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One pitfall in real estate purchase contracts – residential and commercial — involves the failure of the parties and the Realtors to assure that earnest money called for in the contract has in fact been collected and placed in the Realtor’s escrow account.

Earnest money is a deposit made by the buyer that is applied toward the purchase price at closing or disbursed in accordance with the purchase agreement.  The act of a paying an earnest money deposit is a good faith showing to the seller that the buyer is serious about purchasing the real estate.  (Read here and here that it is nothing more than that.)

More often than not, sellers will require buyers to deposit earnest money to avoid wasting time in an already time consuming process.  Generally in real estate transactions, the escrow is the account in which the earnest money is safely kept until the time of closing or until some other triggering event occurs.  An escrow agent or a real estate broker is appointed to manage and disburse the escrow funds in accordance with the purchase agreement.  The escrow agent or real estate broker acts as fiduciary for both the buyer and seller.

Under the standard Cincinnati Area Board of Realtors contract, there is a section below the buyers’ and seller’s signatures where the Realtor is supposed to acknowledge receipt of the earnest money.  If that is completed and signed by the Realtor, the buyer and seller should be able to rely upon that signed receipt in proceeding with the transaction.  If the check later bounces, the Realtor holding the escrow likely has a duty to inform the parties of that occurrence.

Conversely, if the receipt is not signed by the Realtor, the Seller should assume that the earnest money has not been paid, and – assuming that is a material part of the consideration he wants to assure buyer performance under the contract – he should follow up with the buyer’s Realtor to assure that check has been received and deposited, and get a signed receipt for the same.  Absent that assurance, the seller could and likely should terminate the purchase contract and sell it to a more reliable buyer.

A failure to deposit the earnest money in the escrow account will likely constitute a breach of the purchase agreement by the buyer.  Once a breach occurs, the seller may be able to force specific performance from the buyer or completely walk away from the deal.  A buyer in breach who still wants to purchase the real estate may be out of luck if the seller decides to terminate the contract or renegotiate for a larger sum.

We have seen circumstances in which real estate investors who are simply trying to tie up property to see if they can quickly flip it, will sign a contract with loads of contingencies, and never actually pay the promised earnest money.  (Read more about that here.)  Obviously, sellers want to avoid tying up their property with these bogus buyers.

The lesson here is that the seller should confirm the earnest money deposit is in the selling Realtor’s escrow account by getting written acknowledgement of that.  Buyers are forewarned that in this hot real estate market, the failure to pay that promised sum into escrow could result in termination of the contract by the seller.

 

We are seeing the activity with our Realtor and lender clients , we are seeing the activity in our title insurance company, Ivy Pointe Title, LLC, we are seeing the activity with investors making money in development and new construction, and we are seeing the activity in excited families making their first move into a new house or in upgrading their residence.

Now Freddie Mac confirms it: They predict 2016 will be the best housing market in a decade.  Now, candidly, many parts of the past decade have been downright bleak, so it’s not comparing to much, but we are seeing record activity and that’s great news for our Realtor, lender, and investor clients.

The article is here.  Enjoy it while it lasts!

Many times when I teach courses to residential and commercial Realtors, I ask this simple question:

What is the essential bargain going on between a buyer and a seller of real estate?

The reason for the question is that real estate professionals — Realtors, attorneys, investors, and lenders — frequently get caught up in the tall grass of the details of the purchase contract such as personal property, inspection contingencies, representations about property condition, earnest money issues, and on and on.  All these things are important, but shouldn’t we first and foremost focus on the thing that brings everyone to the table to begin with?

But cutting to the quick of the real estate transaction, what is the buyer giving to the seller and what is the seller giving to the buyer?

Cash is exchanged for good title

The answer, very simply, is that the buyer is giving cash to the seller and the seller is giving a certain quality of title to the subject real property to the buyer.

It seems so obvious, that we may overlook this simple and fundamental truth.

Standard Board of Realtors Contract language

Indeed, the Cincinnati Area Board of Realtors/Dayton Area Board of Realtors form of Contract to Purchase buries the clause by which the seller’s obligation is made clear at paragraph 19 on page 6 of a 7-page contract.  Not only that, but the critical clause is in the middle of that paragraph, starting after a semi-colon in the middle of a sentence:

[Seller shall]…convey marketable title (as determined with reference to the Ohio State Bar Association Standards of Title Examination) to the Real Estate by recordable and transferrable deed of general warranty or fiduciary deed, if applicable, in fee simple absolute, with release of dower, on [date]….Title shall be free, clear and unencumbered as of Closing with the exception of the following, if applicable: (i) covenants, conditions and easements of record….”

Goodness, that’s a mouthful, and from an attorneys perspective there is so much meaning in that part-paragraph.

Different standards of title quality

I have seen countless judges and attorneys blow past the issue of what quality of title must be conveyed by the seller at the closing.   Indeed, I had one Judge tell me from the bench, confidently but absolutely incorrectly, that that Marketable Title Act (O.R.C. Section 5301.47-56) defines the quality of title that a seller must convey to a buyer.  That’s hogwash.  The Marketable Title Act simplifies and makes uniform the title examination process, but it does not attempt to tell sellers what quality of title they must covey to buyers.

Three distinctly different contract standards

It is the language of the contract itself that tells sellers what quality of title they must convey to a buyer and there are several different sets of standard language that may be used:

• The above-noted language from the standard CABOR/DABOR contract contains potential problems for a buyer as it requires a buyer to accept title subject to “covenants, conditions and easements of record.”   Really?  What if there is a highway easement running through the living room?  Or how about a title problem I ran into recently that prevents an owner in Mt. Adams from building a second story on their house?  There are all kinds of “covenants, conditions and easements of record” that could well prevent a buyer from making use of his property the way he plans.  This standard CABOR/DABOR language mandates a buyer — even if they find and object to an easement before closing — to a accept title to the property impaired as it is.  The only way to protect one’s self from this contract language would be to do a full title examination and read and understand the easements and covenants of record before even signing he contact.  This rarely happens.
• Some “standard” purchase contracts provide that a buyer must accept title subject to all “covenants, conditions and easements of record” that “do not unreasonably interfere with the buyer’s intended use of the property.”  This standard makes a whole lot more sense for the typical purchaser.  Then, if during the title examination process an offending easement or covenant is discovered, the buyer would be excused from performing.
• Many commercial contracts contain a due diligence period for title, allowing examination and objection for a period of, say 14 days after contract signing.  Thus, the buyer is not forced to accept anything at all of record, and the buyer is constrained to state his objections within a tight timeframe.

Date is important as well

We warn in this blog entry about the contract that doesn’t end, meaning that the buyer has the right to perpetually tie up title to a property while he decides whether or not to buy, and has no closed-ended obligation to actually close on the purchase.  It is a terrible situation for a seller.

So, what happens if the buyer and seller leave blank in the contract the closing date?  Well, since the obligations of both the purchaser and the seller have no contractual deadline, presumably they never have to close.  Does that mean the seller never has to deliver a deed?  That the buyer never has to tender the purchase price?  That the contractual promises are simply illusory and thus unenforceable? Or, finally, that the parties must close within a “reasonable time”?

The cold reality is that in such a circumstance the parties have given lawyers something to argue over, which means time, expense and uncertainty to get a transaction closed, to get rid of a buyer who refuses to timely tender the purchase price, or even to force a dilatory seller to close.

Recordable, transferrable

The above-noted Board of Realtors contract language calls for, among other things, that a deed be “recordable” and “transferrable.”

There can be a host of reasons that a deed is not “recordable” and “transferrable.”  The most common reason is that the there is a new legal description on the deed because since the prior transfer some land has been conveyed away, or the transfer is part of a cut-up of a larger parcel.  In such circumstances, several things could be required, such as sign-off by the local planning commission, recording of a new survey plat and a “closure chart” showing that the legal description in fact “closes” from beginning point to ending point.

It is helpful for a buyer to require the seller to adhere to this standard.

Quality of deed

Finally, the contract will almost always describe the type of deed the by which the seller must convey title to the buyer.  This blog entry thoroughly explores the distinction among a general warranty deed, a limited warranty deed, a fiduciary deed and a quit claim deed.

Conclusion

This one clause is where my eyes first go when I review a contract for a client — whether buyer or seller — for it encapsulates the essential bargain from the seller is to the buyer.  Understanding this provision is fundamental to protecting your client and assuring that he is protected in the transaction.

 

Today’s New York Times has a story, here, on a new initiative of the Consumer Financial Protection Bureau to regulate “Contract for Deed” and what is referred to in Ohio as a “Land Installment Contract.”

Land installment contracts are typically used by individual sellers to provide a financing vehicle for individual buyers to purchase a single family home or investment property.  A typical structure would call for a higher interest rate to be charged under that seller financing than bank financing would provide — precisely because those borrowers do not qualify for bank financing.

The new CFPB has until now limited its scope of regulation to federally-insured lending institutions.  How it intends to increase that scope to include corporate and individual sellers is unclear.

The article also explores other proposed CFPB regulatory initiatives such as (i) prohibiting financing institutions from requiring arbitration of disputes and (ii) new regulation of payday loans.

One thing seems assured: There will be a ramped-up stream of consumer protection regulations coming from the CFPB.

In both commercial and residential transactions I recently have seen a spate of emailed communications purporting to amend a purchase contract.  Many times these are emails among Realtors “confirming” one claimed contractual modification or another.

What is the legal effect of these emailed communications?

Minor changes.

The nature of the emails I have seen typically involve changing (delaying) a closing date or waiving certain of the contingencies.  As the transaction unravels, the client approaches me and wants to enforce the contract as “amended.”  Thus, the question becomes: legally and practically, what effect on the original, signed contract do these emails have?

The answer: Likely none.  The original signed contract will likely stand unamended.

No signature.

As is addressed here, the statute of frauds, which is very similar state to state, requires two things for all contracts for the purchase and sale of real estate: (i) the contract must be in writing and (ii) it must be signed by the party “to be charged therewith,” i.e., the person we are planning on enforcing the contract against.

Because the emails in the cases I have recently seen are not accompanied by the adverse party’s “signature,” they likely will not be enforceable.  Thus, the Courts will probably look to the original, unsigned contract to ascertain the rights and responsibilities of the parties to the contract.

What is an amendment?

Most clients and their agents seem to know about the statute of frauds, and do in fact comply with it as to the original contract. Somehow, however, the message has not gotten through that this applies to every amendment or modification to the contract as well.

Changing a closing date, waiving a contingency, adding personal property to what is to be conveyed, or promising to make certain repairs pre-closing or post-closing are all amendments to a contract and need to comply with these basic provisions of the statute of frauds.

E-signatures still allowed.

Many clients and Realtors have adopted use of electronic signatures (such as DocuSign) to allow fulfillment of the statute of frauds by means of email and the internet for the original contract.  As is addressed here, this method does in fact fulfill the statute of frauds.  Thus, for these fast-developing “minor” amendments to a contract, e-signatures are fine as well.

Conclusion.

I suppose clients and their Realtors see memorializing these changes as not worthy of taking the time to properly document the same, or they misunderstand that these are in fact amendments to the contract. This is especially so with respect to fast-moving developments in a modern real estate transaction.

The rule is simple: the contract for purchase and sale of real estate and all amendments thereto must be in writing and must be signed by the party on the other side of the transaction.