Avoiding Real Estate Contract Mistakes

Real Estate Contracts:

Successfully completing a problem-free real property transaction is a great feeling. Getting caught up in a problem with a fully executed contract isn’t. For as many transactions as I have done over the years I have successfully avoided problems in almost every case, but not all. Here are my opinions from what I have learned:

What is the problem?

I’ve watched real estate novices read and sign contracts before and have seen certain common patterns, many of which are bad. Real estate contracts are long and detailed by nature. They are either written by lawyers representing the parties, or they are MLS Forms written by MLS lawyers and filled in by real estate agents.

So we have contract content created by lawyers, that is being read by regular people. This is a classic recipe for poor comprehension and ultimately a primary cause of failing to fully understand the content and meaning of contract language.

Contract terminology:

Real estate laws in the U.S. are based on English Common Law dating back centuries, so the terminology and formatting can be confusing.

Know this: words really do matter in contracts.

Example:
Does a contract novice understand the contractual difference between warranting something in a written and signed agreement, as opposed to representing the same thing based on current and actual knowledge? Probably not.

Pride:

I ask the guys out there to let me slide on the following gender bias: - men tend to be more prideful than women in real estate matters and seem to be less likely to ask clarifying questions about what they are reading in a contract. No matter the gender, I am solidly convinced that the vast majority of the time parties are signing contracts that they do not fully understand. The key word being fully.

Nerves:

Besides what is referenced above, there is the emotional side. It’s pretty clear that a real estate deal is right up there with one of the bigger financial transactions average folks will ever take part in. There is anticipation and apprehension all mixed together. Also, a raft of documents provided at contract signing, then afterward with the title abstract and finally at closing with escrow. Not to mention, all the stuff in between.

Asymmetric communication:

These days almost everything you get is digital. In a real estate deal it’s super convenient for the party that knows what they are doing. It can be a little harder for folks that have multiple questions, but the symmetry of real time person to person communication isn’t there.

An example would be a preliminary title report provided to the buyers. This happens soon after mutual execution. How does a novice independently read and understand the language of the property abstract and chain of title without some real time help? Or, do they just skim read it an hope for the best?

Review of the problem:

Before the solution, it seems that the problem should be understood. What we frequently see is regular folks dealing with these uncommon situations:

• Content written by lawyers.

• Alien language involving seemingly arcane laws.

• Heightened emotions.

• Making very important and binding decisions about things almost never dealt with in regular daily life.

… but don’t worry, there is a solution.

What is the solution?

Clearly, I don’t take contractual action until the impacts of those actions are fully understood. This is especially relevant for actions contemplated in real estate. Easy to say, but how to do it?

Fact:

There are others that know more than me!

The top of the line iPhone 12 costs around $1,500 these days if I get all the bells and whistles. If the iPhone is damaged outside of warranty and I didn’t buy insurance, I have a $1,500 problem.

OR

I could forego the iPhone until later, use a $500 an hour real estate attorney for my $499,000 real estate deal, and prevent every single problem that I listed above (and more). I can easily prevent a 1/2 a million dollar problem with about the same money I could spend on an iPhone 12.

Which is the better choice? Well,…I guess that’s why I still have an iPhone SE.

Other resources:

The silver bullet in real estate problem prevention and problem solving is the qualified real estate attorney, but you don’t always need a silver bullet for everything.

There can be other very qualified professionals such as title officers, escrow agents and real estate agents that can assist with transaction clarity. The challenge is to make sure they are truly qualified and are only advising within their scope of expertise.

When I first started in land development I was having trouble understanding how to read rectangular surveys. My land use attorney sat me down one time and explained it, but I still didn’t get it. Finally, an experienced real estate agent that had specialized in land for over 30 years sat me down and explained it to me in a way that stuck. In this area he knew as much as the lawyer and for me, was a better teacher.

Your very own self:

Real estate contracts are not particle physics, so a careful and reasonably intelligent individual can and should attempt independent understanding.

Having said that, the same reasonably intelligent individual should recognize when professional help is needed and should have the wisdom and humility to ask for it.

Pace:

There’s a certain momentum in every real estate transaction and the origin of it is the contract. After all, time is of the essence.

Some buyer offers will give me a ridiculously short time to respond on a land deal. I’ll get the buyer offer at 7:30 PM on Friday and am required to accept or counter offer by 5:00 PM the next day. If I have no questions or concerns, then no problem. But if I do, my choice is to talk with who I need to and only respond afterward, whether it’s past the deadline or not. I am not contractually bound at this point, so I make certain before I act.

In my opinion, the way to stay out of contractual trouble in real estate contracts is to gain full understanding of every specific term and condition, using every qualified resource available. Good luck!

Suggested further reading:
Real Estate Contract Basics: https://www.landdevelopmentrealities.com/home/2018/12/8/real-estate-contracts-1

Contact me at: ldr@landdevelopmentrealities.com

Blog photos courtesy of unsplash.com - Artur Opala