12 Ways to Foul Up a Real Estate Transaction
By Evan L. Loeffler
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.