Contractual Problems with Residential Real Estate Transactions

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A residential real estate transaction is a complex process that involves multiple parties, extensive details, and serious contract legalities. The National Association of REALTORS®1) reported that 5.51 million existing homes and 612,000 newly constructed homes were purchased in 2017.

Some portion of these transactions encountered problems or common mistakes that delayed or jeopardized the process or caused legal problems. Issues with the purchase and sale agreement and dissatisfaction with real estate agents and brokers are two common causes of disputes.

Issues with the Purchase and Sale Agreement

Clear and detailed purchase and sale agreements2) are essential for creating successful real estate transactions. Four important areas of the agreement are property details, financial details, disclosures and inspections, and settlement details. Ambiguities and mistakes in the contract can lead to costly legal battles and claims of misconduct against agents and brokers.

Property Description

House for sale iconAn accurate property description3) ensures that the buyer is purchasing the correct property. It provides pertinent details including the following information:

  • Address and legal description (The tax parcel number and approximate square footage might also be included.)
  • Proof that the seller owns the property (A clear title that has no claims of ownership by others or tax liens provides proof of ownership.)
  • Itemized list of any property to be sold such as personal possessions that the seller is not taking (Items like bookshelves, built-in appliances, fireplace inserts, and window screens usually remain unless some other agreement is reached.)

Financial Details

Financial details are part of consideration4), which is one of the six elements of a contract. Each party to a contract is required to provide something of value that motivates the other party to enter into the agreement. The law defines this exchange of value as consideration.

Financial information includes the sales price, down payment, escrow funds, and interest rates. The time frame for procuring the funds, the terms for terminating the contract if funds are not received, and which party will receive the deposit if the transaction is canceled are also included. State law usually determines who receives these funds.

Disclosures and Inspections

Proper disclosures and inspections during the purchase and sale agreement stage regarding the home's physical condition are crucial for (a) preventing doubt about the transaction and (b) minimizing the risk of legal disputes.

Inspections

Measuring tape on wood imageA list of inspections, the party who will pay for the inspections, and remedies for any problems are included in the contract. This ensures that the property will be transferred in an acceptable condition.

Disclosures

The seller's disclosure report includes questions about specific aspects of the property as well as space to list problems that are not covered in the questionnaire.

According to HG.org5), one of the most common disputes between sellers and buyers is the common mistake of failing to disclose material facts or defects that may have impacted the buyer's decision to purchase the home or the price he or she would have been willing to pay for it.

States differ regarding the types of defects sellers must disclose. Furthermore, some states stipulate that buyers can hold real estate agents and brokers legally responsible for failing to disclose defects.

Settlement Information

Settlement information describes how the property will be transferred to the buyer. It is important because it provides a time frame and structure for completing the transaction. It includes closing details and seller's obligations.

Closing

In Escrow SignIn some states, the escrow agreement is included in the purchase and sale agreement. It stipulates that an escrow agent will handle settlement. It also provides instructions for the buyer, lender, and seller including deadlines for submitting documents. The closing costs and who will pay for them are also listed.

Seller's Obligation

The seller's obligation to relinquish the property in a certain condition should be clearly defined. According to Nolo6), the seller's failure to meet these obligations is another common mistake that could cause the buyer to (a) delay closing, (b) make new requests regarding price or repairs, or (c) terminate the sale.

Issues with Real Estate Agents and Brokers

Some clients may believe that their agents are not acting (or did not act) in their best interests. They may believe that their agents hastily completed the transactions to receive the commission, failed to properly advise them, or made mistakes that negatively impacted their interests.

WinningAgent7) discussed eight common mistakes that agents and brokers make when handling real estate transactions.

Failing to Use the Buyer's Full Legal Name

House and contract iconAgents and brokers may mistakenly include inaccurate names on contracts, including the purchase and sale agreement, in four ways:

  • Failing to include all of the buyers' names
  • Failing to include the buyer's middle initial
  • Using nick names (e.g., Alex Duncan instead of Alexander Duncan)
  • Combining spouses names into one (e.g., Alex and Kelly Duncan)

If the full and correct name is not entered on the contract, these issues could arise:

  • The lender must receive an addendum to the contract to use the correct name.
  • The title work must be redone.
  • The appraisal must be amended.
  • In transactions concerning distressed properties, a name change may not be permitted. If the lender cannot make the loan to the buyer because the full and correct name is not on the contract, it can be cancelled.

Failing to Complete Every Blank Space on the Contract

Every space on the purchase and sale agreement should be completed to prevent misunderstandings and opportunities to manipulate the contract. If something does not apply, it is best to place a dash or "N/A" in the blank.

Omitting the Full Property Address or Using an Incorrect Address

Failing to use the full property address or correct address is another common mistake that could lead to the sale of the wrong house. For example, Buyer Susan is purchasing the house at 453 Lake Avenue but her agent listed the address as 453 Lake Street on the contract. If the erroneous address does not exist, the confusion is lessened. However, the property's address is incorrect on a legally binding contract, which could be problematic.

Creating Illegible Contracts

The entire contract must be legible to avoid misunderstandings. Fax machines and scanners that do not produce completely legible documents should not be used because a fully executed contract should be readable in its entirety. Therefore, the print should be large enough to read without a magnifying glass, the paper size should be correct, all pages should be facing the same direction, and no areas of the contract should be cut off.

Using "Per Survey" as Opposed to the Actual Lot Dimensions

Lot dimensions provide the buyer with an understanding of the property's size. This understanding can be a major factor in the expectations, planned use, and value of the property. Including "per survey" on the contract instead of the actual property dimensions is a common mistake that does not assure the buyer that the "dimensions given are the dimensions received."

Failing to Include Complete Contact Information

Contracts and penPurchase and sale agreements typically include space for the contact information of the buyer, buyer's agent, buyer's attorney, condo association (if applicable), mortgage lender, seller, seller's agent, and seller's attorney.

Agents and brokers should ensure that all contact information is included on the contract before the seller signs it.

Negotiating Inaccurate or Unreasonable Contingency and Closing Dates

Negotiating appropriate closing and mortgage contingency dates is one of the best ways for agents and brokers to protect their clients. This ensures that there is adequate time for processes like inspections and the attorney's review to be completed. The seller may be willing to give the buyer an extension on a due date. If he or she refuses to do so, then the buyer might have to relinquish important contingencies to continue with the transaction or cancel the contract.

Modifying the Contract After It Has Been Executed

An agent or a broker might prepare an addendum (or make changes) to the contract based on events that take place after the client has made an offer on the property. However, once the contract is signed, it is legally binding. At this point, the agent or broker should refer the client to his or her attorney if modifications are necessary.

Real estate agents and brokers can reduce the risk of complaints and legal action regarding their handling of real estate transactions in three ways:

  • Develop an in-depth understanding of the transaction process, particularly the purchase and sale agreement
  • Understand state law regarding modifying contracts
  • Work diligently to meet their fiduciary responsibility to clients including avoiding common mistakes that could jeopardize transactions

Avoiding Common Mistakes

Realestatece.com's course, Avoiding Common Mistakes8), discusses mistakes that agents and brokers commonly make and provides a guide for modifying contracts. Course currently available in: Alabama, Connecticut, Georgia, Indiana, Iowa, Kansas, Michigan, Missouri, Montana, Nebraska, New Jersey, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Washington State, and Wyoming.

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