A Breakdown of Real Estate Contract Terms
To begin, a contract is a legally enforceable agreement. A Real Estate Contract contains all the essential elements of a contract, which are: (1) an offer, (2) acceptance of the offer, (3) an exchange of something of value (usually money in the form of a purchase price from the buyer in exchange for the property from the seller), and (4) sufficiently definitive terms.
Under Pennsylvania law, there must be one document signed by or on behalf of each party that creates the terms of an agreement so that a court may enforce it – this is true even when the parties do not intend to create a binding contract. This means that an email, text message or a letter with an offer or acceptance of an offer will be sufficient to form an agreement of sale if its contents are clear enough for the court to interpret the terms.
Real Estate Contracts are essential to real estate transactions because they are the initial documents prepared that outline the agreement between a buyer and a seller. It is where the parties agree on a price and subject to what contingencies, and – most importantly for the buyer – what material obligations must be fulfilled for lender financing obligations and lender approval of the loan to be satisfied at closing . Even when no financing is expressly needed to purchase the property, the lender will likely still need to approve the loan in connection with the buyer’s mortgage.
Prior to agreeing to a Purchase of Sale Agreement (Agreement), the parties may enter into a Right of First Refusal (Right) as to the property at issue; that is, incorporating into the Agreement a provision requiring the sale or transfer of title to the property be first offered to the party not acting as seller on agreed upon terms and conditions. A Right precedes an Agreement, while a contingency follows.
As is usable for any type of sale or purchase agreement, a contingency is a contractual provision dependent on the occurrence of a specific event or state of affairs, the occurrence of which is uncertain. When used with respect to real estate, a contingency is an escape clause that allows the contract to be terminated if the event does not occur. For example, A Right must be exercised within a specified time period or the potential buyer loses the option to purchase.
The most common contingencies are:
A well-written Real Estate Contract is one of the many important components to executing a successful sale of a home. However, it is only one component to completing a successful, legally-enforceable agreement.
The Importance of Property Disclosures
In most real estate transactions, property disclosures are provided by a seller about the condition of the property being sold. Buyer and Seller should complete written due diligence formlets prior to settlement and have them signed prior to the exchange of keys at closing. Depending on the terms of the contract, the executed Due Diligence formlets may or may not become a part of the Contract. Either way, both Buyer and Seller should sign the Due Diligence formlets to certify their review and ensure the information contained within them is accurate.
A property disclosure stated simply, is an explanation from a property seller of what they know about the property. The disclosure will state what is present, such as systems, structures, fixtures and any defects the seller knows of and how the seller intends to provide notification, if at all. A seller who omits known conditions from the property disclosure, runs the risk of getting sued.
If the buyer discovers something that was not mentioned in the disclosure formlet and it is referenced therein, then the seller is responsible to fix it. If the defect is not mentioned in the formlet, the buyer may be forced to remedy the defect out of pocket. In any event the buyer should consult with legal counsel upon receipt of the disclosure and before signing it.
The Importance of a Real Estate Attorney
Buyers and sellors of property need and want to understand that real estate attorneys are involved with property transactions for all parties, whether you are a buyer or a seller. Real estate attorneys play an invaluable role in real estate matters, attend settlements and closings, and guide their parties through the process. Your attorney will work with you, your lender, the deposit closing company, and the seller and their attorneys and lenders as necessary to get the transaction to closing.
But many people do not understand why a buyer, seller, or lender needs a real estate attorney. Buyers of property may think their lender’s attorney, who is looking out for the lender’s best interest, will answer their questions. Sellers might think their realtor will answer their questions and provide the legal advice they need. Your title insurance company’s attorney works for the title insurance company and is looking out for their company’s bottom line.
A lot of buyers and sellers find that despite well-meaning lenders, title companies, and real estate agents, they still do not understand the intricacies of their transactions. Buyers and sellers find themselves in the position of needing a lawyer late in the transaction, at the closing table, when the review and approval powers have been reduced to a handshake and a quick verbal instruction to sign here, initial there. It’s at this time that buyers and sellers need more than a handshake — they need an attorney.
Don’t push that boulder up the hill more than once! Instead of running around later because an issue was missed or a problem has been discovered, consult with an experienced real estate attorney before the deal starts rolling. No one wants the buyer to be at the closing table with a pre-approval letter from their lender covering $200,000 but instead having the loan covered by a non-suit credit card with an interest rate of 32.74%. The type of situation happens more than once every few years and is easily missed. Save yourself the headaches and consult with your real estate attorney early and often.
A Primer On Title Insurance
"Title insurance issued to a buyer (and a lender if applicable) insures against defects in the title to the property that are not specifically excluded from the coverage provided under the policy. Title defects may be – as in the case of liens for work done to the property without the owner’s consent, unpaid taxes or municipal liens, the result of an inadvertent filing error or simply unknown to the buyer, the seller and the closing attorneys. In any case, the buyer is purchasing the property subject to the charges or possible charges that may be uncovered in the Examination of Title Process. If a title defect is covered under the policy of insurance , all legal fees and costs incurred in the removal of the defect from the title are reimbursed regardless of whether the title insurance company is involved in the actual removal of the defect. A title insurance company will not defend litigation, even though it may be responsible for all legal fees and costs in defending litigation which was brought against the insured owner or lender to take away or diminish its rights in the property after closing and once the policy of insurance is in effect. A title insurance policy is a limited form of indemnity and not a guarantee that there are no title defects."
Real Estate Investing Legal Considerations
For both seasoned and first-time real estate investors, it is crucial to have a solid understanding of the legal issues related to your investment. Key issues include property taxes, zoning laws, landlord-tenant regulations and how to legally protect your investment.
Property taxes are, of course, one matter that should be at the forefront of an investor’s mind. While it may be impossible to predict future tax hikes, savvy investors should familiarize themselves with local tax regulations as well as understand what could contribute to future increases. Property taxes can be a significant portion of your yearly expenses, so make sure to do your due diligence into this issue prior to purchasing any property.
Zoning laws set the foundation for the property market, determining what type of property can be built where, as well as what kinds of businesses can operate within any region. In addition to zoning restrictions, there may also be property deed restrictions, predicated on the previous owner or the builder of the property, which dictate how you can or cannot use the property. You must ensure that the properties you wish to invest in are zoned properly and that their deeds do not limit your options.
Maintaining good landlord-tenant relations is paramount to successfully managing an investment property, so understanding the relevant laws and regulations is to your benefit. State laws, which vary upon jurisdiction, determine the particular rights and responsibilities of both the owners of rental property and the tenants. Thoroughly vet all prospective tenants and ensure that you are familiar with the landlord-tenant laws, property owner associations and other related policies in your area to avoid any missteps that could be difficult or costly to correct later.
With any investment, particularly real estate investments, having the right legal protections in place is essential to protecting your assets. You should consider forming a limited liability company. In this way, you can limit your own personal liability in the event that the property is vandalized, a tenant has an accident on the premises and pursues legal action or the property fails due to market conditions. Additionally, you should also have the appropriate insurance policies in place to protect the value of your property.
Resolving Real Estate Disputes
Disputes between real estate parties can take many forms, including disagreements over boundary lines, property lines, access issues, payment disputes, defects in the property, or a failure to carry out the contract’s terms. A common source of dispute is a breach of contract, which occurs when one party doesn’t uphold its end of the bargain.
There are two types of damages that may be available in a breach of contract claim: expectation damages and reliance damages. Expectation damages refer to what the injured party expected to receive from the contract, while reliance damages cover the expenses it incurred by relying on the agreement. The injured party will typically seek expectation damages, as this is the damages calculation that is in keeping with the expectations of both parties; reliance damages, meanwhile, is more complicated.
If the contract was breached prior to closing, the injured party may walk away and recover its earnest money deposit, as well as other fees associated with closing the contract.
A party may also pursue specific performance , which is a court order to fulfill the terms of the contract. This remedy is generally favored in real estate agreements because homes are considered unique, and it may be hard to determine monetary damages if something goes wrong.
Finally, there is the option of rescission. If the contract is rescinded, the buyer may be released of all liabilities under the contract, as well as be refunded any earnest money deposit.
In North Carolina, there is also the option of mediation. During a mediation hearing overseen by a third-party facilitator, both parties have the opportunity to present their side of the story, after which the mediator provides a recommendation. Although the mediator can offer this advice, the parties will ultimately choose how to proceed.
It’s important to note that there is a time limit on how long you have to pursue a civil lawsuit after the discovery of the violation of a real estate contract, so it’s best to consult with a lawyer about your options as soon as possible.
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