Last time we examined the first of three distinct phases in all home sales: the presale phase. This column will address Phase 2: disclosures and contract negotiation. The next column will address the settlement process.
Although disclosures will vary from jurisdiction to jurisdiction, there are certain disclosures that must be provided by all sellers under federal, state and local laws. For example, the District, Maryland and Virginia all require that sellers provide buyers with a property condition disclosure and disclaimer statement.
This required form permits sellers to disclose, to their actual knowledge, whether the various property elements are in good working order, whether they have defects or whether the condition is unknown. This form covers the house from roof to foundation and everything in between.
I highly recommend that sellers err on the side of over-disclosure. Often, questions arise about disclosing prior defects that have been fixed. I recommend disclosing and, if possible, identifying who made the repairs and when. If those repairs are still under warranty, deliver those warranties to your buyer. The law also permits sellers to disclaim rather than disclose.
Latent defects known by the seller must be disclosed under all circumstances. Even if the property is being sold “as-is,” the seller must use the prescribed forms to make these disclosures or disclaimer and have those forms signed by the buyer. Although there is no penalty for failing to deliver this statement, a buyer may cancel his contract until he receives the statutory form signed by the seller or settlement occurs. Certain sellers, such as an estate’s personal representatives, are exempt from this required disclosure.
For homes built before 1978, sellers are required to provide federal and state lead-based paint disclosures. Similarly, sellers are required to deliver the Environmental Protection Agency pamphlet “Protect Your Family From Lead in Your Home” available at www.epa.gov.
In the District, sellers must certify that they complied with the city’s Tenant Opportunity to Purchase Act. Under that law, D.C. tenants have the right of first refusal to purchase their home. Failure to address tenant rights long before a proposed sale will almost always cause delays in settlement, since tenants have six months or more to decide if they are interested in purchasing.
Montgomery County requires its Government Regulation, Easements and Assessments Disclosure and Addendum (REA) to be delivered to all buyers before they make an offer. The REA becomes part of the ratified contract. This exhaustive, nine-page behemoth covers an enormous range of disclosures including, but not limited to: water and sewer service availability; condominium and homeowner association assessments; estimated future property taxes for the buyer; utility costs for the previous 12 months; recorded subdivision plat; information about historic preservation; forest conservation; underground storage tank existence; and all airports and heliports locations within a five-mile radius from your home. As you can see, accurately completing this form is a daunting task, requiring many hours of research at no fewer than seven government agencies.
Once the required disclosures have been assembled and are ready for delivery to prospective buyers, the seller’s next step is negotiating the sale terms and conditions. All real estate contracts must be reduced to a written contract that must be signed by all parties.
Keep in mind that all terms between buyers and sellers are negotiable. Many local Realtor associations make standard contract purchase forms and addenda available to their members. These forms are protected by strict copyright laws, and only members of the National Association of Realtors may use them.
For a contract to be legally binding it must be in writing and signed by all parties. Real estate sales contracts must contain at least the following terms and conditions: all buyers’ and sellers’ full legal names, property legal description, purchase price, earnest money deposit, down payment, any contemplated financing, settlement date, delivery date (if different than settlement date), seller concessions, transfer and recordation tax division, property condition, included and excluded items.
Buyers will often include contract contingencies that will allow them to terminate the contract if the contingencies are not satisfied. Buyers often insert contingencies in their purchase offer covering: financing, property inspection, radon inspection, appraisal, existing home sale and third-party approval (as is the case in short sales). Just because a buyer asks for these contingencies does not mean you must agree to them.
If you do agree to financing, inspection or appraisal contingencies, you should insist on a relatively short time frame for satisfying these contingencies. Twenty-one days should be sufficient. If you agree to allow your home to be off the market until the buyers sell their home, you should insist that their home be priced competitively and listed with a real estate agent who can aggressively market it.
You should also try to negotiate to continue to market your home and accept backup contracts. By protecting yourself in this manner, you will not be losing valuable marketing time. If you get a backup contract, you can then present it to your first buyer, who can then either waive the home sale contingency and proceed to settlement or can release you from the contract, so you can proceed to settlement with the backup buyer.
Next time: The settlement.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel. Jacobs can be reached at firstname.lastname@example.org.