Washington Post Misrepresents New Real Estate Contract

Monday, December 19, 2011

I’m very pleased that the Washington Post has taken an interest in the small details of the real estate market that can affect the sale of a home. I read Mr. Jacobs opinion piece with interest, but had some concerns with the accuracy, completeness and slant taken in his writings. Here is a portion of the concerns that I have with his article, taken paragraph by paragraph:

Paragraph 1:
“The Greater Capital Area Association of Realtors (GCAAR) has just issued revised residential real estate sales contract forms [Regional Sales Contract or “RSC”] that make sweeping changes to the way business has been conducted in the region.”

1.       There are no “sweeping changes to the way business has been conducted” in our region. There are no state law changes, there are no changes to the way settlements take place, the way inspections are handled, the multiple listing service, advertising, fiduciary relationships between agents and their clients, interest rates, disclosure requirements or any other fundamental aspects to the sale of real estate. Mr. Jacobs is referring to changes in less than 50 paragraphs in a library of forms that are in excess of 100 pages long.

2.       GCAAR does not have the ability to revise the RSC unilaterally, it is part of a group of associations that created and updates the RSC as needed. GCAAR’s forms will only affect the manner in which real estate is conducted in Montgomery County Maryland and the District of Columbia. While that is a portion of the business in the Washington real estate market it is hardly “the region.” The RSC will also be used by the Northern Virginia Association of Realtors (NVAR). NVAR covers Arlington, Alexandria, Falls Church and Fairfax Counties. Combined with GCAAR these two associations do comprise a large portion of the Washington market, but does not include Prince Georges, Loudon, Howard, Prince William or Charles counties.

3.       The RSC is created for Realtors use only. While most people believe that Realtor and “real estate sales person” are interchangeable, they are not. In order to be a Realtor you must be a member of the National Association of Realtors and only approximately 1/3 of the licensees in the United States are Realtors. Thus, only 1/3 of licensees are eligible to use the RSC.

Paragraph 2:
“These forms, which become effective Jan. 1, affect real estate transactions in Maryland, the District and to a lesser extent, Northern Virginia. Everyone planning to be involved in the local real estate scene in the new year should read and understand these new forms thoroughly before proceeding.”

1.       The changes do not affect real estate transactions in the entire state of Maryland. In fact, these changes can only affect changes in 1 out of 24 counties in the state. Further, the buyers in the single county have the option to use the “MAR Contract” instead of the Regional so there is not necessarily any change for buyers from this contract in the Maryland. In direct contradiction to what is stated in the article, the form is more widely used in Virginia than it will be in Maryland. In fact, the form will be used in Arlington, Alexandria, Falls Church and Fairfax.

2.       The local associations of Realtors have been offering extensive classes on these forms as have the local settlement attorneys. The brokerages that do work in these jurisdictions have also had extensive training on these forms. So this concern has already been addressed.

Paragraph 3:
“For many years, these standardized forms were basically designed to protect real estate agents and keep them out of trouble. Despite their historically self-serving nature, these forms tended to be quite fair and balanced to buyers and sellers alike. The current changes, however, seem to have tilted the playing field more toward the seller.”

1.       The purpose and design of these forms is to facilitate real estate transactions. They are not designed to “protect real estate agents and keep them out of trouble.” That is unless, you believe that obeying the law is only done to “protect agents and keep them out of trouble.” Maryland, Virginia and District of Columbia law require licensed real estate agents use forms created by attorneys which is precisely why these forms were created. So, indeed, these forms are self-serving in that they allow Realtors to comply with the law.

2.       Ironically, the forms were modified in order to help buyers have a more balanced transaction. The previous versions of the forms provided that the seller would warrant all electrical, heating/cooling, plumbing, appliance and smoke detector systems in a home. Because only those systems were warranted sellers felt that they were not obligated to fix any issues that were not in this group. This led to situations where a buyer would ask for a light to be fixed in an oven and the seller was obligated to fix it, but the crack in the foundation of a house was not being addressed. In order to do away with any preconceptions about what should or should not be fixed, the forms were changed to allow the buyer and seller to negotiate ALL aspects of the home inspection without making one item more important than another. The new form allows all inspections and repairs to be made, just the same as they were in the previous version of the form.

3.       The Realtor associations represent both buyers and sellers and attempt to create contracts that are balanced because agents can represent either side of a transaction. There is no incentive for the associations to create unbalanced forms because they would only be hurting themselves.

Paragraph 4:

“Starting in January, all properties being sold using the new forms are being sold as is. What this means is that unless buyers insert inspection contingency clauses or seller’s property condition representations into their contracts, the buyers will have no protection if the home is later discovered to have unacceptable or even defective, unsafe or unsanitary structural damage or components.”

1.      It does not matter what contract is used to purchase real estate, if there is no home inspection there will be no way to determine what the condition of the home is. This holds true with the current contract, the proposed contract or a contract written by an attorney.

Paragraph 5:
“Sellers will not be liable for conveying defective or even non-working plumbing, heating, ventilation, air conditioning and other systems. The seller’s sole responsibility is to deliver the property “free and clear of trash and debris, broom clean and in substantially the same physical condition as determined” on contract date, date of home inspection or other agreed-upon date. Gone are the days when buyers could rely on the seller’s express written warranty that all systems are in good working order and repair. The seller is not required to make even lender-required repairs in the event that the buyer’s lender requires that repairs be made as a condition of the loan.”

1.       The buyers never could rely on the seller’s express written warranty that all systems are in good working order and repair. The current contract did not provide that and the new one does not either. There were some systems that were warranted to be “normal working order” in the previous contract but that loose definition was the source of great ambiguity and dispute and served neither buyers nor sellers interests.

2.       Stating “The Seller is not required to make even lender-required repairs” is false and misleading. The seller is, in fact, still required to make lender-required repairs if there is a financing contingency. The change is that the reference to that requirement has been moved to a different page of the contract.

Paragraph 6:
“There is, however, some good news for home buyers in that agents also have revised their six-page addendum of clauses to include two mutually exclusive forms of home inspection clauses. The first paragraph, called Home Inspection Contingency, provides the buyer with a right to conduct a home inspection and present the seller with a list of items that the buyer wants the seller to replace or repair.”

1.       Mr. Jacobs says: “agents also have revised,” which is absolutely inaccurate. The agents do not write or revise the contract. Attorneys revise the language on the contract.

2.       The two inspection contingencies have always been in the six-page addendum of clauses. This is not a change.

3.       This particular addendum of clauses is only used in Montgomery County, Maryland and the District of Columbia. The addenda used for all other jurisdictions are different. So, changes here only affect a small portion of the transactions in the region, which again belies the argument that there are sweeping changes to the region.

Paragraph 7:
“The buyer can also request dollar credit in lieu of repair or replacement of the unsatisfactory inspection item. After receiving a copy of the home inspection report and the buyer’s list of requested repairs, replacements or dollar credits, the seller can opt to make repairs, replacements or provide credits. The seller can decline to make any repairs or concessions, but must notify the buyer of such a decision within three days of receiving the buyer’s inspection report and notice. Failure to provide the three-day notice may deem the seller to have agreed to the buyer’s requests.”

1.       This is a fairly accurate representation of only one part of the paragraph Mr. Jacobs is explaining. However, it fails to point out that if the buyer fails to ask for any repairs the contingency automatically expires. And that if the seller does respond to the buyers requests within the three-day period and then the buyer fails to respond the buyer is deemed to have accepted what the seller has agreed to do. Thus, both parties must be responsive, neither side can be complacent.

Paragraphs 8-9:
“The other inspection contingency in the second paragraph of the addendum of clauses is called General Inspection Contingency (No Right to Negotiate). As the name implies, this inspection does not give the buyer any right to ask the seller to make any repairs or concessions. The inspections provided for by this clause are for informational purposes only. If the inspection is unsatisfactory to the buyer in his sole and absolute discretion, his only right at that point is to notify the seller that the contract is void and to receive his deposit back.

Under either inspection clause, it is critical that the buyer send his notice to the seller before the stipulated inspection deadline. Failure to meet this deadline will result in the contingency terminating and the contract remaining in full force.”
 
1.       On these two paragraphs Mr. Jacobs is accurately describing the addendum. But it should be noted that the buyer has a choice of contingencies to use. Their agent will help the buyer decide whether the “No Right to Negotiate” is the right choice or not.

Paragraph 9:
“Other notable changes to the real estate sales contract include the financing and appraisal contingencies being removed from the body of the contract into their own separate addenda. Thus, if a buyer wants the benefits of these contingencies, he must make sure that he asks for them. There is no longer a list of possible addenda and contingencies as there was in prior versions of these contracts.”

1.       The buyer had to ask for the contingencies to get their benefits on the old contract and will have to on the new contract as well.

2.       There are check boxes for the appropriate financing options in the body of the contract. They are, in fact, on the very first page of the contract to bring more attention to them for the buyer’s benefit.

Paragraph 10:
“That mini-checklist was useful in informing buyers and sellers that various contingencies were available. Now the burden is on the party preparing the contract to advise everyone that additional pre-printed clauses may be available to protect their interests or that clauses can be drafted from scratch to customize the deal to meet their needs.”

1.       I agree with Mr. Jacobs that the mini-checklist was useful in the old version of the Regional Sales Contract. However, it also caused confusion. Since only some of the contingencies would be appropriate in a particular transaction buyers would ask for things such as a “Lead-Based Paint Test” for a home constructed only a year ago, when there was no lead-paint legally allowed to be used in the United States after 1978. This, in fact, would have been a detriment to the buyer, not a benefit.

Paragraphs 11 and 12:
“The revised sales contract incorporates specific jurisdictional addenda for D.C., Maryland or Virginia. These jurisdictional addenda, which conform to the new 2012 regional sales contract, address how local items are to be handled, such as grantor’s, transfer, recordation taxes and fees. It is imperative for home buyers and sellers opting for the new forms to use only the most recent editions for their specific jurisdiction. Parties should use the jurisdictional addenda for location of the property, regardless of where they reside.

Finally, these new forms are not mandatory and, in fact, are drafted, copyrighted and designed for GCAAR member use only. While it is perfectly legal and often desirable to amend these forms using separate addendum, all jurisdictions have laws prohibiting the unauthorized practice of law and thus non-lawyers must be cautious when drafting legal contracts for others.”

1.       Mr. Jacobs is quite right that the appropriate and current forms should be used when creating a contract. He is also correct that caution should be used when drafting legal documents. However, I take issue with Mr. Jacob’s assertion that only non-lawyers should be cautious. I would hope that Mr. Jacobs implication that lawyers need not take caution when drafting legal documents was simply an incautious statement.

2.       He is correct that the forms are copyrighted, as is his article in the Washington Post and any other non-governmentally generated legal document. However, the RSC copyright is not held by GCAAR alone, nor is the RSC copyrighted materials for GCAAR members only, it is available for use by other Realtor association’s members as well.

3.       He is correct that these forms are not mandatory. The law does not require buyers and sellers to hire an attorney (or an agent) to handle the negotiations or even the writing of a contract to buy or sell real estate. However, it would be inadvisable for an individual to act without the advice of a licensed agent (or attorney) to help with the process.

Paragraph 13:
“If you are contemplating a real estate transaction in the coming year, you are best served by having it drafted or at least reviewed by a competent local real estate attorney who is up to date on the latest contract language.”

1.       Mr. Jacobs is exactly correct that it is important to have the contract you use drafted by a competent local real estate attorney. Fortunately, the RSC is just such a document having been created by a group of attorneys in Maryland, Washington, DC and Virginia.

2.       The associations also felt strongly that their clients would be best served by specifically informing them that they can have their offer and contracts reviewed by an attorney. In fact, the RSC has a bold faced reference in the contract that says: “If legal advice is desired by either party, such party is advised to seek legal counsel”

3.       I believe that Mr. Jacobs is also correct that if an attorney were to be hired to review the contract that he or she be competent and up to date on the latest contract language. I would recommend an attorney who has no misconceptions of the RSC and a complete and accurate understanding of the differences between the current contract and the new contract that will be released in January.

Botched Home Inspection Responses

DON'T BOTCH THE HOME INSPECTION RESPONSE

NOTICE AND DELIVERY PROVISIONS VARY IN MD, DC, and VA

We recently had an issue involving a property located in Montgomery County.  The parties were in the process of negotiating the Home Inspection Contingency.  The agent representing the buyer sent a repair list in writing (as an attachment signed by the buyer) via email to the agent representing the seller.  The listing agent responded by forwarding to the buyer's agent an email communication between himself and his seller client agreeing to provide a credit toward repairs for the buyer.

Was this response proper under the Contract?

In order to answer this question we need to read the appropriate addenda in the contract.  They are very different in MD, DC and VA.  In all three jurisdictions, Notice must be in writing.  In MD and DC, Delivery of Notice can be sent to either the Seller/Buyer or the agent representing them.  In  VA, Delivery of Notice is to the Seller/Buyer at their property address, fax or email, with "Courtesy" (not required) copy being sent to the agents.  In MD, DC and VA, Notice may be delivered via email but in MD and DC there is also an additional requirement the email must include an "attachment with an actual copy of the executed instruments being transmitted."

In our case this difference is very important.  By only providing the email communication without the repair list as an attachment, the listing agent did not deliver proper notice.  Pursuant to the Home Inspection Contingency in the Addendum of Clauses, "Failure of either party to respond within 3 days after Delivery of Notice from the other party will result in acceptance by both parties of the terms of the most recent Notice."  By not responding properly pursuant to the jurisdictional addendum, the listing agent put his client in a bad position; a position which could result in the Seller's obligation to complete all of the repairs on the Buyer's list.  Ouch!

Your partners at KVS are always available to answer your contract questions, so don't hesitate to ask us if you are in doubt.  Whether current or new forms we are here to put you and your clients in a good position and keep you out of a bad one.

 This article was created by Kantoroom, Vitale + Stanton, LLC and was republished with their permission. http://www.kvslawgroup.com/