Customize That ‘Standard’ Home Purchase Contract

When I bought my first residence more than 30 years ago, theprinted purchase contract (the realty agent called it an “agreement”) wasonly one page. Today, it is not unusual for printed home purchasecontracts to be four to eight pages, even more with addenda.

After searching weeks, perhaps months, for a home you like well enoughto buy, your agent will probably pull out of her briefcase a package ofpurchase forms and say something like, “Here’s the standard purchasecontract.”

However, though there are standard or required clauses, there is nostandard purchase contract.

Some realty firms have their attorneys prepare forms, and others useone recommended by the local or state association of Realtors or selectone from a form publishing company. Where I live, there are at least five”standard” home purchase contracts from various respected sources.

Remember who wrote the printed form. The smartest home buyers, whenbeginning their home searches, ask their realty agents for blank copiesof the purchase contracts they recommend. These shrewd buyers then studyso they will understand what they will be asked to sign.

Just because a clause is printed doesn’t mean it can’t be crossed out(except for a few phrases required by state law). Many purchase contractsare neutral, favoring neither buyer, seller nor agent. But others aredefinitely pro-buyer, pro-seller or pro-agent.

Not surprisingly, forms prepared by Realtor groups are usuallypro-agent. For example, many Realtor groups favor arbitration of anydisputes, because it is usually cheap and fast.

However, home buyers and sellers should be aware that by agreeing toarbitration, they give up the right to a jury trial, appeal of thearbitrator’s verdict and court rules of evidence.

My advice: Don’t agree to arbitrate until a dispute arises.

Some pre-printed forms require mediation of disputes, but that’s allright because the cost and time involved are minimal and a lawsuit can befiled later if mediation fails to resolve the problem.

Pretend a judge is looking over your shoulder. Years ago, when I beganinvesting in real estate, a wise realty broker told me, “Pretend a judgeis looking over your shoulder when you write a purchase offer.” That is,the printed form and the written or typewritten additions should be soclear that they will stand up in court.

For example, if a home buyer sues the seller in a specific performancelawsuit to force the seller to deliver the deed as agreed, a judge willcarefully read the contract to be certain it is not vague or illusory andhence unenforceable.

To illustrate, if a purchase offer says, “Buyer to obtain maximummortgage on best terms available,” that clause makes the contractunenforceable because it is so vague.

Essential terms of a home purchase contract. In addition to the namesof the buyers, property address or legal description, offer price andfinance details, a well-drafted home purchase agreement includes theseterms:

(1) Earnest money deposit.
Although not legally required (becausemutual consent of buyer and seller forms a binding contract), 99.9% ofhome purchase offers include a good-faith earnest money deposit.

Few home sellers will accept an offer without a reasonable depositbecause it enhances the probability that the buyer will complete thepurchase as agreed.

The larger the deposit, the greater the chances that the seller willaccept the offer and that the buyer will not try to cancel the purchase.

Typical deposits are 1% to 5% of the purchase offer. Often, theinitial deposit is small, to be increased upon removal of the inspectioncontingencies. But a large deposit check, to be held in a trust accountbeyond the seller’s grasp, often convinces the seller to accept a lowoffer.

(2) Professional inspection contingency clause.
Smart home buyers andrealty agents insist on a contingency clause for a professionalinspection. If the buyer doesn’t approve the inspector’s report, thepurchase can be canceled and the buyer’s earnest money refunded.

Buyers and their agents should always accompany the inspector todiscuss any defects the seller did not previously disclose. Some defectssound severe, but are actually minor and not worth voiding the sale over.However, others are serious enough that if the seller won’t correct them,the buyer should cancel the purchase.

(3) Mortgage finance contingency clause.
Another critical contingencyclause buyers should include (unless paying all cash) is a mortgagefinance contingency.

Although the smartest home buyers are pre-approved (not justpre-qualified) for a mortgage, the lender will insist on an appraisal tojustify the purchase price. When a VA or FHA mortgage is to be obtained,specific contract terms are required to protect both buyer and seller.

If the lender’s appraisal is less than the offer price and there is nomortgage finance contingency clause, the buyer is obligated to buy eventhough the lender is not required to lend. But with such a clause in thecontract, the buyer can either try to obtain a mortgage elsewhere, orcancel the purchase and obtain the deposit refund.

(4) Personal property clause.
Well-written purchase offers specifywhich personal property items, in addition to the structure, areincluded. Examples include window coverings, screens, storm windows anddoors, wall-to-wall carpets and TV antennas. If you want any personalproperty included, such as the seller’s refrigerator, washer, dryer andpatio furniture, be sure to itemize it on the purchase offer.

(5) Liquidated damages clause.
Many pre-printed agreements contain aliquidated damages clause. That means that if the buyer defaults withoutgood cause, the seller is entitled to keep all or part of the buyer’sdeposit as a forfeiture and agreed damages. A liquidated damages clauseeliminates the need to go to court if the buyer defaults because theparties have already decided the buyer’s penalty.

Some states limit the amount of liquidated or agreed damages. Forexample, California sets a limit of 3% of the sales price or the homebuyer’s actual deposit, whichever is lower.

(6) An all-inclusive weasel clause.
The finance andprofessional-inspection contingency clauses are usually sufficient toprotect home buyers.

However, some buyers insist on an additional “all-inclusive weaselclause,” such as: “This purchase offer is contingent on the buyer’sattorney (or financial advisor) approving this purchase contract within10 days of the seller’s acceptance.”

Such a clause provides a “free look” while your attorney, CPA or otheradvisor reviews the contract. To avoid wasting time and money, specifythat the review will take place after the offer is accepted by theseller.

Robert J. Bruss is a syndicated columnist, as well as a real estate investor, lawyer, broker and educator in the San Francisco Bay Area.