Understanding Real Estate Contracts and Forms
No matter if you’re buying or selling a home, the simple fact is you will always have a contract or form that needs to be read, filled out and signed as part of any real estate transaction. If you are you using a REALTOR®, chances are you will have to sign a contract before you even get started. Below we have listed some of the most commonly used contracts and forms in any real estate transaction. We have also provided a detailed explanation that will allow you to understand the purpose of the contract or form and provide clarity on any questions you may have.
Buyer Representation Agreement
The representation agreement is a form that is signed by the prospective buyer looking to buy a home. It is an agreement between the buyer and REALTOR® that allows the REALTOR® to work on behalf of the buyer locating a home. It outlines the buyer’s expectations and the REALTOR®’s duties, specifically showing listings and drawing up the contract. It gives the REALTOR® assurance that the buyer won’t be represented by another agent during the real estate process. Basically you’re committing to use the specified REALTOR®/agent throughout your buying process and cannot select another REALTOR® unless otherwise agreed between both parties. This form motivates the REALTOR® to work vigorously on your behalf and reassures them you want to work with them. Furthermore it lets the REALTOR® know their time and efforts won’t be wasted frivolously. In some cases under this agreement if you’re using a REALTOR® and decide to offer on a property “for sale by owner” or for any reason the seller does not pay the commission for your REALTOR®, you can be liable for their fees or commission under this binding agreement.
In some states “intermediary agreement or dual representation” is legal. This is a form that designates the REALTOR® can represent both the buyer and seller during one transaction. Both the buyer and seller have to agree to this representation before any transactions can occur. Typically you see this scenario when a REALTOR® has listed a property for sale and the prospected buyer/s contact the agent directly for a showing and do not currently have a REALTOR®. The REALTOR® would be obligated under this agreement to be fair and diligent for both parties. However, many REALTORS® are not comfortable with this arrangement and will suggest the buyer contact an outside agent or refer them to one.
The seller’s disclosure is a mandatory form filled out by the seller/owner of the property and it is legally binding. It is a crime for a seller to lie, mislead or intentionally withhold information that is required to be disclosed. The purpose of this form is to detail and outline any defects, previous maintenance or problems and any current issues the home may have. It is also designed to reflect any renovations, upgrades and remodeling projects that may have occurred. It also covers the general composition of the home, pest infestations, surrounding area and any hazardous neighboring issues. If you as a seller, are unsure about the answer to any question, it is always best to mark “unknown” or “unsure” because you do not want to guess or provide false information.
However, the seller does not have to list conditions or defects that they are unaware of. In most cases the seller will make the disclosure available at the time of showing or you can request one prior to making an offer. Otherwise the sales contract specifies a deadline the seller has to provide you with the disclosure.
There is an exception to the seller’s disclosure. If you’re buying a foreclosure or bank owned home, then you’re buying it “as is” and they are not required to provide you any disclosure.
The listing agreement is an agreement between a seller and the REALTOR® they select. There are a few types of listing agreements but the most common are: exclusive right to sell and exclusive listing. The “exclusive right to sell” means that your agent will be the only one listing or selling the property. The agent can work with prospective buyer’s agents to complete the transaction but they will have exclusivity as the listing/selling agent and their commission is mandatory. The exclusive listing means that the REALTOR® is the only listing agent but you (the seller) can also market your property and try to sell it on your own. In the event you sell it without your agent you won’t be liable for commission but some agents charge a “listing fee” in this event.
The agreement will cover legal regulations during the process, the commission, marketing strategy (listing on MLS), full disclosures and showing instructions like using a lockbox or alternate method.
Another important part of the listing agreement is the timeline or amount of time you agree to list the property with this REALTOR®. Most agreements are 90 days and others can range from 30 days or more depending on the market and urgency of the seller. If you feel like the seller did not do a good job generating showings or you were unhappy with their performance you can opt not to renew the listing. You can also choose to list with another firm or REALTOR® after the listing agreement expires or take your home off the market until conditions improve. Once the listing agreement is signed, it is binding and legal. You can end the agreement early but you may have to pay a penalty or early termination amount listed in the agreement. Unless you can show just cause for termination or neglect of duties by your REALTOR® you will be bound to pay what was listed in the agreement.
Lastly, one of the most important factors in the listing agreement is the sales price. You and your REALTOR® will have to review your home’s condition, the area comps and the market conditions and determine the listing price. Of course you will discuss all potential offers (full disclosure) that come in even if they are below your asking price. At that time you and your REALTOR® can determine if it is a fair offer and if not you can draft a counter offer.
The sales contract is another important form to understand. Typically the buyer and their REALTOR® will write up an offer (sale contract) on the desired home. This contract will include: the price the buyer is offering, the prospected closing date, method of payment (cash or finance) and any special provisions the buyer is requesting. The buyer’s agent then sends the offer to the listing agent for review by the seller. Keep in mind contracts offered at the listed price have a better chance of being accepted. The buyer then waits for the contract to be accepted or countered. If you’re offering on a home in a high demand area or neighborhood and there is a lot of competition or interest in that specific home, a buyer can make an offer higher than asking. The important thing to understand is that if the contract is accepted you (the buyer) will need to be ready with earnest money and have all your financing in order. If you miss any of the deadlines (closing date) or are unable to obtain financing you could lose the earnest money you put down. This is why it is important to understand the type of offer you’re making. Be sure the contract states what appliances will stay and if the seller is currently living in the home you will need to make sure the proper addendums are attached. You will need to address property condition expectations, the sellers move out date and any specific cleaning you want done before you take possession. In some cases if a seller can’t vacate by closing they will have to pay the new buyer rent, unless otherwise specified. All these special provisions can be discussed with your REALTOR®.
Although real estate laws and forms vary from state to state, the above listed contracts/forms and their functions are all pretty synonymous nationwide. Hopefully understanding the importance of each form will help you in understanding the entire real estate process and the many transactions that can occur.