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Douglas Trudeau , Assoc. Broker
Prudential Foothills Real Estate
64 N. Harrison Road, Suite 160
Tucson , AZ 85748
Mobile: 520-954-2209
Contact Me

What Makes Up A Contract

A couple days ago someone asked me the components of a contract. As an experienced Realtor you would think that I could rattle it out without thinking. Brain freeze, embarrassment, and a lot of thinking afterward. Contracts are a critical part of real estate. Sometimes we write contracts, knowing what is required without thinking about all the parts. I must say, I feel good about how much I put into contracts. Beyond the requirements, making sure that expectations are clearly written. We have all seen some contracts that questionably written, vague about expectations, or are confusing as heck.

I started wondering about buyers and sellers who may not know requirements of a contract. There are a lot of home buyers and sellers, some who use a Realtor, some who don’t who understand even less about contracts and liabilities. So what makes up a contract?

Performance and Expectations:

In any transaction requiring a contract there are certain expectations from both sides. I n real estate, Sellers expect to get paid for the sale of their home with minimal or no problems. Buyers expect to buy a home with minimal or no problems. Mutual agreement so far. Sellers expect to surrender possession of the home, buyers expect to take possession. If only it were this simple.

If a lender is used, additional expectations will arise. Considering what has happened with the lending industry over the last 18 months, these expectations can be very strict with fewer buyers qualifying. For Sale By Owners (FSBO) have little protection in this area to confirm a sale if they are not savvy with writing contracts. Some sales can be very complicated and require very specific language to protect all concerned. In real estate only what is written is binding. If one side states something verbally, the other should insure receipt in writing.

Valid Consideration:

Sellers expect to get paid for the sale of their home. Buyers expect to pay for a home. Method of payment may be in cash, cashiers cheque, money order, bank wire transfer, or lender provided. The later is the most common. With a lender, they will want certain guarantees before releasing funds for the loan.

Offer and Acceptance:

Mutual agreement between buyer and seller. What is really accepted? As humans we all have different interpretations. Clarity in offers from both sides saves problems later. Manymisperceive that a contract is a contract once an offer is written. Not so, everything is an offer until there is mutual agreement in writing. Buyer can offer, seller counter offer, buyer counter offer the seller’s counter offer and so on until both come to a mutual agreement. Once both agree in writing, there is a binding contract with conditions defined within.

Time Frame To Perform:

Without providing time frames for performance and expectations a contract can go on and on for an unreasonable amount of time. In Arizona Realtors use a standard contract that has time frames for

Seller response,
Counter Offers,
Inspections,
Repairs,
Signing documents, and
Closing Escrow.

For failure to perform, there are cure periods to perform or the contract may be voided.

Warranty and Services:

What warranty does the buyer have that the home will be in the same condition as it was when an offer was submitted? What warranty does the seller have that the buyer will do what is needed to acquire a loan in time? What property must convey with the home? What is the seller allowed to take? What happens if repairs needs arise two days after the Deed exchanges hands?

Clarity for warranties and services early in the contract is essential to prevent problems after the transaction has closed. If the air conditioning doesn’t work when summer comes for a home purchased in the winter, who is liable for repairs? If the room addition is not up to code and the city or county insists it be corrected at the cost of thousands of dollars, who is responsible? If agreed repairs are not completed before close of escrow or in a reasonable manner, what action can be taken? Clarification in the contract will make this clear from the beginning.

Payment:

Time of payment is normally at Close of Escrow (COE). What about earnest money? If the deal fails to go through, who gets the earnest money? Standard contracts used by Arizona Realtors answers this question in the contract. Lender performance has always been the primary problem in this area. Until full payment is received, no transfer of the title. If not careful, FSBO contracts may not have this protection.

If repairs are not completed, how much money is held back? Rule of thumb one and a half times the estimated costs maybe held back for uncompleted repairs. Putting a time frame for completion or all withheld funds go to the buyer puts emphasis on getting repairs done quickly.

Conflict Resolution:

If there is a conflict in one side not performing as expected by the other side, what is the means of resolution? Are there penalties? Is there a cure period forcing performance? At what point does it go to litigation? What avenues are there for seeking resolution?

Communication:

Timely communication is important in all contracts. Letting the other side know progress of expectations solves a lot or problems, especially when unexpected interruptions occur. Holing back and not letting the other side know creates unnecessary conflict.

Competent or Authorized Parties:

One thing that can cause a deal to fall apart is having the wrong person sign the offer or contract. For investment groups, family trusts,LLC’s , etc. making sure that the person with authority to sign is the person who you get signatures from is important. When dealing with elderly home buyers or sellers, it is a good idea to get a family member for the client to review all documents and advise accordingly.

I may not have the quick witted answer to break a contract down into its essential components at a moments notice. But, I do know how to write good contracts. Each situation has its unique characteristics. Knowing what is best for the client and insuring those needs in clear, concise, precise understandable verbiage will prevent problems and misunderstanding. If it isn’t in writing it doesn’t exist. After all, buying a home is one of the biggest decisions most people make. Doesn’t it make since to take time to review the offer/contract and make sure it is written right before it is submitted?

This entry was posted on Wednesday, February 13th, 2008 at 11:11 am and is filed under Tucson Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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