The Real Estate Contract

In order to list or purchase a home, a real estate agent must use contracts.  Years ago, this consisted of a form with a lot of blanks and a book with a lot of clauses that the agent put into the blanks.  Now it is a multiple page form with many short blanks.  The contracts we use in California are supplied by CAR and PRDS.  These have been improved and revised over the years to provide some protection to all of those involved in the transactions.

The agents only need to fill in the blanks.  However, addendums can be added that require the agent to create clauses to protect the client.  Most agents do not have enough training or experience to create clauses that provide their clients with adequate protection.

I have seen many ambiguous or incomplete clauses that agents have written.  If the contract ended up disputed by either party, it would create a problem.  In addition, agents don’t realize that whoever drafts the ambiguous clause is more likely to have the clause interpreted in favor of the other party.  In other words, against them and their client.

Although agents advise clients to get an attorney to look over the document initially, the agents still fill in the blanks and drafts the clauses on addendums.  These are agents who may never have written an addendum before in their lives.  They probably have no legal experience and generally are not asking someone to check what they are doing until after the fact.

If the other agent, the one receiving the offer, is conscientious, she may write a counter offers simply to clean up the problems on the initial offer.  If the buyer’s agent left issues that created conflicts, then the seller’s agent recommends countering the offer to clean up the mess.  Since most agents have not received adequate training on the contracts, and since most agents only sell a handful of homes each year, this happens a lot.

Even if the contract is filled out correctly, and there is no reason for additional language to cover additional issues, there are still two clauses that are potential problems.

In the real estate contract in California, there are two clauses that need to be signed by the buyer and seller in order to be included in the contract.  These are the arbitration and liquidated damages provisions.  If both parties do not initial these, they are not part of the contract.    In fact, if the buyer has signed an offer that has the clauses initialed, but the seller does not initial the clauses, there is no contract.  If the seller counters the offer using the CAR counter offer form, then unless both the buyer and seller have initialed those clauses, those clauses are excluded from the agreement.

The problem occurs when these clauses are inadvertently missed.  The seller will sign, but the seller’s spouse will miss it or one of the two buyers will miss it.  Or it is completely missed unintentionally.

When the initial offer is made, the entire contract is faxed or delivered to the sellers’ agent.  When the seller wants to counter the offer, the seller is required to initial each page of the purchase agreement, sign the agreement and check the box marked “Subject to Attached Counter Offer”.  Many agents will fax back only the first and last page of the contract with the Counter Offer.  This is dangerous.

If the buyer and seller have not both initialed the liquidated damages and arbitration clauses, then, per the language in the CAR counter offer form, they are excluded from the contract.  The agent receiving the counter offer may not know the status of those clauses.  The agent can ask the other agent, or ask that the other agent to fax her the pages involved.  However, if the market is moving quickly, the agent may need an answer from her clients now.

If the clients don’t know about this potential minefield, and the agent doesn’t explain it, then the buyer and seller may not be in agreement on those two clauses.  Since both of these clauses can be important if there are disputes as a result of the purchase agreement, not having all parties in agreement at the time the counter is signed is very dangerous.

Agents generally have a cavalier attitude about this.  Comments like, ‘you have to move fast or you won’t get the deal’ are not unusual.  Agents also seem to believe that everything will work out.  In general, this is true, but there is always the potential for a deal to fall apart.

Mediation, arbitration and litigation are becoming more and more common in the real estate world.  (In fact, the arbitration clause is there to specifically avoid litigation.)  Agents need to be aware of the problem before they get themselves into one.

Read all clauses you or another agent writes.  Make sure that you understand the clause and that the clause isn’t ambiguous.  If the clause is ambiguous, counter the offer.  If you don’t notice the problem until you are already in contract, then write a letter, send an e-mail, just get something in the file indicating that you have discussed it with the other agent.  Get the other agent to clarify the interpretation of the clause.  And, if it has the potential to become a real problem, add an addendum to the contract clarifying the issue.

© 2007 by Judy Kane