What's in a home sales contract? It's ironic that with so much money at
stake, and so many days of searching for the right home at the right price,
that a homebuyer would sign anything without a second glance. Yet thousands
of sales contracts are signed every day, with no questions asked. In some
cases, homebuyers don't realize their risk until it's too late-their
financing falls through for whatever reason, and they forfeit thousands in
earnest money. Ironically, just a simple provision in the contract can
prevent major catastrophe, if you let a lawyer review it for you.
Standard sales contracts are generally accepted in the real estate industry
by buyers and sellers, as well they should be. To a point, the basic
contract approved by state and local real estate boards serves everyone well.
The problem is that in a standard real estate transaction, the seller's
agent presents the contract. It's in the agents and seller's interest to
make the sale quickly, not necessarily to look out for the buyer. Neither is
the settlement attorney looking specifically for loopholes that might hurt
the buyer--he or she represents the interests of all involved.
Usually, should something go wrong before closing despite the buyer's best
efforts to obtain financing and complete the sale, the buyer typically gets
the deposit money back. But that's not always the case. What if you're
downsized and lose your job? Nothing says that the lender has to go through
with the loan. Banks generally can turn down a loan very late in the process
if the borrower's financial situation goes in the tank or a family emergency
changes things for the worse. In fact, some states are tipping the scales in
favor of the seller. Colorado, for example, has changed the standard sales
contract such that if a buyer's loan is approved, but later canceled by the
lender for some reason prior to closing, the buyer is considered in default.
Unless the seller feels charitable toward you, you can kiss your deposit
money goodbye. Not only that, the seller has the right to sue you in court.
So where does that leave you the buyer? Looking out for yourself. One way
you can do that is by hiring a real estate attorney to review your contract
prior to signing. Here are some issues to look out for. First, don't accept
any contingencies for obtaining financing except for the one that requires
you to have a job at closing. Consider an escape clause that lets you out of
the deal if you lose your job unexpectedly. Another way to protect yourself
is to make sure the lender gives your loan commitment more than just a
cursory glance. The lending business is booming, and busy lenders can issue
quick commitment letters and then later refuse to close on the loan, because
they failed to research your financial situation.
Another provision to consider is a rider covering fires, floods or other
unexpected damage to the home that happens between the contract signing and
the closing. This rider would allow you to either accept the home as is at a
reduced price, or have the seller perform the repairs, or simply back out of
the contract entirely. Defects or repairs discovered during the home
inspection should be handled the same way. But most standard contracts allow
the seller to fix problems their own way, and you're left with accepting the
house whether you're satisfied with the repairs or not. Make sure that your
home inspection clause lets you back out of the contract, if necessary.
Finally, make sure the deal is contingent on an accurate land survey, so
you're sure that the lot is the same size the seller claims it to be.
Sources used to create this article include Money magazine and writers
Gregory P. Kowalski and Richard Bierck.