EXPLAINING CONTRACTS TO CLIENTS

EXPLAINING CONTRACTS TO CLIENTS

 The residential real estate market is moving incredibly fast.  Inventory is low and many listings are receiving multiple offers and offers above the asking price within days of going active on the market.  A downside of this frenetic activity is that buyers and sellers often do not have the benefit of the time it takes to fully understand the impact of the contracts that they sign, usually by Docusign or similar remote format.  Certainly Realtors should not offer legal advice regarding the provisions of a sales contract, but it would be appropriate to provide a copy of the most commonly used contract and addenda forms upon engagement of the client when time is essential in submitting or considering an offer on a competitive listing.

I have long recommended that as soon as agents obtain a listing or enter into a buyer brokerage agreement, a copy of the likely contract and addenda should be provided for review by the client so that when the time comes, they will have a general familiarity with the expectations of the legal documents.  Is the property in a jurisdiction that is likely to use a GCAAR Sales Contract or Maryland Realtors form and the associated addenda?  Whichever form is used, the basics could be explained by the real estate agent, or suggest that the client discuss the forms with an experienced real estate attorney.

 The initial discussion should be about the financial obligations of the buyers.  Are they paying cash, in which event they will need to prove they have funds readily available, or is the transaction contingent on financing, in which event they will need to consult with a lender for a pre-approval letter.  In this market, however, some agents are recommending that the offer be made without a financing contingency, even though a loan will be necessary to complete the purchase.  Buyers need to understand that without the contingency, if the loan is not approved, their earnest money deposit will be at risk, and in fact their legal liability could exceed that deposit amount. Undoubtedly if something goes wrong, the agent will be blamed.

Basic contract terms should be reviewed with buyers or sellers early in the process, including not just the anticipated sales price, but the financing terms, if any, the amount of the earnest money deposit and when it must be delivered, as well as the desired settlement date.  But outside of these basic concerns, anticipated contingencies should be explained.  Again, because of the hyper-active market, agents sometimes suggest that the buyers forego a home inspection contingency.  Since that is such a significant risk, the implications of waiving a home inspection should be clearly explained to clients.  If it turns out that there is a major defect that would have been revealed through an inspection, the clients are likely to blame their agent who made the recommendation to forego an inspection, even though it may have been necessary to win the bid. The parties should understand the effects of a Radon Inspection Contingency, an Appraisal Contingency and any other useful contingency.

 It is not the obligation of Realtors to explain the meaning and impact of every provision in a sales contract or the addenda, but it is incumbent on Realtors to give their clients the opportunity to review the forms, understand them or seek additional information about the rights and responsibilities of a contract.  Many contracts are actually Docusigned on cell phones or other mobile devices that make it difficult to read and fully comprehend what is being signed. Consequently,  the initial delivery and explanation of the basic form contract of sale and potential contingencies are important to avoid customer dissatisfaction or worse.

  Clients look to their real estate agents not only for help in locating the house they wish to purchase, but they are also looking for guidance, advice, and, unfortunately, protection from entry into a contentious contractual situation.  The best protection for agents is to provide an opportunity for clients to understand and review the contract forms and to seek advice from their attorney, accountant or other trusted advisor before finalizing the agreement.

James E. Savitz, Esq. 

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