One would think that the transfer of ownership of real estate from one party
to another should not be much more difficult than buying golf clubs at a garage
sale. The seller puts a price tag on the goods to be sold, the buyer identifies
the goods to be purchased, the parties dicker over price and, eventually, agree
on a price. Money changes hands and both parties walk away happy.
Unfortunately, it is not that simple when dealing with real estate. Each
jurisdiction has special rules, regulations, taxes, forms, and procedures that
must be followed not only to effectuate a sale, but to protect the parties
involved from litigation later. Further, most sales of real estate involve a
mortgage, which requires an additional raft of paperwork in order to effect the
sale.
There are a number of publications and periodicals dedicated to educating the
reader how to successfully close a real estate transaction. Since it is not
possible to summarize all those publications into a small article, it seemed
that it would be of more utility to identify for the reader the more common
mistakes made in real estate transactions. The following, admittedly incomplete,
list discusses a few situations that one would think obvious, but still occur
with startling frequency.
#1. The seller does not have authority to sell the
property.
Most lawyers will recall learning in Contracts that one cannot sell what one
does not own. A simple enough concept, but it is not uncommon that an owner
transfers ownership of the family home into a trust, a limited liability company
(that may or may not still exist), or pursuant to a community property
agreement. Possibly the seller has authority to sell the home pursuant to an
expired power of attorney. The parties are then unpleasantly surprised to learn
that the seller who negotiated and entered into a real estate purchase and sale
agreement in his personal capacity did not have the authority, or sole
authority, to do so. It is usually a matter of an Internet search or a phone
call to a title company to determine the legal owner of the property. It would
be wise to make that call early on.
#2. The purchase and sale agreement contains an incomplete or
inadequate legal description.
The property to be sold must be adequately described in the purchase and sale
agreement. The mailing address is not an adequate description of the
property. The purpose of a legal description is to describe a particular parcel
of land in a unique and unambiguous manner that will survive forever. In the
United States, this is done by reference to lots and blocks in a subdivision
map, by metes and bounds, by aliquot (using the nomenclature of the U.S. Public
Land Survey System, or by a combination of the above. Thus, it is necessary to
include or attach the entire lengthy and convoluted legal description on the
purchase and sale agreement for it to be enforceable.
#3. Zoning is Inconsistent with Intended Use
One might think this is strictly a “let the buyer beware” issue, but it is
not uncommon that a party purchases property with the stated intent of building
a duplex only to discover that the property has been zoned only for single
family use. Or a party purchases an existing restaurant only to learn that the
liquor license was “grandfathered” to the former owner and will not transfer.
Sellers should know the zoned status of the property to be sold and disclose
this information to prospective buyers. Buyers (and their attorneys) should
perform a due diligence inquiry regardless of what the seller says long before
closing.
#4. Failure to pay earnest money or follow earnest money
provisions
Earnest money is money the buyer gives the seller to show good faith when
making an offer to purchase the property. Sometimes, however, while there is a
contractual provision that the earnest money must be paid by a certain date, it
is not paid, not paid on time, or paid by a check that is dishonored. Buyers
must understand that it is a breach of the real estate contract to fail to pay
the earnest money. Sellers who do not insist on the strict performance of the
buyer in this regard may be damaging their position if they turn down completing
offers to purchase the property due to the mistaken belief that they already
have a buyer.
#5. No meeting of the minds in the purchase and sale
agreement
The failure to recognize whether or not there has been a true acceptance of
the real estate contract is another issue that bogs down or fouls up a real
estate transaction. If one party makes a written offer to enter into a purchase
and sale agreement, and the other party makes changes to that offer there is no
contract unless the first party expressly accepts and initializes those changes.
What has occurred instead is that the second party rejected the offer and made a
counteroffer. It is therefore important for a party reviewing a purchase and
sale agreement to be sure that any handwritten changes that may appear in the
purchase and sale agreement have been agreed to.
#6. Balance of the loan will be paid off with promissory note and
deed of trust and then the note and deed of the trust are not
attached
Unless the buyer intends to show up for the closing ceremony with a
wheelbarrow of money, the purchase and sale agreement will be financed by a
promissory note and secured with a deed of trust. The terms of these documents,
including principal, payment terms and interests, should be made a part of the
purchase and sale agreement. There is potentially no contract if all the terms
of the agreement are not attached, and this is a classic method of voiding a
sale. The basic form can be attached as an exhibit or an addendum and referenced
using language such as, “payment for the property will be made pursuant to the
terms of a promissory note and deed of trust the terms of which will be
substantially similar to the forms attached hereto as exhibit A.”
#7. Everything must be in writing
Communicate everything in writing pending a closing. This should go without
saying in any transaction. For example, if the seller agrees to make repairs
prior to closing, put down the substance of the repairs to be made in an
addendum to the purchase and sale agreement and have all parties sign it. Do not
telephone the seller and indicate the repairs are OK (or that they are not OK),
write it down. Include an integration clause in the lease, that the
purchase and sale agreement is the entire agreement and any changes must be in
writing and signed by both parties.
#8. Confirm that seller disclosure form is filled out
correctly
It is a legal requirement in most jurisdictions that the seller of real
estate certify that any existing defects in the property have been disclosed and
any prior defects have been properly repaired. This includes cracks in the
foundation, leaks in the ceiling, electrical defects and plumbing problems. In
Washington State, for example, there is a statute that requires a particular
checklist to be filled out and provided to the buyer. Frequently, sellers
massage the facts, or indicate that they “don’t know” if there have ever been
any defects. Generally, the test is whether a seller knew or should
have known of defect in the ordinary course of events. If the seller’s
answers on a disclosure appear to be vague or unresponsive, it is a good idea to
wonder why.
#9. Allowing seller to stay in possession after closing without an
airtight possession agreement
The inclusion of a “possession due on sale” clause is highly advisable.
Sometimes the seller is willing to sell the house but not willing to move out in
a timely manner. If the buyer is willing to allow the seller to remain in
possession for a short period of time after the sale closes, it is necessary to
execute an occupancy agreement that clearly spells out the dates of occupancy,
the consequences of failed to abide by the dates, and any remuneration or
consideration for the buyer allowing the seller to remain in occupancy after
closing. Further, the buyer should seriously consider liability and insurance
issues relating to the seller’s occupancy. If the seller is injured moving out
due to a faulty step, can the seller sue the buyer? If the house burns down
during the seller’s post-closing occupancy, whose insurance will cover the
loss?
#10. Failure to clearly indicate what the seller takes with
her
Much time and money has been spent in litigation over whether the seller was
entitled to take her chandelier, washer, dryer, range, oven, or refrigerator
with her when she moved. The parties should execute a written addendum to the
purchase and sale agreement clearly indicating what fixtures stay and go.
#11. Buyers fail to get an environmental audit if property is
commercial or if the property has ever had an underground oil tank
Few things upset a buyer more than learning the home he just bought is
contaminated. If the home has an oil furnace—or has ever had an oil
furnace—there is almost certainly a tank somewhere leaking oil. The sellers
should provide an environmental audit indicating the property is clean, that the
tank is in good working order, not leaking, has been removed, or has been
filled.
#12. The parties neglect to include a merger clause in the purchase
and sale agreement
Post-closing obligations may not survive closing unless there is language in
the purchase and sale agreement indicating they will. If the sellers agree to be
responsible for removing the pile of trash after they vacate the premises, there
had best be language that establishes their continuing obligation to do so.
