Do you know what you’re signing? A brief Glossary of Terms in Real Estate Contracts

Often, I see a Real Estate contract that I KNOW the Buyers and Sellers don’t fully understand.

Each time it happens, I’m more perplexed.

How could a person sign a 9 page document committing them to the largest transaction of their life without having a full understanding of the terms?

Some folks might call this “Careless,” and many “get away with it” unscathed . . . but we Real Estate Sales Professionals know that it’s only a problem when it becomes a problem.

Is this a gamble worth taking?

Who’s responsible for defining the terms in a contract?

The ultimate responsibility falls on the “Parties to the contract” (The Buyer and the Seller). If the thing doesn’t say what they want it to say, they should probably STOP before signing and get any questions or discrepancies ironed out before inking their “John Hancock.”

Once the deal is signed, it is THEIR responsibility because they are now in a legally Binding agreement . . . and the terms cannot change without ALL parties’ written consent.

Of course, the Real Estate Sales Professionals also bear some responsibility here.

While the Client’s “job” in a transaction is to make the decisions and perform as agreed, the professional’s job is to provide advice and counsel, honor fiduciary obligations, protect confidentiality, and manage the process.

Every REALTOR knows that it is not always our fault when the client fails to understand the terms, but whenever this happens it is OUR problem to solve.

It is during the “contract to close” phase of every transaction when overlooked and misunderstood terms rear their ugly heads . . . and wherever there’s one, there are likely to be many (Pandora’s Box) and this creates a swirling maelstrom of confusion and frustration for EVERYONE involved – Buyers – Sellers – REALTORS – Lenders – Title Companies and many of the other 30 (or so) people who touch a deal during this phase.

So . . . 30 minutes or so of extra time and attention invested in the construction and presentation of the Purchase Agreement so as to to ensure that ALL parties COMPLETELY understand what they are signing erases 98% of the angst that ensues when this attention to detail up front is lacking.

Many of the issues I see happen because of terms that are discussed between the Client and the Agent but don’t end up being written on the offer.

I’m BEGGING you!

PLEASE!

DON’T LET THIS BE YOU!

KNOW what you’re signing BEFORE you sign it!

Hey REALTORS!

Do you want an easier life?

Do NOT allow ANY client to sign ANYTHING unless you are 100% positive that they fully understand the terms.

If you rush this part of the process, you’re cruising for a bruising (for EVERYONE) . . . and we’re better than that, Aren’t we?

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In the Title of this post, I promised a “Glossary”

This is going to be short and in “layman’s terms”

CAVEAT!

I am NOT an attorney!

This is NOT legal advice!

I am in the State of Tennessee, and some of what I say below may not be true in other states.

Words and phrases . . . In order of appearance in our “Purchase and Sale Agreement”

Offer –

A completed “Purchase and Sale Agreement” prepared by a party (Buyer or Seller) containing ALL terms and conditions required by that party – This is NOT a “Contract!” The receiving party can Accept, Reject, or Counter-Offer

Time Limit of Offer

While the “offer may be withdrawn at any time before acceptance with (WRITTEN) Notice, it TERMINATES if the receiver of the offer fails to respond before the time limit Day and time

Counter Offer

The receiving Party’s response to the “Offer” – Accept all terms as written in the offer, or Reject, or Counter with itemized “Exceptions” . . . The receiver of the Counter Offer (The original Offer-or)  can then Accept, Reject, or Counter-Offer with “Counter Offer #2” . . . This continues for as many counter Offers as necessary until the parties either agree to all terms and ACCEPT . . . or quit. NOTE: The Final Counter Offer should reflect ALL changes to the original offer, be signed and dated by all parties with a “Binding Agreement Date” noted by the final signing party

Binding Agreement Date (BAD)

The date/time that ALL parties have agreed to ALL terms in the Offer and Final Counter Offer . . . This is NOW a BINDING CONTRACT. The BAD is the date from which all time deadlines referenced within the contract are counted. Defining and Understanding the BAD is CRITICAL to avoid future complications.

INCLUDED

A paragraph defining all of the things that are included in the sale – Essentially everything that is ATTACHED (Built-In) and “Permanently installed” including ALL window treatments (Curtains, rods, shades, blinds)

“Other items that REMAIN or WILL NOT REMAIN”

A place for things that are NOT attached to either stay (Kitchen Appliances, Grills) or be required to be removed (Debris in the crawl space, Storage Building) – ESSENTIAL that ALL parties take some time to think this through and walk through the house to be sure they’re not missing anything. When in doubt, WRITE IT HERE! I’ve seen more fights over curtains, appliances and storage buildings than you could shake a stick at.

Purchase Price, Method of Payment and Closing Costs

Oh! PLEASE take your time on this one. This states the price and how the Buyer is getting all the money to the closing. To the Seller it’s always “All cash at closing,” but it generally includes money from a Buyer’s loan + cash from the Buyer.

Appraisal

If Buyer is securing a loan, the Mortgage Company will order the Appraisal. A licensed appraiser visits the property and verifies Square Footage and Features and then performs a Statistical Market Analysis to determine an “Opinion of Value” (Appraised Value) and presents it in a standardized format. The contract may (or may not) be contingent upon this “Appraised Value either equaling or exceeding the agreed upon purchase price.” In the event the contract IS contingent upon the appraisal and the Appraised value falls short of the purchase price, Buyer and Seller may agree to adjust the price accordingly, or Buyer can bring more down-payment, or Buyer can terminate the contract with earnest money returned

Closing Costs and Discount points 

This paragraph delineates the “Normal Expenses” for the Seller (Costs related to Closing the sale) and the Buyer (Costs mostly related to Loan) . . . and provides a place to define which party pays the Title Expenses (Title Search and Title Policies). Which party customarily pays varies by area.

Closing Agency

“Back in the Day” most Real Estate Sales Transactions closed in one place . . . These days, it is more customary for the Buyers and Sellers to close with different Title Companies. Typically, the Buyer’s Closing Agency handles all of the money (Take in the cash from the loan and down-payment and them “Disburse” money per the contract) . . . The Seller’s Closing Agency ensure clear title and prepares the deed . . . Once all parties have signed, the Closing Agencies do a “Doc Swap” and exchange disbursed funds for the deed . . . Once the deed is recorded (Often done electronically) the deal is CLOSED

Financial Contingency

Here is where it is CRITICAL for the Buyer to be “Pre-qualified” or approved by a mortgage lender so the Buyer can be as specific as possible about the loan being secured “conditioned upon Buyer’s ability to obtain a loan.” In the event the Buyer has done everything required in the contract  (Loan Obligations Paragraph defines these) and is declined for the loan, Buyer can terminate the contract and get the Earnest money returned in full. If this section of the contract is not specific and something goes wrong, the Buyer may lose the right to terminate and risks loss of earnest money and has potential for being sued by Seller for performance . . .

Finance Contingency Waived

If the Buyer is paying CASH or is getting a loan but chooses not to make the agreement contingent upon financing, Buyer can waive the rights afforded by this contingency. They must provide proof of funds available to close with a Bank statement or solid lender commitment letter

Earnest Money

This is an amount of money paid by Buyer as “Consideration” to strengthen the Buyer’s “Promise to perform” . . . This is the Buyer’s “Skin in the game.” It is generally held in a dedicated Escrow account by the Listing Agency, but can be held “as agreed by all parties” by an attorney or other party. There’s no “rule” as to how much earnest money should be tendered . . . I generally recommend 1% of the purchase price. Earnest money can only be released upon closing (returned to Buyer), by mutual agreement of all parties, by court or arbitrator order, by the Holder’s “Reasonable interpretation of the agreement” (rare), or by interpleader (Court action)

Closing Date 

The date after which the agreement expires if not closed on that date or before (as agreed by all parties in writing). If things don’t align for an “On-Time Closing,” and the parties want to continue with the transaction, it is essential that (BEFORE the agreement expires) all parties sign a Closing Date Extension with an agreed upon future date for closing.

Possession

Defines the date and time, possession of the property goes to the Buyer. Often, this is “With Delivery of Deed” with Buyer receiving the keys at closing. More complicated but possible are scenarios in which Seller continues occupancy after closing or Buyer takes possession prior to closing . . . In each of these cases, it is critical that written agreements are executed by all parties (We REALTORS have Addenda for this)

Prorations 

All of the expenses of the closing are calculated to the day of closing. Most title companies do this math assuming 30 day months and “Charge Per Diem Fees”

Special Assessments and Association Fees

If the property is a condo or a house in an association, there could be assessments to all of the owners for repairs or improvement . . . These should be disclosed and all parties should be clear as to who is responsible for paying them . . . Same thing goes for association fees . . . It’s a MESS if these are discovered AFTER the closing with no defined agreement.

Title and Conveyance

This requires the Seller to deliver and warrant a clear title to the Buyer at closing. It then address the procedure if title defects are discovered in the search and defines the “rules” for how long the Seller has to “Cure” the defects and the Buyer’s right to terminate the contract based on these defects.

Seller’s Property Disclosure

The “Tennessee Residential Property Condition Disclosure” is a standard, REQUIRED form for all people selling a house . . . There are many complicated ways to describe what this is all about, but the simplified version is that this is the document that provides the instrument for the SELLER to communicate DIRECTLY to the Buyer regarding the condition of the property. It’s simple: The Seller is required to DISCLOSE any known defects and can also brag about IMPROVEMENTS they’ve made to the property.

 Inspections

 Seldom does a house sell without the Buyer having a Professional Inspector do a formal inspection of the property. These inspections are for the purpose of determining the over-all condition of the house with emphasis on Systems (Electrical, Plumbing, Heat and Air), “Wood Destroying Insects” and structure. The most often “Major Issues” relate to “Water Management” from the peak of the roof to the basement/crawl space. The contract provides for the inspection to be completed and a release of the contingency to be submitted to the Seller with x number of days of the Binding Agreement Date. Adherence to time deadlines is important.

Disclaimer

This is a “Catch all” form for the purpose of putting the Buyer on notice about all of the sundry things the Buyer might be concerned about regarding the property – Condition, Environmental Hazards, Square Footage,Value, Boundary Lines, Easements, acreage, Zoning restrictions, Utility Connections, Flooding issues, School Districts, Crime reports, legal advice, etc . . . It makes clear that if any of these issues are of concern to the Buyer, the Buyer must satisfy himself

The above has been a quick stroll through the Purchase and Sale agreement with only a taste of the terms to be considered.

With EVERY client (Buyer or Seller) I (AND most every REALTOR) walk through the Purchase and Sale agreement carefully so as to ensure understanding and minimize unintended omissions . . . and then we walk through the execution of the terms of the contract throughout the contract-to-close period.

Needless to say, there’s more . . .

When you’re ready to make a move, connect with me and we’ll get together for an initial consultation so as to orchestrate a SMOOTH and “Surprise Free” Real Estate Transaction.

and remember: Don’t sign ANYTHING you don’t fully understand!

Published by Barry Owen

Strategist-CEO of Pareto Realty Real estate sales Professional Inviter-Facilitator-Practicer of Open Space Technology Opening safe space for people & organizations to self-organize around issues & opportunities BarryOwen.US Invite-Listen-Love

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