Is a Real Estate Agreement of Sale Worth the Paper it's Written on?

Is a Real Estate Agreement of Sale Worth the Paper it's Written on?
Posted By Jeffrey Hogue @ Oct 19th 2019 10:35am In: Real Estate

An agreement to sell and purchase a property is a written promise by the parties involved. Promises in agreements can be conditional. Do all the conditions and lack of a reasonable earnest deposit make an agreement nothing more than a glorified worksheet?

WARNING, this week's article may come across as a rant. A better explanation might be that the following content was borne out of a sense of frustration on my part.

 

A Little Agreement of Sale Background

The agreement of Sale we use here in Reading and Berks is known as the Standard Agreement For The Sale of Real Estate (PAR ASR). PAR stands for "Pennsylvania Association of Realtors." The State Real Estate Commission created the agreement, and associated PAR documents in conjunction with the Forms Committee made up of Brokers and Realtors statewide, along with some influence from the state BAR association.

 

When I became a Realtor in 1993, the agreement was two legal-sized pages long. The agreement document of that time was very manageable. When the buyer needed a mortgage, we added a mortgage contingency addendum. If the buyer wanted a home inspection, yet another addendum was added, and so on. Today, Many of the addenda used for specific situations are now piled into the agreement document, whether they are needed or not. The latest agreement creation has ballooned to 14 letter-sized pages.

 

An Issue With Today's Oversized Agreement

In my humble opinion, filling an agreement with unneeded conditions creates standards of practice in our real estate industry that are not always helpful. Some agents feel the need to address these added conditions, whether they apply or not, just because they exist. Many agreements of Sale are filled with terms and conditions that allow the buyer to opt-out of the purchase with no penalty.

 

Example: A buyer plans to make a $300,000 offer on a home and intends to mortgage $100,000. The buyer goes to a mortgage lender, who tells them they are very qualified for the proposed loan. The buyer asks their Real estate agent to prepare a purchase agreement. The agent asks if there will be a mortgage and fills in the mortgage contingency section of the contract. The buyer is only financing one-third of the purchase price, qualified by a mortgage lender, has proof of the needed funds to close, and may only need an appraisal. So why not just have an appraisal contingency? The buyer agent will almost always advise the buyer to include the mortgage contingency just in case something with the buyer's mortgage goes bad. What could go bad? The buyer loses their job, the mortgage company goes out of business, or something entirely unforeseen happens to the buyer. This common practice, like other similar situations, creates yet another potential escape clause in the transaction and puts much of the risk back on the seller.

 

Often, these contingency riddled Agreements of Sale have minimal good faith deposits that allow would-be buyers to walk away and risk little to nothing. Much of this happens because our industry says these are "acceptable practices," so sellers and their agents do not question it for fear of being unreasonable.

 

Sellers often ask me when their home sale is completed. I tell them it occurs at settlement when they have the check in their hand and not before. As you can imagine, it is hard for most sellers to plan almost anything without assuming much of the risk of a flimsy agreement that has little or no money down.

 

When it comes to creating well-balanced agreements that serve the best interest of all parties and manage the risks accordingly, it is prudent to have an agent who understands the agreement documents and will negotiate vigorously for you. A solid agent can tell you what to expect, where the risk lies, and is not afraid of attacking the status quo or refusing to bow to "acceptable practices" at the expense of their client. Sometimes habits are the enemy of right!

 

Knowledge is Power!
Jeffrey C. Hogue


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