February 24, 2016
Real Estate Contracts You Will Encounter During a Home Sale or Purchase
Definitions used in this article:
Implied Contract: A contract created by actions of the parties involved and is not always in writing. Courts usually look for a meeting of the minds to determine if an implied contract exists.
Explicit Contract: A contract created by a written document which is signed by all parties involved with the contract.
When buying or selling a home you will come across a number of different contracts that you will sign as part of the process. You may be wondering what all these contracts are and how do they impact you. This post provides a general explanation for the various contracts used in a real estate transaction and the functions they serve in the transaction process.
Buyer Representation Agreement
A Buyer Representation Agreement is an agreement between the home buyer and a real estate agent. The agreement generally states that the real estate agent will get a commission by helping the buyer find a home and assisting in the process of buying the home. The assistance aspects include taking the buyers to homes they want to see or suggesting homes for them to see; preparing the offer in accordance with the buyer instructions; negotiating on the buyers behalf with regards to any matter related to the home purchase; guiding the buyer along the home purchase process and more.
This type of contract should be in writing (explicit contract) to have maximum effect. Sometimes these agreements will also state that the real estate agent is due a commission regardless of whether or not the buyer uses the agent’s services or showed them a particular home. Some agreements may only require the payment of a commission if the real estate agent is the procuring cause of the sale (i.e. the agent showed a particular home to the buyers).
Sometimes a real estate agent may forgo having their buyer sign this type of document in order to not make the buyers feel pressured. Those agents may be proceeding under the assumption that they are under an implied contract with their buyers. If the buyer who has not signed any agreement happens to purchase a home without the help of their real estate agent or another agent happens to put in an offer for the buyer, the agent may not be entitled to a commission. Whether the agent will get a commission will depend if it can be shown that they are the procuring cause and whether or not their broker will pursue a lawsuit to get the commission.
Seller Representation Agreement
A Seller Representation Agreement is an agreement between a real estate agent and a home seller for the purpose of listing the seller’s home on the market for sale. Generally most real estate brokers want these agreements to be explicit contracts signed by both the seller and the agent representing the broker so as to avoid any confusion as to duties and rights. Many states have laws governing the marketing of real estate by licensed real estate agents and usually do have other forms for the sellers to review and sign in order to indicate their understanding of how the real estate agent they have hired will work when it comes to representing them and other buyers and sellers.
The seller representation agreement usually has a start date, end date, terms regarding what will go and what will stay with the property, language regarding use of advertising signs, forms of advertising (internet), home warranty information and more. It should be noted that while the seller representation agreement may state what items will stay with the home after closing that agreement is not binding upon the seller and buyer since it is only an agreement between the seller and the real estate broker. If a buyer wants certain things to stay with the home those items should be specifically mentioned in the Offer to Purchase contract document talked about below.
Buyer Offer To Purchase
The buyer’s offer to purchase represents merely an offer until it is accepted in writing by the seller. Any counter offer by the seller represents a new offer. If the buyer rejects the seller counter offer the seller cannot go back and decide to accept the offer that was first presented unless the buyer agrees to it. While an offer to purchase or counter offer can be made verbally (implied contract) in order for the offer to be legally enforceable in court it must be in writing (explicit contract) in accordance with the Statute of Frauds. Anything not captured in writing will not be enforced in a court of law. Therefore if there is something from the house (movable kitchen island, curtains or other non-fixed window treatments etc.) that you would like to stay with the home it is best to make sure that item is specifically written in to your offer to purchase.
Generally earnest money is not a requirement of an offer to purchase residential real estate. Earnest money is used to show a good faith desire to enter into a purchase agreement but is not required by law. Earnest money is usually credited towards the buyer upon closing. The earnest money will be returned if the seller and the buyer are unable to come to agreement on an offer. If the seller or the buyer call off the offer to purchase due to some disagreement then usually any claim to the earnest money must be released by the seller in writing before the money can be returned to the buyer. If a seller refuses to release their claim to the money then the parties must go to court to have a judge decide who is entitled to the earnest money.
Just because either the buyer or the seller state they want to back out of the deal does not mean they can back out of the deal without both parties agreeing to cancel the Offer to Purchase. If one of the requirements (contingencies) of the offer of the offer is not met then the offer can be cancelled without consequence to either party. Contingencies such as financing, home inspection, selling another home first are some common contingencies found offers to purchase. If the buyer or seller wants to back out of the purchase offer for the simple fact they changed their mind they could be sued by the other side for breach of contract.
When money is borrowed to purchase a home the mortgage document represents an explicit contract between the borrower and the lender. The mortgage document will set out the terms of the payments, due dates, late payment penalties, assignment provisions (the ability to sell the loan to another company) and more. While there are many consumer protection laws designed to keep borrowers from signing documents with illegal or unethical provisions one should still review the document and understand what is being signed since the commitment is a long term one.
Other Explicit Contracts in Real Estate
With a home warranty the buyer or the seller can purchase warranty coverage on the major systems of the house like water heater, HVAC, appliances, etc. Usually the warranty coverage is provided for a one year period and can be renewed yearly. The home warranty company will require the warranty agreement be signed by the person paying for the warranty. Always make sure to read the warranty document to know what is and what is not covered under the policy.
Title Insurance Policy:
The title insurance policy covers the lender and the buyer (if the buyer purchases a policy for themselves) in case there are hidden title defects on the property. In order to set out the terms of coverage for the insurance policy everything is put into writing and is signed by those seeking the coverage. For more information on Title Insurance check out the title insurance section at Ivy Pointe Title.
Other Implied Contracts
Implied contracts during the real estate process can include services provided by a company or individual with the promise of payment upon completion of the work. For instance a cleaning company, home inspector, home stager may agree to do work in your home in exchange for payment after completion. Due to the smaller amounts of money involved both parties agree to do the work without any written contract.
A common example of an implied contract is when you contact a cleaning company and ask them to clean your home prior to your putting it on the market for sale. A cleaning company may agree to perform the work with an unwritten implied promise to pay them for the work after they are done. If the home seller refuses to pay the cleaning company after the work has been done the cleaning company can sue the homeowner in small claims court and attempt to recover the money owed. The court will look at if there is a written contract (whether language via email or text message) or will look towards what the parties actually said and/or did and make a decision on whether a contract does exist.
Many real estate contracts can be confusing with all the legalese in them. If you have any questions or are unsure about terms of a particular requirement in a contract you should ask the person presenting you the contract to explain the language to you. If the answer does not resolve your questions or concerns then you need to find outside expert help from a real estate attorney. It is better to walk away from a contract than to sign something that will bind you to terms or requirements you never intended to.
Do you have a real estate contract you have questions about?
Paul Sian is a licensed attorney in the States of Ohio and Michigan. If you have any questions about a real estate contract you are being asked to sign feel free to contact me at email@example.com or via phone at 513-943-5668. Feel free to connect with me on Twitter and Facebook.