Another New Contract, Part 1
Originally appeared in Hills Publications, May 17, 1996
Earlier this year, the California Association of Realtors (CAR) again revised the purchase contract for residential properties with one to four units. Aside from changes in contract format and language, there is another important distinction from previous contract revisions. In the past, the new version of a contract replaced the older one. This time, the choice of using either the current, eight-page contract or the new, “four-page” contract is at the discretion of the agent. This has already caused some confusion among agents. If agents are confused, we can count on buyers and sellers being confused.
Many clients treat the contract as important, but not something which requires serious study. Although each revision to the purchase contract contains improvements, no contract will be perfect for everyone. A thorough review of the document will reveal which paragraphs are favorable or unfavorable to you as a seller or buyer. A comparison of the new contract and its predecessor reveals noteworthy changes. In these articles, I will highlight some points about both contracts that deserve attention.
When four equals seven
The most obvious modification is that the new contract is referred to as the “four-page” contract although it is actually seven pages long. The first two pages have a back side and there is a one-page addendum used for probate sales and other, less common, situations.
A strong word of caution: do not assume the back pages are unimportant. One could easily get that impression because the print is small, tightly packed and there is no place for the buyer or seller to sign or initial. Read everything carefully and ask questions before signing.
Cost clauses on first page
A positive change is that all cost items are now on the first page of the new four-page contract. This is convenient and sensible.
Before agreeing to pay for anything, however, be sure to ask this question: “What should I be paying for?” This really means what is “customary” in the area, but it does not necessarily mean the item or items cannot be negotiated. This is just one reason you need an experienced, knowledgeable professional to look out for your best interests.
Appraisal clause
Most agents have been adding an “Appraisal” clause into the financing section of their eight-page contracts. The new four-page contract now contains this clause.
It makes the offer contingent on the lender appraising the property at no less than the full purchase price. If the lender’s appraiser indicates a lower figure, the buyer is allowed to cancel the contract.
Another possibility is to have the seller reduce the purchase price to the appraised value. In some cases, the seller may choose to carry a second loan for the difference between the purchase price and the appraised value. Besides having both parties agree, this will only work if the buyer’s down payment is large enough, normally 20 percent or more. If the buyer’s down payment is substantially more than 20 percent of the purchase price, the less-than-full-price appraisal may not effect, i.e., decrease, the loan amount.
Possession clause
An example of the danger of not reading and understanding the back pages of the new four-page contract is the paragraph dealing with tenants and possession. This clause states that if the tenant has not vacated a tenant-occupied property at close of escrow, the buyer has the option to cancel the agreement. This language is not contained in the eight-page contract, although both contracts say the property shall be vacant at close of escrow unless otherwise agreed in writing.
From the buyer’s perspective, he will probably not want to take title to a house he plans to live in if the seller’s tenant has not vacated. If he does, he could end up in a long, drawn-out legal hassle to get the tenant out. This can be both emotionally and financially draining.
From the seller’s point of view, it may not seem fair for the buyer to cancel the contract if the tenant is late in moving out. This would be especially true if the seller fulfilled his side by giving the tenant adequate, written notice to vacate. It is apparent that buyers and sellers may have opposite interests in a rental situation. Clearly, reading and understanding the contract is imperative.
Another disparity between the four and eight-page contracts is that the four-page contract does not address the use of Interim Occupancy Agreements. This covers a situation where the buyer moves in prior to close of escrow, which is very risky for the seller. The Residential Lease Agreement After Sale, often called the seller rent back agreement, is also not mentioned. Allowing occupancy without using the appropriate form could lead to serious problems later. This could happen if an inexperienced agent was not prompted by the reminder found in the eight-page contract.
Seller warranty or no warranty?
Pay close attention to this one! Under “Condition of Property,” the eight-page contract is divided into A) “Seller Warranty” (if box is checked), or B) “As Is Condition,” (if box is checked). If, inadvertently, neither box is checked, the contract would be incomplete until one of the two options was chosen.
The four-page contract says “No Warranties Except As Specified,” and indicates that the property is sold “As Is” and “With All Faults.” It provides seven boxes where the buyer can specify which items he wants warrantied by the seller. For example, box #1 cites that “Roof shall be free of leaks known to seller or discovered during escrow.” Other boxes cover appliances, plumbing, fireplaces, etc.
The danger for a buyer is that his agent could inadvertently forget to check any boxes in this section. The purchase would then be an “As Is” sale. “As Is,” of course, benefits the seller, but is it what the buyer is intending at the price he is offering? This illustrates the reason for my belief that having two contracts available with different formats could cause confusion to clients.
To this point, I have covered some of the aspects of purchase contracts that require your diligence. In Another New Contract, Part Two, I will describe other possible pitfalls for both buyers and sellers.
Related Articles:
Another New Contract, Part 2
Contract Revised Again
Understand Before You Sign
Not Just Termites, Part 1
Not Just Termites, Part 2