This summary covers the most common problems when completing a Residential Purchase and Sale Agreement from a Risk Management perspective. Use it to onboard new hires or as a great summary and refresher for all licensees.
Filling out the Purchase Contract Correctly
Be sure to fill out the contract and, if there are counters, completely and clearly. Don’t leave something so critical as financing terms blank. If there’s a problem and the buyers want to get out, they’ll say, “I didn’t get the loan I wanted, and the contract doesn’t list any terms.” So, the fault falls to the agents for not drafting a clear contract.
Avoid saying, “Seller’s choice” and not putting something in when your buyer has a chance to specify. Have the buyers use service providers they know and trust and put that in the contract. “Are there any title companies that you like?” (Should the buyers try to get their deposit back, you don’t want any issues of favoritism — like the broker-owned escrow is favoring the listing agent and the seller side.)
Give at least three or four suggestions to allow your clients to select their service providers and don’t present it as a preferred provider list.
When it comes to inspections (whether home, termite, roofer, or septic), licensees can say, “Here’s the list of vendors that our clients have had good success with.” If they don’t do a proper inspection, then you don’t have a negligent referral argument.
See 5 Common Pitfalls in the Residential Purchase Agreement.
Appraisal Addendum
If your buyer is going to get an appraisal, you have to address the appraisal contingencies. Generally, those already in the contract include:
- “We’ll pay the purchase price regardless of the appraisal”
- “We’ll renegotiate.”
- “We can cancel the contract.”
Your buyer’s tactic could be, “I’m paying all cash and I’m waving all appraisal contingencies, I don’t care what it appraises for, I’m not getting an appraisal.” You just set your purchase price and don’t worry about the appraisal (option #1 above).
Or you could go with option #2 and use an appraisal addendum. The purpose of the appraisal addendum or additional terms is basically to pre-renegotiate. You’re escalating your purchase price based on the appraisal price.
This is likely when you suspect a property may not appraise for what the buyer offered. Typically, a short sentence can say “we’ll pay $10,000 over the appraisal price regardless.”
Once you get the appraisal, the addendum may be triggered. So, the appraisal addendum needs to reference the contract terms and say what the buyer is going to do. ”We’re not pursuing option #1 and option #3, but on option #2, this is what we’re willing to do.”
In this case, the initial offer you submitted does not have a good purchase price. And that can become very problematic, because everyone (title company, buyer, seller, lender, etc.) needs to know what that purchase price is. So, you will need a new addendum that clearly sets forth that this is the purchase price we’ve agreed to because the appraisal came in at $X or that we executed this addendum. This new addendum should be signed by both parties to agree to the final purchase price.
Appraisal Gap
When your buyers make an offer that says they will pay an amount above the appraised value, their lender may only lend up to a percentage of the appraised value.
A buyer’s agent must have a conversation with the buyer, to ensure that the buyer does have the amount necessary to cover the gap between what the lender will lend and the offer the buyer has made. If it turns out that the buyer cannot bring additional funds to the closing, the buyers could lose their earnest money.
The buyer’s agent needs to document that this conversation took place and that the buyer understood these risks. The additional provisions language regarding the appraisal gap must be clearly set forth in the Contract to Buy and Sell in order to avoid any dispute with the seller, seller’s agent, and the buyer.
It is always advisable for the broker to advise the principals to consult with an attorney and have an attorney draft this type of additional provision. Language that many brokers add to cover any additional provisions creates a lot of uncertainty and doubt. The best advice is to have an attorney work with you in preparing that contract language.
Ambiguous Amend/Extend Language – Don’t Write Your Own Amendments
If there are delays associated with appraisal, inspections, and financing, sellers may be reluctant to grant extensions. If you’re considering adding provisions allowing for an extension, be sure you clearly articulate your client’s position and protect that position through clear drafting and communication of amend/extend terms.
Sometimes, it becomes unclear when the earnest money “goes hard” or whether the backup offer goes into the first position should the buyer not be able to close by the deadline. If there is any doubt, ambiguity, or concern, the buyer and the seller should consult with legal counsel who should assist with drafting amendments or extensions to the Contracts to Buy and Sell.
If it’s more than just a very basic, simple additional provision, or fill in the blank, brokers have a duty to advise your clients to talk with an attorney.
Contingencies
It’s so important to draft contingencies in a way that clearly communicates the interests of the party who is proposing the contingency. Careful thought should be given as to how the words could be interpreted or applied to different scenarios. Attorneys can be of great assistance to the parties in drafting contingency language.
Contingencies that most often result in disputes include: 1) deadlines for the buyer to close when the contract to purchase is contingent upon the sale of buyer’s current property or another property; 2) a price escalation clause to meet appraised value; 3) the aforementioned appraisal gap contingency, and 4) an initial cash offer contingent upon whether the buyer elects to seek financing.
These contingencies can lead to delays which bring up disputes and place earnest money at risk.
For example, the sellers may think that they can find a suitable replacement home or go live with a family member or friend. But once they realize just how difficult it is and how expensive it is to find another place to live, sellers often want to terminate and get out of the contract.
The sellers may sue their agent for not better advising and protecting them from the risk of their own decision. The best way to manage this risk is to document in the transaction file that the broker discussed with the seller their options, the difficultly of buying in this market, and that the seller has a clear, reliable backup plan in the event that another property cannot be put under contract in time.
One alternative for sellers who are looking for a replacement home is to negotiate a post-closing occupancy arrangement with the buyer. This can allow the seller to continue to reside in the home after closing. All Post-Closing Occupancy Agreements should be written agreements that clearly identify the date by which the seller must vacate, including all personal property that was not included in the transaction. The written agreement must identify what consideration is being paid by the seller to continue to occupy the property, if any, and the consequences for any breach.
(In Colorado, the Post-Closing Occupancy Agreement form does have limitations and can lead to disputes. If the seller is likely to remain in the property for more than six months, it is best to not use the Post-Closing Occupancy Agreement form and instead have an attorney prepare a lease agreement. If using the form, the Agreement must state the specific deadline by which the seller has to vacate.)
Zillow Purchase Agreement Hazards
If Zillow acts as seller, it will insist on using its own purchase agreement, a document that may contain sections you’re not familiar with and may be missing protections you normally enjoy with your state association documents.
The Zillow purchase agreement has no built-in protections for the selling / buyer’s agent. Your own state agreement may have other disclaimers, warnings and other built-in protections. Any disclaimers and releases in the Zillow agreement only apply to seller and the listing broker. Further, the Zillow agreement has no procedures for cancellation.
Appraisal, financing and sale of buyer’s own home are the only contingencies in the Zillow agreement. Physical inspection is not a contingency. Unless the buyers advise the seller by the due diligence expiration date (10 days) that they want to cancel, all physical issues are waived. The buyer may ask the seller to make repairs and that adds five more days for the seller to respond. If the seller is non-responsive, the buyer can only cancel (or proceed without the repairs being addressed).
If the sellers fail to satisfy their obligations, the buyer may terminate the agreement and receive a return of the deposit; however, the buyer cannot sue the seller for specific performance or for monetary damages. There are also no attorney’s fees allowed under the agreement. If the seller breaches the agreement, all the buyers can do is cancel.
There is no provision or form for an increased deposit, which could invalidate the liquidated damages clause. There is no option for the buyer to disagree with a liquidated damages clause. It is typically recommended that in a sellers’ market, the buyer not sign the liquidated damages clause because the seller will not be damaged if the buyer breaches.
Buyer also releases the seller and listing broker in the Zillow agreement from any losses whatsoever relating to environmental and physical conditions affecting the property.
Under the Zillow agreement, “Buyer waives any right to receive a completed seller’s property disclosure statement as required by applicable law or custom in the jurisdiction where the property is located.”
This would be unacceptable to buyers in California because disclosures cannot be waived under California law. It is recommended that brokers fill out the broker portion of the disclosures and advise their clients in writing that the seller is refusing to provide additional disclosures in violation of California law. (Check the disclosure requirements in your state.)
The current Zillow agreement is also behind in catching up with all the new California statutes. It does not provide for a Wildfire Disaster Advisory, Fair Housing and Discrimination Advisory and California Consumer Privacy Act Advisory. It is recommended that brokers give those forms to their clients regardless of the Zillow agreement (and any other forms required in your state), so that brokers will be compliant.
Beware when your buyers decide to use the Zillow form and give them written notification of its risks, without providing any legal advice.
Charging Transaction Coordinator (TC) Fees
Any TC fee charged to a buyer or seller in a transaction must be disclosed upfront and agreed to in writing by the buyer or seller, either as an Addendum to, or a provision of, the Residential Listing Agreement, the Buyer Broker Exclusive Representation Agreement, or a stand-alone agreement.
If the TC fee is not referenced in the broker/principal contract, the buyer or seller has a basis to refuse to pay the fee. An Addendum can be incorporated by reference in the Compensation provision to the principal/broker contract to specifically describe the TC’s duties for the anticipated sale or purchase.
With respect to RESPA, problems arise in charging a TC fee and then splitting it with a TC engaged as an independent contractor. Additional TC fees simply should not be passed on to the consumer.
RESPA seeks to restrict situations where consumers are charged fees for services which should already be performed by the professional. In the case of a real estate transaction, a real estate licensee’s responsibility to prepare a transaction file is part of the real estate licensee’s required duties. As such, one might argue that the TC fee is a “junk” fee. See Transaction Coordinator Fees and RESPA.
To avoid even the appearance of a RESPA violation, specific services provided in a transaction, over and above the services described in the commission agreement, should be specifically defined; but there is no need to charge an additional fee for these services.
A Transaction Coordinator helps keep your transaction on schedule, by tracking down missing paperwork, following up on any outstanding signatures, verifying signatures and initials on all documentation, and coordinating with other parties.
Your real estate E&O may only protect you. If you employ a Transaction Coordinator as part of your brokerage team and have CRES real estate company E&O, you’ll have Team/Non-Licensed Assistant Coverage. (If you outsource Transaction Coordination to a separate company, they’ll need their own E&O insurance.)
Thank you so much. CRES Risk Management has made my experience a lot less painful than it could have been. I received the support and guidance promised, and will continue to use CRES as my E&O provider for years to come.
– Karen S. – Mechanicsville, VA
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See all of our ClaimPrevent Summaries:
ClaimPrevent® Summary 1: Attracting Clients and Showing Property
ClaimPrevent® Summary 2: Licensee Responsibilities When Creating New Listings
ClaimPrevent® Summary 3: Seller Disclosures and Working New Listings
ClaimPrevent® Summary 4: Handling Offers to Purchase Real Estate
ClaimPrevent® Summary 6: Handling Challenges with Clients and Other Licensees
ClaimPrevent® Summary 7: Avoiding Legal Trouble when Working a Real Estate Contract
ClaimPrevent® Summary 8: Property Management Ads and Screening of Applicants
ClaimPrevent® Summary 9: Property Management Evictions and Maintenance
