Contracts used to be simple: a handshake, then scribbles on napkins and scraps of paper. Today, if you are, or plan to be, a buyer or seller of residential real estate, you will come face-to-face with the new eight-page California Association of Realtors residential purchase contract. In this case, more paperwork actually equals better protection for the consumer — if you understand what you are signing.

With the growing complexity of transferring property, the new CAR contract spells our many items more clearly than before. It does a good job of covering most situations that come up in residential and small owner occupied income property transactions. It standardizes language that had been subject to interpretations. 

First, the most obvious recommendation: read the contract carefully before signing. Most of the new contract is small type, "boilerplate" language. Specific clauses, however, could either be beneficial or detrimental, depending on your particular situation. If you don't understand sections of the contract, or don't have the patience to carefully read all eight pages, having the right agent is of major importance. Make sure you choose an agent who is technically competent and who can communicate complex concepts in simple language. When you and your agent have finished going over the contract, you should know exactly what you are signing.

Do you know what the "Liquidated Damages" clause means? Can you explain the difference between "mediation", "arbitration" and "going to court" if there is a dispute? What are the advantages and disadvantages of "active" vs. "passive" removal of contingencies? Most people don't know and cannot be expected to answer these questions without professional help.

Not knowing what you are signing can get you into trouble. For example, the "Condition of Property" clause is used in most purchases. This says the seller "warranties" certain items. It states that the roof, shower pans, chimneys and fireplaces will be free of defects, unless the seller indicates otherwise in writing. If he is not aware of any problems, he probably won't be concerned. If something is discovered, however, during or shortly after escrow closes, he pays. How much? There may be no limit. A seller can be protected if the proper clause is written into the contract.

As a buyer, imagine you are buying a condo in a building with units below you. One of the new clauses says you cannot have the shower pan water tested without the consent of the people below. Does this mean you go downstairs and ask permission to water test your shower? What if they say no? Should you risk not having the shower pan water tested? This could be expensive if there is an undetected problem. Who is responsible if you find it leaking right after close of escrow? Again, understanding the referenced clauses will allow you and your agent to specify how this problem is to be handled.

In having the new contract cover more territory, standardizing language and addressing concerns which have arisen since the last revision, other issues have appeared. All of these issues, however, can be handled by a knowledgeable agent.

No contract revision will ever be the perfect solution. You, as a buyer or seller, must take personal responsibility to read and understand real estate documents. If something is not clear, have your agent explain that section to you. Do not sign until you are satisfied you understand. Once you sign, you are committed.

Related Articles: Another New Contract, Part 1 and Part 2; Contract Revised Again