to surface, though they’re not always accepted. Bennett says one couple who seriously considered a Lincoln Avenue apartment worried about noise. Their contingency was that they be allowed to spend a night in the apartment. The seller refused; the deal died.
– Closing. The closing is the time when the property legally changes hands. Most Realtors suggest that the transfer of possession occur on a weekday, not on a holiday and at “closing” rather than on a specific date, which can lead to haggling over what time on that date.
To ensure a smooth transfer, many attorneys recommend that some money-about 2 percent of the purchase price-be set aside in a possession escrow account in case the seller can’t vacate the premises at the appropriate time. Typically, this amount is not placed in an interest-bearing account because it’s supposedly for such a brief period. From that amount, a per diem rate-usually between 5 and 10 percent of the 2 percent figure-is paid back to the buyer to cover the seller’s “rent” if they don’t vacate on time.
Most attorneys representing buyers recommend that that strategy be avoided unless a top dollar amount is set. “You can get into situations where the seller’s new home isn’t ready and it’s cheaper to stay in the house than move to a hotel,” Eigel says. Adds Kennedy, “You also run into other problems. A buyer claims that the sellers ruined a bathtub when they stayed on.”
– Exclusions. Form contracts list what’s traditionally included-curtain rods, shades, appliances, window seat cushions-and list or leave blanks for what’s excluded-family chandeliers, curtains that match bedspreads, pot racks. Items that cause the most disagreement are those that some view as attached and others consider portable, such as built-in barbecues, sconces, fireplace equipment.
But even unattached items that look attached can cause problems and derail a deal, says Realtor Jenny Gilbertson of Mitchell Bros./ERA, Evanston. She cites leaded glass windows hung in front of main windows and ornate mirrors as prime culprits.
Realtors suggest sellers remove items they don’t want to leave behind before showing a property. Some recommend replacing those critical to the ambience with less costly versions. “Items listed as excluded become more desirable,” Eigel says.
Buyers and sellers also should know that different geographic areas have different traditions. “In Southern states, appliances are always taken along,” says Rubloff’s Kinney.
– Inspection. Buyers should have two inspections of the property, but need to request that in most contracts. They’ll want the first within seven days of acceptance of their contract. The inspection serves as a contingency to let them out of the sale if it reveals major defects that can’t be remedied by repair or a lower sales price.
Buyers will want a second inspection 24 to 48 hours before they take possession to be sure sellers haven’t removed items that were to be left and that appliances and heating, electrical and air conditioning systems appear in good working order.
– Condition. Buyers want sellers to be as specific as possible regarding condition. Their attorneys often favor such language as “properly functioning” over “in working order,” says Eigel.
In the same vein, the term “broom clean,” which refers to the way a property is supposed to look just prior to closing, is subjective, though it has come to connote a fairly clean property, but one that may require some cleaning, says Jim Diamond of Diamond/Schreiber/Re/Max Town & Country, Highland Park.
– Taxes. Traditionally, property taxes are prorated between buyer and seller. But because taxes are paid in arrears, neither side knows at closing what the final tax bill will be and hence their share. How outstanding taxes will be covered needs to be addressed in the contract.
Because taxes historically have increased between 5 and 10 percent annually, sellers generally credit the purchase price by 110 percent of the most recently ascertainable tax bill, Elrod explains. But because taxes have increased more than 10 percent annually in some areas, that amount may not be sufficient and may need to be increased accordingly. Both sides also should know, he adds, when a property is subject to reassessment, which may affect proration.
Other matters that need to be covered in a contract include municipal, state and county transfer taxes, water bills and assessments.
– Signing. Even the most detailed contract becomes legal and enforceable only when both sides sign their names and initials in all the required spots, says Eigel.
