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In today’s competitive market, your clients are looking for a win. To keep a leg up on the competition and help maximize your client’s chance of success, you need to make sure that your contract is error-free, clear and organized (and you’ll want to avoid those tiny mistakes that amount to big pet peeves for listing agents).
So, we reached out to agents, brokers and affiliated industry professionals to find out what contract problems or problem strategies are most prevalent right now. Here are some best practices, plus common mistakes to avoid.
1. Not having an inspection contingency
Lisa Caldwell | Avenue 8 in California
The biggest mistake we’re seeing right now in terms of contracts is buyers coming in without any sort of inspection contingency. Aside from obvious pitfalls, buyers may find themselves unable to secure homeowner’s insurance without obtaining an inspection contingency first. As such, it is absolutely essential to have these contingencies in hand before writing an offer, or buyers could find themselves in some seriously hot water.
In the state of California, for example, insurance companies have backed out of offering coverage for certain areas of the state — the same can be said about states that may be prone to other natural disasters like hurricanes or tornadoes. If a buyer writes an offer without an inspection contingency – perhaps even getting through the contract and appraisal — and is then denied homeowner’s insurance by their provider, they are consequently at risk of losing their entire deposit.
One way to protect buyers is to have them call their insurance agents prior to writing an offer, to ensure the property is insurable. Be sure too that there could be an additional cost(s) if the property is located in a flood zone, an earthquake fault zone, or in a high fire severity zone — these factors can make a buyer’s homeowner’s insurance policy considerably more expensive and possibly cost-prohibitive.
Agents and brokers not only need to be hyper-vigilant, ensuring that inspection contingencies come through in time for potential homebuyers, they need to educate their clients on what could be at stake. Proactive agents should encourage homebuyers to call their insurance providers and have all of their ducks in a row with regard to contingencies before even considering putting down an offer.
2. Waiving the home inspection
Jason Gelios | Community Choice Realty in Southeast Michigan
One of the biggest mistakes I see home buyers making in this hyperactive market is waiving the home inspection. While many home buyers are waiving this contingency thinking it gives them a leg up on the competition, they are really putting themselves in a grave situation.
One major mistake with a home could cost a new homeowner tens of thousands of dollars. A home inspection should not be waived — even in a competitive market.
A common mistake I see with newer real estate agents is not spelling out the terms of their offer. Many newer agents will write up an agreement with assumptions that certain things are included in the sale.
It’s not until they get to closing that they realize that the agreement doesn’t state that their buyer client is legally entitled to those items. Every offer on a home should spell out exactly what the buyer wants in such language that a fifth-grader can understand it.
3. Not providing precise lot measurements
Charles McMillan | Stand With Main Street in Connecticut
Rather than using the actual lot measurements, “per survey” was used. Most contracts provide lot measurements for a purpose. Based on papers provided by the selling agent or seller, the purchaser obtains a comprehensive picture of the property’s size.
Relying on the lot size, the buyer sets expectations for the property’s usage and future sales. The term “per survey” in the contract quickly dispels these assumptions, leaving the buyer unclear of the actual dimensions.
Preferably, provide the precise measurements of the lot. Gathering this information may require some extra effort on your behalf, but the time you put in will pay off in the end.
4. Waiving the appraisal contingency
Sarah F. Bandy | The Lifestyle Group, Jason Mitchell Real Estate in New Jersey
The biggest mistake Realtors are making is encouraging their clients to waive the appraisal contingency.
For example, if a client has the winning bid at 600,000 and the home only appraises for 525,000, the Realtor has already encouraged their clients to offer an appraisal waiver. That client is on the hook for the 75,000 difference when the bank doesn’t lend on the full amount.
Now, it is a necessary evil to win the bidding wars, but morally and ethically — is it the right thing to do?
My clients have done it, even though I’ve explained the downfalls in doing so. They’ve outright told me, “Sarah, we need to win.”
It may get them what they want and in the more elite towns, the property values continue to rise, pandemic or not so in the long run … it will not be an issue, but what about all the other towns? What happens when the market corrects? What happens if someone used their whole life savings because they removed the appraisal contingency?
I would rather see a variation of this where the seller has some skin in the game. Let’s say they each split 50/50. This makes me feel a little better. This is one of the big issues that we are facing now, and I think it will hurt buyers in the long run. In my opinion, it is truly a mistake to do so.
5. Not double-checking contract details
Dan Belcher | CEO of Mortgage Relief in Oklahoma
One of the most typical contract blunders is changing details after the contract has been signed and completed. Homebuyers, in my experience, are highly enthusiastic about purchasing their property, causing them to overlook every aspect of the agreement.
They would sign it and begin the legalizing process, and it wouldn’t be until they received their copy that they would notice the contract’s errors. As a result, we must restart from the beginning, which is both time- and energy-consuming.
So, while buying a new property, stop getting emotional and double-check everything stated in the contract. A contract acts as a legal bond between the buyer and the seller, so it’s important to double-check everything written in the deal. Everything must be written precisely to avoid future complications.
6. Making changes to contract after signing
Michelle Coffing | Great Vancouver Homes, Weichert Realtors Equity NW, Vancouver, Washington
The “multiple offer” environment is certainly causing people to go out on a limb legally. People are making rookie errors that could have serious ramifications should anything go wrong further down the line.
One of the worst mistakes that you can make is attempting to change a contract after both parties have signed the document. Without the support of an attorney, neither party can attempt to make changes to the contract.
If you attempt to change a legally binding contract, this could result in some serious consequences. You must make sure you seek advice from an attorney before changes are made.
7. Making a noncontingent offer
Joy Aumann | Compass LuxurySoCalRealty in California
People are making the mistake of removing their appraisal contingency with the intention of using other contingencies left in place to possibly leverage as the reason for backing out.
Of course, a buyer’s investigation contingency is open to verify the condition of the property, title, HOA docs and seller disclosures, but not acting in good faith could subject their earnest money deposit to future arbitration or court.
Buyers are willing to remove inspection, appraisal and loan contingency to win offers, essentially making a noncontingent offer. Traditionally, this was only done by professional investors/flippers.
This can put a buyer’s earnest money at risk if a very costly defect is discovered (mold!), rates go up and your loan is no longer approved, or if your appraisal comes in way short, and you have to come to closing with more cash than you can afford to.
8. Not educating clients about the pros and cons of removing contingencies
Megan Ward Stevens | Principal broker at Windermere Realty Group in Oregon
The biggest mistake an agent can make is not educating their client on the risks involved when removing contingencies. This is an atypical market and buyers need to be walked through the risks and rewards of waiving the contingencies in the sales contract. Also, even if there is a pre-inspection done on the property, I highly recommend buyers conduct their own inspections.
Many buyers are waiving financing contingencies and/or inspections. Even if a previous inspection has been done and provided to the buyer, the buyer should still hire an inspector and have their own inspection. This is an expensive purchase, and home repairs can add up. It’s important to know what you are inheriting.
When getting a loan, only the lender can waive the appraisal, but a buyer can remove the appraisal contingency. When waiving the appraisal contingency, buyers need to be prepared to bring the cash to the table should the home not appraise. I highly recommend they run the numbers with their lender and make sure they are prepared.
Additionally, make sure the language is crystal clear in the contract so all parties know what to expect if the appraisal should come in short. Yes, buyers are taking on more risk when making an offer these days, but if they are working with a knowledgeable broker, they should be well-informed and prepared.
9. Inattentiveness to sellers’ timeline
Chris McGuire | Founder of Real Estate Exam Ninja in New York
A common pitfall of transactions stems from inattentiveness to the timeline, as some sellers may be set in stone with their preferred closing dates. It’s best if real estate agents evaluate if their buyer can comply and realistically appraise the property on the date set by the seller.
Although it can be negotiated most of the time, the buyer and the agent should also make sure that both parties sign any mutually agreed move of the purchase date if the original date is affected.
10. Cutting corners and missing important details
Lauren Cohen | Attorney and founder of e-Council, Inc. in Florida
People in a crunch tend to forget to dot their i’s and cross their t’s. Realtors and other real estate professionals are no exception. More often than not, people barely skim contracts when rushing to make deals happen, and the results can not only be costly but potentially devastating. Details are being compromised at the expense of getting deals done, but all parties are subject to suffer in this environment.
I hear all too often “just do whatever it takes to get the deal done” with little or no due diligence and often no concern as to the ramifications of cutting corners. This is particularly true and even more problematic for people that are investing across borders. They tend to forget the importance of setting up the right structure and just want to make the investment at all costs.
They’ll compromise their tax and potential legal liability in order to make a transaction happen and then pay the price dearly on so many levels at a later date, sometime sooner than they think.
11. Poorly writing an escalation clause
Trey Langford | Founder of Build Idaho in Idaho
In Boise, it’s all about escalation clauses lately. In simple terms, instead of offering a specific amount, a buyer offers to pay more than the other highest offer. This strategy allows a buyer to make an offer that continues to outbid other offers.
One benefit is that the buyer does not have to make the highest bid up front, so this can save them money. Unfortunately, this can be a very slippery slope.
If not written well, a buyer finds themselves committed to paying more than they realized or possibly can even pay. A well-written escalation clause protects a buyer from offering a price that is beyond what they intended.
A common situation is when a buyer is financing the purchase of the property. What happens if the appraisal is below the price offered? Is the buyer required to pay the difference or does the seller have to accept the appraisal amount? It is all about how the contract is written and if there is room for interpretation. A contract left to interpretation or without clearly defined boundaries leaves a client vulnerable.
12. Adding unnecessary friction to the transaction
Daniel Sperling-Horowitz | CEO and co-founder of OfferMarket in Maryland
With record-low inventory, we’re seeing an influx of real estate agents involved in off-market transactions — specifically wholesale deals using assignment of contract.
The mistake we are seeing among real estate agents who are not experienced with off-market transactions is an insistence that the contract be on the state’s association of Realtors standard contract of sale form.
This is not necessary as there is already a valid contract in place with the seller and assignor, and it adds considerable friction to the transaction. As a result, buyers represented by real estate agents are losing out on many of these deals.
13. Not protecting your clients
Katie Temple Keehfus | Managing partner of Hodge & Temple Real Estate Attorneys in Georgia
As the Atlanta market continues to be super competitive with ultra-low inventory, we are seeing all kinds of unusual situations as people try to wriggle out of contracts. Our firm likes to keep our finger on the pulse based on what is happening on the ground.
One such situation should be of real concern to listing agents. They put a house on the market and receive multiple offers. They end up going with the one that drops all contingencies and is all cash.
Imagine though, that this all happens over the course of the weekend or a 24-hour period. The buyer who goes binding arranges to go see the property first thing on Monday, but the trick is they have three days to produce their earnest money.
The buyer goes to see the house and do an inspection (which they waived) and then never produce their earnest money and claim that they were never binding. That buyer got to actually do the inspection they waived, and now the seller can either sue that buyer or turn to the next buyer waiting in line.
14. Impossible-to-fulfill, tight closing dates
David Aylor | David Aylor Law Offices in South Carolina
The real estate market has incredibly low inventory right now, which puts a load of pressure on buyers to make their deal the most attractive to the seller. Unfortunately, I’ve seen some contracts with very tight closing dates, which make the sellers happy but may be impossible to fulfill.
Buyers need enough time for inspection, mortgage underwriting and other homebuying processes, which can take several weeks to finish. A tight deadline only makes the seller happy if you can meet it, and these contracts are more likely to fall through if the buyer runs out of time and the seller refuses to extend, canceling instead.
Agents and lawyers need to take the extra time to check the contract dates set and ensure they’re reasonable to avoid potential heartbreak for the buyer and frustration for the seller down the line.
Christy Murdock is a Realtor, freelance writer, coach and consultant and the owner of Writing Real Estate. She is also the creator of the online course Crafting the Property Description: The Step-by-Step Formula for Reluctant Real Estate Writers. Follow Writing Real Estate on Twitter, Instagram and YouTube.