In some states, such as Arizona, attorneys are not typically used when buying or selling a home. Instead, buyers and sellers rely upon their real estate agent to represent and advise them. In nine out of ten transactions, this may not become an issue. But, if there is anything non-standard about the deal, and “additional contract provisions” are drafted and added to the standard purchase contract, it can easily lead to a very expensive misunderstanding.
Here are two examples, one in Arizona and one in New Jersey, where a real estate agent’s poor contract drafting led to expensive legal bills.
In Arizona, the buyer was doing a 1031 exchange, meaning he was selling one property and “exchanging” it for another, preserving his tax basis and avoiding having to pay capital gain taxes on the transaction. Seller was asking for $580,000; Buyer offered $530,000. Seller tried to get Buyer to come up on the price but Buyer was adamant that $530,000 was all they could offer. So, Seller agreed, so long as Buyer took the property “as is,” with no request for repairs. Buyer’s agent drafted the additional contact provisions, which started with, “Buyer is doing a 1031 exchange at no cost to Seller…” The third part of the additional contract provisions said that Seller agreed to release $50,000 Buyer’s proceeds for Buyer to use to repair the property. Everybody signed, with Seller thinking that he was getting $530K...but the Buyer thinking he was paying $530K but getting $50K for repairs, meaning Seller would be receiving the net amount of $480K! Needless to say, when the misunderstanding was figured out days before the scheduled closing everything came to a screaming halt and Attorney Ely W. Sluder was called in to help resolve the dispute. It wasn’t easy, but the deal eventually closed with everyone, especially the real estate agents, contributing to get the deal done.
In New Jersey, the owner of a residential property wanted to sell it since he was moving out of state. While it was listed for sale, someone offered to rent it for a few months until such time as they received a large cash settlement and could purchase the property. While the owner had not desire to be a landlord, he agreed to a one-year lease with an option to purchase. The tenant’s real estate agent wrote up the lease with an additional contract provision stating, “Tenant plans to purchase home. Once settlement is received, tenant and landlord will negotiate a purchase price and tenant will have first right of refusal to purchase the home.” First of all, an option should be spelled out clearly, including how a purchase price is to be determined. Stating that someone wants to purchase the property and will negotiate the terms later is basically an illusory promise--it doesn’t actually bind anyone to anything. Additionally, a “right of first refusal” is a powerful right to grant to someone and when doing so one would expect to see a few paragraphs explaining how such right is to be exercised. It typically requires the existence of a third-party offer and isn’t normally triggered until one is received. In this case, however, the right to match a third-party’s offer was haphazardly tacked onto a sentence that was only supposed to give the tenant the right to make an offer to buy the property. So, what happened? At the end of the one-year lease the owner tried to get the tenant out, but the tenant would not vacate. The tenant kept promising to buy the property but never performed, despite being given nearly a year to do so. Almost two years after initially leasing the property to the tenant, and expecting to sell it to them within a few months, the owner is still trying to get the tenant to vacate. The owner eventually received a third-party offer, which the tenant failed to match. Still, the tenant refused to vacate without being evicted, and wound up dragging everyone through months and months of hell and exposing the owner to legal liability for damages incurred by the third-party buyer. Basically, a nightmare scenario that is costing thousands and thousands of dollars to deal with, all which could have been avoided had an attorney been consulted before the lease was signed.
I am often asked, “I’m buying or selling a home; why do I need an attorney?” I answer, “Because... An ounce of legal prevention is worth a TON of cure!™”
The standard form purchase and lease agreements typically used by real estate agents can have huge holes in them, holes that won’t be a problem in nine out of ten deals, but, for that one deal that does go bad because something wasn’t adequately addressed, understood, or agreed upon, can easily end up costing both sides of the deal tens of thousands of dollars in litigation. A comprehensive attorney review of the contract before it is signed can help you avoid major headaches later.
In New Jersey when a residential property is purchased there is a three-day attorney review period, during with one of the attorneys will send the other attorney an “attorney review letter.” Here are a few examples of what might be included in a typical attorney review letter:
“Time is of the essence” – This is a very common contract term, one found in the standard form but that is almost always taken out during attorney review. Yes, everyone wants to close on time. But, you also don’t want to get sued if you fail to close on time for any reason. There are lots of things that can cause either the buyer (financing, inspection/repair issues, etc.) or the seller (title issues, etc.) from being able to close on time.
Oil tanks – It is important to get at tank sweep done to make sure you are not buying something with an expensive environmental disaster buried somewhere on the property.
Radon – A radon test takes a few days; it is important to provide that the inspection period will be extended as needed to allow the test to be done properly.
Deadlines – Some of the standard deadlines are either too short, too long, or, more dangerously, not clear and understandable, especially when the contract is signed by everyone but then essentially cancelled until the attorneys review and sign off on everything. This should happen quickly but can extend beyond when the standard form says certain things must happen, such as when deposits are due, when the due diligence/inspection period starts and ends, etc.
Title company – Most attorney review letters add that a “reputable” title agency must be used; apparently, there were issues with shady title companies!
Seller representations and disclosures – “If you do not ask the right questions, you do not get the right answers.” The standard form agreement provides some basic seller representations, which are essentially affirmative answers to a few questions:
Do all electrical, plumbing, heating, and air conditioning systems work now and will they work at closing?
How much is the annual HOA fee?
Any HOA or township assessments currently imposed or pending?
The Seller’s Property Condition Disclosure Statement (the “SPDS” is often referred as the “spuds”) covers a lot more things, but it is a form with dozens and dozens of YES/NO questions and, frankly, it is not always completed accurately. A comprehensive attorney review letter will ask many more “right questions” to help protect the buyer from a seller who may be trying to “bend the truth” when it comes to the current condition of the property. This is done by adding a list of things that the seller, by agreeing to the additional terms set forth in the attorney review letter, is affirmatively stating as true. If anything turns out to be untrue, the buyer will have a lot more leverage than they would using the standard form agreement. Here are some of the “right questions”:
Have all repairs/renovations been done in accordance with local, state, and federal laws?
Any EIFS siding, stucco, UFFI, mold damage (not just current existence of mold), etc.?
Any notices received regarding Superfund, Superlien, and/or Spill Act liability?
Has seller made a claim under seller’s homeowners property insurance for damage within the past three years?
Has seller received any notices pursuant to Megan’s Law (sex offender registry)?
Additional contract terms – Almost every contract winds up having additional terms added to it, and, as discussed above, the poor drafting of additional contract terms can have very expensive ramifications. It is very important that all additional contract terms are clearly stated and understood by everyone involved in the transaction, so it makes sense to have an experienced contract/real estate attorney draft them. Sometimes, an additional term may be added by the attorney to clarify something. Additional/clarifying terms may include:
Seller must freeze any home equity loan at least 30 days prior to closing.
If property fails to appraise for the purchase price, Seller may terminate.
If the contract is legally and rightfully cancelled for any reason, buyer gets a full and prompt refund of all deposited funds.
The contract can be cancelled in the event buyer dies, suddenly becomes disabled, or involuntarily loses employment prior to closing.
Contract is contingent upon buyer obtaining and approving a survey.
If seller files bankruptcy, buyer’s deposited funds shall not become part of seller’s BK estate.
Basically, your real estate attorney is supposed to predict any and every possible problem, no matter how remote, that might pop up related to the transaction. While doing so is virtually impossible, by conducting a thorough review of the purchase agreement, SPDS, title report, and other documents, and providing a comprehensive attorney review letter, your real estate attorney should be able to head off any significant issues. Using an attorney is similar to buying homeowners insurance—most houses don’t burn/fall down, just as most real estate transactions would probably close without the assistance of an attorney; however, in the event your house does get destroyed, or your real estate transaction goes sideways, you will be very happy that you spent the money to be protected!
Call 609-208-0999 or contact us online to set up an appointment to discuss how Sluder Law Firm can help you achieve a successful real estate closing.
If you are a real estate agent in Arizona or New Jersey, contact us for a free consultation regarding any additional contract terms you may need to draft for a transaction. We will help you make sure the agreement of the parties is written up clearly and unambiguously so as to avoid any honest misunderstandings.