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Real Estate Contracts II

Real Estate Contracts II

Real Estate Contracts II:

On of the great things about real estate is the flexibility that contracting parties have for doing just about anything they want, as long it is legal. Verbal negotiations eventually lead to the written contract phase and this is when things start to really matter. Remember that when it comes to real estate, contracts must be complete, in writing and fully signed around by the parties.

Anatomy of a contract:

A contract is a promise or combination of promises between the contracting parties that is legally enforceable. It must be properly drafted and executed. In real estate, contracts are usually bilateral – meaning between two or more parties, but there are also unilateral contracts – a contract where only one party is bound to perform. Failure to perform on a valid contract results in a breach of contract and there are legal remedies for this provided by law.

Key contract requirements:

Valid contracts depend on what the law requires, but in general the parties must be of legal age, competent, not under duress, contracting for a legal purpose, involve some form of consideration (usually, but not always money), mutually agreed to by the parties and not fraudulent or misrepresented in nature. A contract could be ruled to be void or non-enforceable if what the law requires is not fully met

Attorneys:

Lawyers always compose the best contracts and please do not forget it. To be precise, I always use an attorney who specializes in the subject area. For instance, I wouldn’t use my estate planning attorney to write a real estate contract even though he is a top-notch estate planning attorney.

When moving to the written contract, skimping on attorney fees is a fool’s errand. This is exactly where you need to be willing to part with money to get it done correctly. Once a legal contract is signed around it is binding and enforceable and if the “you know what” hits the fan, the signed contract is what everyone falls back on.

Preventing problems:

Your attorney is there to protect you and your interests. Clients can get aggravated because they sometimes feel that their attorney is overcomplicating something by wanting to put in added layers of protection. The client just wants to get it done and the interaction with the attorney almost feels like he’s going to wind up killing the deal by making it more complex than it has to be. I would suggest that you not be that guy. Failure to listen and act on the attorney’s legal advice and suggestions is most always a really poor choice.

If the other party to the contract is using an attorney to draft or edit, I always involve mine. I have a fair amount of experience in reading, understanding and editing contracts, but I realize that I am not an attorney and that the language of a contract really does matter. For instance, warranting something in a contract is a world of difference from simply representing something based on actual and current knowledge. Also, an attorney will always skew a contract to favor his/her client. It just part of protecting them, which is good or bad depending on who the attorney is representing.

Finally, overruling the attorney’s legal advice. Here we find the guy that wants to keep it simple. When advised by counsel on a matter he will use phrases like “I don’t think we really need to put that in” or “let’s just keep this as simple as possible”. If I find myself starting to think this way I usually stop and start listening to the advice my attorney is providing. He’s usually right in the end, if not always.

Real estate agents:

I have been a party to hundreds of real estate contracts written by agents. Some are good - even outstanding, and some are absolutely awful. You might think that the longer an agent has been around, the better and more thorough their contracts would be. Not in my experience. For the record, I am not dissing on anyone here since I owned my own real estate brokerage for 9 years.

As far as contracts, the real estate agent is allowed to fill in blanks on the MLS forms which, of course, were written by MLS attorneys. There also can be blank addendums that are sometimes used, but all agents are very careful not to fall under the unlawful practice of law. This is one reason why agent contracts are frequently specific, short and to the point, without always layering in added protection that is sometimes needed. Another reason can be that the agent doesn’t want to kill the deal with a burdensome and complicated contract offer. Finally, if the client is an idiot the agent still has to write up what the client wants (if he can’t talk sense into him).

I always remember this: a real estate agent can be very valuable across the spectrum of real property issues, but they are not as adept and knowledgeable as attorneys. Not even close. Every real estate contract is big money to whoever is involved since we all buy and sell at the economic level we are at. Therefore, if an agent presents something to me where I have any questions, I have my attorney look at it. Any lawsuit takes time and money to resolve – a lot of it. Through awareness of who to use and for what purpose, a guy can avoid a lot of problems.

A short list of common contracting errors:

The legal description is not attached, or the legal description is incorrect. Overlooking key timelines for specific performance. Not fully understanding what you are signing. Relying on any verbal promise that is not included in the signed around contract. The other guy is using an attorney, you aren’t. Dealing with the opposing attorney directly, without using your own counsel. Failing to legally execute, notarize, or record required documents. Trusting the other guy without contractual backup. Somehow failing to produce or execute a legally binding contract. Not strictly abiding by the commitments in the contract, Letting the other guy slide on not strictly abiding to his contract commitments. Trying to resolve contract breaches or problems without bringing in your attorney. Failure to recognize when attorney involvement is needed. Recognizing that attorney involvement is needed, but failing to do so.

Wrap up:

I always think that there are two key negotiation areas in a real estate deal. The first is the sit down verbal stuff where everyone verbally agrees to what they are going to do and for how much. Then, the nail biting starts when the contract is being drafted. I consider this to be the second and most important phase of negotiation since a valid written contract is what will be reviewed and used by any ruling authority if there is a problem. Contract wisely and with professional assistance as required. It can prevent many headaches and costly efforts in both time and money.  

Valuation of Raw Land

Valuation of Raw Land