I spend a fair amount of time trying to convince clients that their real estate contracts are not long enough. While most clients just want a one page, quick and simple contract, I try to convince them that we need to add more language, not less, to the agreement. I’m frequently met with resistance. The clients’ meaning is clear: Stop "over-lawyering" and get my deal done. At the risk of once again being accused of the dastardly “over-lawyering,” the following are a few examples of why silence is not golden in real estate investment contracts—and how to write a better real estate contract.
Pay attention to liability and damage coverage
I have seen installment land contracts that didn’t obligate the buyer to maintain any liability or damage coverage on the subject property. Now, if you’re the buyer, I suppose that’s a good thing (but only if the contract requires the seller to maintain such coverage!). But if you’re the seller, unless you’re willing to provide the coverage—which is usually not the case—then the agreement needs to bind the buyer to do so. It’s not good enough that the buyer actually shows proof of the coverage; it must be a contractual obligation, or the buyer can cancel coverage at any time with little recourse for the seller. And what about that same contract with no buyer indemnities to seller in the event of an accident on the property? That’s a time bomb ticking.
Plan ahead for breach of contract situations
What about the seller who tells you that the roof and furnace were replaced three years ago? It’s an "as is" sale with no inspection. What if you discover several thousand repair dollars later that the seller actually only thought about replacing the roof and furnace? A simple written rep and warranty from the seller might be golden. If the seller makes a statement that you’re relying on to do the deal, make it a rep and warranty in the agreement. Then, if it turns out not to be true, you have a classic breach of contract claim.
Be sure you can walk away if necessary
If you’re buying property from a company, do you have any reps and warranties from the company regarding their legal status, authority to enter into the agreement with you, status of existing or known possible litigation regarding the property? This type of silence can be deadly. Additionally, do you have an airtight financing contingency that lets you out of the contract if you can’t secure financing? Many states’ typical board of realtor purchase and sale agreements have undergone revisions in this area that favor the seller, making it much harder for buyers to walk away from deal because they didn’t get financing. Check these provisions carefully.
Balance earnest money provisions
What about earnest money? If you’re the buyer, you want to ensure provisions are in the contract to get your earnest money under all conditions except your outreach breach. Of course the seller will be trying to limit that type of broad refund provision, so it’s a balancing act.
Include an appraisal provision
Finally, buyers should always include a provision that the contract is contingent on the property appraising for at least the purchase amount. Otherwise, you could find yourself obligated to make a larger down payment to secure financing to consummate the deal.
The bottom line is that you should pay as much attention to what’s not in the contract as what is in there. Ask yourself if everything you know about this deal is covered in the contract. That’s a good starting point. A wise attorney once said that a contract is no more than the ground rules for a war that may never be fought. If the war comes, the big problems will probably be in areas where no rules were provided. In other words, what the contract doesn’t say will probably prove to be more important than what it does.