Avoiding Pitfalls of Standardized Real Estate Contracts

Contract Teardown

It’s been a seller’s market in real estate, and stories abound of buyers waiving inspection rights and paying hundreds of thousands of dollars over asking. Unfortunately, this context means that the purchase and sale agreement runs the risk of being dismissed as an unnecessary formality. Of course, a good lawyer knows that this contract is fundamental to ensuring all parties are protected and have access to their basic legal rights and obligations.

For drafters working to make the sale and purchase process as efficient as possible, a form contract is a great option. These cover the basics of any real estate transaction and are concise and easy to complete, with fill-in-the-blank options. The downside is that they run the risk of glossing over important considerations that can disrupt the sale process and haunt the client down the road.

In short, for lawyers representing clients in a home sale, a form agreement is a great idea, but they must be able to spot a contract’s red flags and recognize the client’s unique circumstances. In what follows, an analysis of the Standard Form Contract for Purchase and Sale of Real Estate used in New York state offers a great overview of the clauses, regulations, and situations that require an astute drafter’s eye in order to best serve clients in today’s robust housing market.

Questions in this Episode

  1. What questions should an attorney ask before using the standard contract for real estate?
  2. What are the delays in real estate transactions and how can you handle them?
  3. How does creative usage of property affect the title?
  4. How can drafters deal with inspections in the contract?
  5. Do you even need a lawyer for a real estate transaction?

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This is a Real Estate Purchase and Sale Standard Form Contract. Believe it or not, you could technically use this contract to purchase every single residential home in the United States. But the reason we’re here today is to highlight a few of the clauses you should be aware of when using a form like this to purchase your house.

Pay Attention

We’ve dealt with enough standardized contracts to know that sometimes the questions are deceptively simple, but there are some things to consider.


1. IDENTIFICATION OF PARTIES TO THE CONTRACT
A. SELLER – The seller is _____________________________________________________________________________________________
B. Residing at _____________________________________________________________________________________________________
(The word “Seller” refers to each and all parties who have an ownership interest in the property.)
C. PURCHASER – The purchaser is ______________________________________________________________________________________
D. Residing at _____________________________________________________________________________________________________
(The word “Purchaser” refers to each and all of those who signed below as Purchaser.)


Questions to ask as the attorney:

  • Will you buy the house in your individual capacity?
  • Are you married?
  • If yes, how are you going to hold this house with your spouse?
  • If one of you passes away, does the interest go to the surviving spouse or does it go to your children?
  • If you have children, do you have a trust?
  • Do you want to create a trust for tax reasons when you want to give away the house? Or are you trying to rent this house out one day?
  • Do you want to start an LLC?

If you’re a buyer, these are things that you might never think about. Say you’re buying it from an investor. Say you’re buying a church from a church. Guess what? In New York, you must seek approval from the attorney general’s office.

Handling Delays in Real Estate

The title is often overlooked, just because it’s boring.  It’s not exciting to say that someone didn’t pay a tax lien 40 years ago, or that you owe someone child support from 18 years ago, and now I have to find that person. However, it is crucial.

“Should I buy title insurance?” is one of the most frequently asked questions. They will not request title service. They ask for an attorney.


9. TITLE AND SURVEY
A ___________ 40-year abstract of title, tax search and any continuations thereof, or a ___________ fee title insurance policy, shall be obtained at the expense of ____________ Purchaser or ____________ Seller. (If both boxes are checked, the option of whether an Abstract of Title or fee policy is provided shall be that of the party paying for same.) The Seller shall cooperate in providing any available survey, abstract or title or title insurance policy information, without cost to Purchaser. The Purchaser shall pay the cost of updating any such survey or the cost of a new survey.


It is recommended to pay a one-time fee that is relatively low in comparison to the overall cost of the house. Even if you get the best closing and own the house, anyone can sue you and pursue you for that claim. If you don’t have $5,000 set aside to pay a retainer to an attorney to defend you, even if you know you’re going to win, it might be a good idea to spend $1,000 now and pay for title insurance. When someone comes after you, you make that one phone call and everything goes away.

Don't just put things down in a standardized contract thinking you can put anything. The process and the paperwork have to mirror each other. - Di Ma #ContractTeardown Click To Tweet

Transfer of Title Delays

When it comes to Section 15, an attorney’s perspective differs greatly from that of the client, because a client is much more fearful when they see a date in a contract. We’re all lawyers, so we’re used to each other.

Sometimes the delay is caused by someone other than the parties. It’s waiting on Department of State appraisers and lenders who are on vacation in December, especially during COVID.

If it is important to you, your rate lock or lease is expiring, and your landlord's kicking you out – let your attorney know. Time is of the essence. - Di Ma #ContractTeardown Click To Tweet

Conditions Affecting Title

Section 10 is very important for an attorney and their clients because a lot of times they have creative uses.

Di adds, “for example, I have a client right now, who’s trying to buy in the mountain areas and one of the concerns she has is permitting. So, she’s thinking way ahead. It’s not just about the land being buildable, it’s also about what is the town going to make me do to achieve my dreams? She wants to build her tiny house compound for her family. You can imagine this land is worth everything to her if the town will help her achieve her dreams. But if it turns out that the land’s not livable – the seller owes something, or the zoning is not correct, it becomes useless to her.”


10. CONDITIONS AFFECTING TITLE
The Seller shall convey and the Purchaser shall accept the property subject to all covenants, conditions, restrictions and easements of record and zoning and environmental protection laws so long as the property is not in violation thereof and any of the foregoing does not prevent the intended use of the property for the purpose of __________________________________; also subject to any existing tenancies, any unpaid installments of street and other improvement assessments payable after the date of the transfer of title to the property, and any state of facts which an inspection and/or accurate survey may show, provided that nothing in this paragraph renders the title to the property unmarketable.


Conditions affecting the title – while it's boring – don't speed through these red flags. - Di Ma #ContractTeardown Click To Tweet

Inspect to Protect

A wise buyer will always request inspections. Just as you can close on a house without purchasing title insurance, you can do a variety of other things. It’s simply not recommended, especially with the inspection.


15. TRANSFER OF TITLE/POSSESSION
The transfer of title to the property from Seller to Purchaser will take place at the office of the lender’s attorney if the Purchaser obtains a mortgage loan from a lending institution. Otherwise, the closing will be at the office of the attorney for the Seller. The closing will be on or before (Date) ___________ , 20___ . Possession shall be granted upon transfer of title unless otherwise mutually agreed upon in writing signed by both parties.


In New York, there is a $1500 threshold. This means that if you sign a contract to buy a house for $1,000,000 and they discover that something is wiggling in the toilet, it’s a $750 problem. Guess what? You should still buy the house for a million dollars because we don’t think it’s a big deal. Now, if you discover that the roof is damaged and that the repair will cost $20,000, you can’t do it right now because it’s snowing. That’s fine. Never, ever freak out. This is the negotiation process because we can then ask the seller to give you a credit and do a number of other things before saying goodbye.

It’s best not to waive inspection because no one knows your expertise if you’re a structural engineer, termite expert, or dishwasher expert, and if you waive the inspection—you can always waive it later—don’t waive it in the contract.

Standardized Contracts – Do you even need a Lawyer?

Internal conflict is common in real estate because we use a standardized five-page document and a very standardized process. But there is—everything in real estate is unique. There are no two transactions that are exactly the same.

When a client pays you, don’t think of it in terms of reading five pages or filling in the blanks. It’s more about all of those red flags we discussed, something as simple as who is the buyer. That is what you are truly being paid for, as well as the thought that has gone into all of this.

What are the tax implications if you decide to sell your house one day? Let’s reduce the amount you have to pay later today by considering all of these legal considerations. In one sense, the standardized contract is very useful because it can encompass many of these situations, whether it’s a $10,000 piece of vacant land or a $50 million house.

In some of the more complex contracts, the basic terms are still used, but there are a million addendums for homeowner’s insurance, development plans, and financial offerings — all of that is added on.

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Show Notes

In real estate, drafting a sale and purchase agreement using a standardized form can be a great way to save time and effort. However, lawyers still need to know how to spot red flags that could bring their client unwanted consequences. In this episode, New York-based attorney and licensed real estate broker Di Ma explains that when it comes to representing your client, it’s not always about the contract in itself. Most important is the lawyer behind it all who can adapt a form agreement to their client’s needs.

THE CONTRACT: Standard Form Contract for Purchase and Sale of Real Estate

THE GUEST: Di Ma is a licensed attorney in upstate New York. She handles real estate matters such as purchase and sale, refinancing, commercial and residential leases, sometimes evictions, etc. Prior to starting her own firm,  she was General Counsel for a large public housing authority. This is where she gained most of her legal real estate knowledge.

THE HOST: Mike Whelan is the author of Lawyer Forward: Finding Your Place in the Future of Law and host of the Lawyer Forward community. Learn more about his work for attorneys at www.lawyerforward.com.

If you are interested in being a guest on Contract Teardown, please email us at community@lawinsider.com.

Interview Transcript

Mike Whelan Hey, everybody, welcome back to The Contract Teardown Show from Law Insider. I’m Mike Whelan. The purpose in the show is exactly what it sounds like. We take contracts, we beat them up, we make them feel bad about themselves, and then just nudge them nicely out the door. I hang out with smart friends like Di Ma here. How are you today?

Di Ma Good. How are you, Mike?

Mike Whelan Very good. So I gotta tell you a story. Yesterday, because I loathe myself, I went and looked at a house to purchase and in the middle of this conversation—there were all these cars outside and all these people waiting for cars—and this guy says to me, the realtor says to me, “Don’t buy a house right now. It’s ridiculous out there.” And we’re going to talk about that a little bit, because I have you here to talk about this document. Let me share it real quick. Di, what is this document and when are we going to see it?

Di Ma So this is a standard form contract for the purchase and sale of real estate. And believe it or not, if you were to use this contract to purchase every, let’s say, residential home in this country, you could technically use it. But the reason why we’re here today is so I can point out a couple of the clauses that you should really watch out for when you use a form like this to buy that house of yours.

Mike Whelan Things to pay attention to. And what’s crazy is people are filling out paperwork like this so fast. The guy mentioned that people are buying houses without inspections and I mean, it’s just insane right now. So we’re going to talk a little bit about that speed and that necessity to get an offer and what that means and how lawyers need to still pay attention. But before we do that, tell us about you a little bit. What’s your background? When are you running into documents like this?

Di Ma Thank you. My name is Di Ma. I’m a licensed attorney in the state of New York. I’m licensed in the law and also I have my real estate broker license and I have my own firm now. And I do a lot of real estate closings day in, day out. So a lot of buying and selling. And I can definitely speak to you about the timing of things as well.

Mike Whelan Okay, Di. What I’m going to do is walk you just through this contract from the top to bottom. There’s a lot of blank spaces. There’s decisions to be made. But let’s start at the beginning in the Identification of the Parties. What do you think about this section? What kind of red flags do you see that we should pay attention to?

Di Ma So, Mike, you’ve dealt with enough standardized contracts to know sometimes the questions are just deceptively easy, but things that you should think about, especially in your case, right? Will you buy the house under your individual capacity? Your attorney needs to be asking you questions: Are you married? If you are married, how are you going to hold this house with your wife? If one of you passes away, does the interest go to the surviving spouse or does it go to your children? Do you want—if you have children, do you have a trust? Do you want to create a trust for tax reasons for when you want to give away the house? Or are you trying to rent this house out one day? Do you want to start an LLC? And these are questions that you as the attorney, when you’re reviewing these parties, things to think about. And if you’re a buyer, some things that you might never think about. Say you’re buying it from an investor. Say you’re buying a church from a church. Guess what? In the state of New York, you need to go to the attorney general’s office for their approval as well. So little things to watch out for that may delay the process or just burden the transaction.

Mike Whelan Got it. So jump it down to six. One thing that the realtor pointed out yesterday to me was that people getting financing, is like, is a delay, there’s time involved. And so some of these people, their parents, like grandparents of some of these families, are so annoyed with their kids not being able to get a house that they’re just forking out cash, because as soon as you introduce a bank into it, you’re adding a layer of complexity and some decision-makers. Jump down to six. It talks about the mortgage contingency. What do you think about this section and what we’re looking out for?

Di Ma So on a very selfish note, my favorite is when clients come in with all cash because you can scratch out this entire paragraph. We don’t need to worry about it. However, you probably lived through 2020 and definitely 2021 with us. And you went house hunting last week. Guess what? People are still paying over ask, right? Which sounds good. But one thing that you need to keep in mind, explain to your clients—and I have very sophisticated clients that forget—there is the deed, which is your legal title to the house, but then there’s a mortgage. When you have that lender that you’re talking about, the lender has an interest in the house. So when you’re hearing people say, Oh, I’ll just pay 200,000 over whatever Mike’s offering, that’s great. I might get the contract. But then when I go to Bank of America, someone is going to say, will this house appraise for 200 over? And if it doesn’t, this is where you need to sit the client down and say, all right, where’s your rich parents? Where’s your spare 200,000? You need to pony up the cash or we might have to say no deal.

Mike Whelan If you’re paying so much for a house that even the bank is like, Bro, you should really start thinking about whether you should buy this house right now…. Let’s jump down to nine where it talks about the title and survey. Boy, I could tell you stories of when I was doing divorce law. The amount of times a title held things up. What do you think about nine, the title and the survey?

Di Ma So title is something that’s often overlooked, just because it’s boring. It’s not exciting to say, 40 years ago somebody didn’t pay a tax lien, or you owe somebody child support from 18 years ago and now I have to find that person. But it’s hugely important. And one of the questions that comes up the most is they ask, should I buy title insurance? They don’t ask the title service. They ask you as the attorney. So that’s when I generally tell people and I’ll be honest, I recommend it because it’s a one-time fee, relatively low compared to the overall cost of the house. But for example, even if I give you the best closing and you know you own this house, Mike, anyone can sue you, anyone can come after you for that claim. If you don’t have that $5,000 saved aside to pay me the retainer to defend you, even though you know you’re going to win, it might be beneficial for you to spend $1,000 right now, pay the title insurance. So whoever comes after you, you make that one phone call and everything goes away for you.

Mike Whelan Yeah, I had a divorce case where the special warranty deed that transferred the ownership of the house had quoted the real estate information, the long paragraph that tells you the property description. And it was missing, like, a single letter. And underneath it said, also commonly known as, and then had the normal address. There was no doubt what house we were talking about. Everybody knew. Ten years later, I mean, this was ten years after, somebody is trying to buy the house and can’t, because the title companies are looking at this and, like, the subdivision alphabet distinction is missing. How do we do this? And so I think to your point, when you’re drafting this kind of document, it’s easy to see it as a standardized, “let’s just rush through it.” But you miss one thing, you know, and it’s messing up the title history ten years down the road. Let’s look at ten and the conditions affecting title, thinking about the restrictions that transfer with the property. I assume this happens a lot more, frankly, in a place like New York City than somewhere where I live in the middle of nowhere, Kansas, just because the places are not that old. What do you think about Section 10? Is it doing what you want it to?

Di Ma So Section 10 is very important too to me and my clients, because a lot of times they have creative uses. For example, I have a client right now, she’s trying to buy in the mountain areas and one of the concerns she has is permitting. So she’s thinking way ahead. It’s not just, is this land buildable? It’s also what is the town going to make me do in order to achieve my dreams? And I’ll tell you, she’s very interesting. She wants to build her own tiny house compound for her family. So you can imagine this land is worth everything to her if the town will help her achieve her dreams. But if it turns out, the land’s not livable, or the seller owes something, or the zoning is not correct, it becomes useless to her. So these things, while it’s boring, you know, don’t speed through these red flags.

Mike Whelan Yeah. I’m looking at 15 and the Transfer of Title and there’s decisions to be made when you’re bringing in all these outside facilitators to make a transaction happen and sort of who pays for that and who’s organizing that. Do you think 15 sets that out easily? Or again, is this a section that people should really pay attention to?

Di Ma So Mike, great question. I think when it comes to Section 15, in my experience, my perspective is very different from the client, because when a client sees a date in a contract, they’re much more fearful. Now, we’re lawyers. We’re used to each other. And also just working with other parties, right. It’s not even you or I causing the delay sometimes. It’s, especially during COVID, waiting on Department of State appraisers, lenders who are off during December. So in my experience, if it is important to you, if your rate lock—right now, the rates are going up—if your rate lock is expiring, if your lease is expiring and your landlord’s kicking you out, let your attorney know. And then we say time is of the essence. Don’t just put things down in a standardized contract thinking, Oh, we can put anything. The process and the paperwork have to mirror each other.

Mike Whelan Yeah. And if there’s a week delay, we’re excited because we’re like, Cool, I don’t have to do paperwork for a week. And I’ve been procrastinating this because we procrastinate everything to the last minute and I get to procrastinate even longer. And the client is like, What? They’re homeless! They’re sitting in a cardboard box outside waiting for their dadgum house. Alright. 21 talks about inspections. And I had mentioned that this realtor had pointed out that, like, people are buying without inspections. And I mean, dadgum like, it’s not that expensive to get an inspection. What do you think about 21 and the inspections that it’s requiring sign off on? Is that unique to New York, or is this the kind of thing that you’re going to see a lot? How much should we be paying attention to these inspections right now?

Di Ma Well, I think a smart buyer will always order inspections, just like you can close on a house without buying title insurance, you can do a whole lot of things. It’s just not recommended, especially with inspection. In New York, we have a threshold of $1500. What does that mean? You sign this contract, you say, I’m going to buy this house for $1,000,000, and they find out, the toilet, something’s wiggling in it. It’s a $750 problem. Guess what? You should still buy the house for a million because we don’t consider that to be a big deal. Now you find out the roof is damaged and it’s a $20,000 fix. And you can’t do it right now because it’s snowing. That’s okay. Don’t ever freak out. This is what the negotiations process is, because then what we can do is we can ask the seller to fix it for you. We can ask the seller to give you a credit. We can do a number of things before we have to say bye bye. But what I strongly recommend is that you do not waive inspection because a lot of times, even if you walk it up and down, I don’t know your expertise, I don’t know if you’re a structural engineer, and a termite expert, and a dishwasher expert, and if you waive the inspection—you can always waive it later—don’t waive it in the contract. Now I know, it is a seller’s market—giving up your rights, it is beneficial to the seller, but always remember what are you truly giving up? Because you gotta watch out for yourself. And in the lawyer’s case, you gotta watch out for your client’s benefit. And I always, always, always double check if they want to waive inspection.

Mike Whelan Yeah, thinking big picture, I got a question recently about contracts becoming so standardized that we don’t need lawyers anymore for certain kinds of transactions. And theoretically, this is it, right? These real estate transactions happen all the time. Yes, they’re big dollar things, but there’s like all kinds of protections legislated. But if I look at this document five years ago versus right now, right? It’s the exact same document, but the background situation is so different that I’m not sure that you’re negotiating these things in the same way. So tell me, give me an idea of the relationship between, okay, we’ve got a standardized document. We’re trying to keep this simple, we’re trying to keep this fast. But also recognizing the negotiating positions of these two parties are totally different and how you, as an attorney, kind of stand in between that weird conflict.

Di Ma So I’m so happy you brought that up because I have this internal conflict all the time because we do use a standardized five-paged document and it’s a very standardized process. But as you know, there’s—everything is unique in real estate. There’s no two transactions that’s exactly the same. So when a client pays me, I don’t think of it as the client paying me to read five pages, we’re filling in the blanks. It’s more about all those red flags that we talked about, something as simple as who is the buyer. That’s what you’re truly paying for, the consideration that goes into all of this. So that one day when you go to sell the house, what are the tax consequences? Let’s minimize what you have to pay later today by thinking out all of these legal considerations. So in one way, I do think the standardized contract is very beneficial in that whether it’s a $10,000 piece of vacant land or that $50 million house, it probably can encapsulate a lot of these situations. But keep in mind, some of the more complex contracts, you’re still using the basic terms, but you have a million addendums, for the homeowners insurance, for the the development plans, and the financial offerings, all of that gets added on. So I think, you know, working with the right parties, the right lawyer, title service, lenders, with a standardized contract, that’s how a client could truly feel protected.

Mike Whelan Yeah. And I think as the lawyer, I mean, there’s a place to add value here that might be hard to explain. But in your dealing with clients, you’ve got to figure out how to explain that because they’re looking at this as a standard document. Why is this taking so long? So definitely, I think there’s some value description here that’s going to be necessary, and just as part of managing clients. Well Di, I appreciate you walking through this document with us and sharing some of these red flags. For people who want to learn more about this kind of document and your work in New York, what’s the best way to reach out to you?

Di Ma So I am happy to give out my email address. It’s dilovesmail at gmail dot com. And Di is spelled d-i loves mail at gmail dot com. I’m always happy to reach out to other lawyers and connect.

Mike Whelan Perfect, and we’ll include that information and a link to this document and to similar documents over at Law Insider dot com slash resources when the blog post is up. So go find us there. Also, if you want to be a guest on The Contract Teardown Show, just send us an email. We are at Community at Law Insider dot com. We will see you there and we will see you guys next time. Thank you, Di.

Di Ma Thank you, Mike.

Contributors

Di Ma
Di Ma
Attorney
Mike Whelan
Mike Whelan
CEO @Lawyer Forward

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