What is a Real Estate Contract?
Real estate contracts are legally binding agreements entered into by the seller and the buyer or tenants in the lease, and the main objective of the contract is to fairly regulate a transfer of real estate property ownership. Usually, real estate contracts in Florida follow a specific format and the same legal format is used. The contract details all the conditions that have to be met before the transaction is final, for example, arranging for the payment of taxes, obtaining financing, repairs to the property, meeting closing dates, etc . The contract can set out conditions or contingencies that must be fulfilled before the contract becomes binding on the parties, the purchase price, the identity of the seller, details of the property and other important details.
Real estate contracts often also contain clauses of indemnification, warranties, and representations. Per Statute 475.01 Florida Statutes, all real estate agents in Florida have to be licensees, and they cannot legally represent a party in the sale of the property in the absence of a legally binding contract.
The Purchase Agreement
The purchase agreement is the bedrock of any real estate transaction. That’s because it contains all the specific details that you and the seller identified during negotiations. However, it’s also the first major opportunity for a buyer to get burned. After all, many sellers will take advantage of a buyer’s inexperience and put together a sloppy contract. On the flip side, some buyers will overlook important aspects of the agreement or ask for changes that virtually no seller would ever agree to. In either case, it’s still a good idea to hire an attorney to review your purchase agreement even if you are using a real estate agent. Your agent may cover them with a general disclaimer, but a lawyer’s review of this contract is most valuable at this stage.
While each purchase agreement may differ in some of its details based on the residential real estate laws in a particular state, they usually contain some of the same details, including:
• Description of the property, including the address, legal description, and parcel number
• Description of the sale (residential, commercial, manufactured home)
• Required deposit amount
• Financing method & terms
• Closing date
• Use of the property
• Contingencies for closing (financing, property inspections, sale of another property)
• Description of fixtures and/or personal property that are part of the sale
• Seller disclosures of any known problems with the property
• Seller disclosures concerning zoning regulations
• Methods of resolving a dispute should one of the parties file for bankruptcy
The bottom line is that closing on a real estate deal involves a great deal of moving parts. But as long as you have the proper documentation (like a purchase agreement), you will be protected should something go awry and you end up in court.
Lease Agreements Overview
A residential lease is a contract between a landlord and a tenant that describes the terms of the tenant’s stay on a rental property. A residential lease generally details how long the tenant will rent the property, the cost for the rental, and any deposit that the landlord may wish to collect. In California, the lease operates under general contract law, and there are also federal and state housing/tenant protection laws that apply as well.
Commercial leases govern the relationship between a landlord and a business tenant renting a space for the purpose of conducting business. These leases can be quite sophisticated and include complex terms and conditions requiring legal review and analysis by a real estate attorney experienced in commercial leases. The scope of a commercial lease can range from a single office space to large shopping centers to stations operated by national and/or worldwide corporations.
Assignment of Real Estate Contracts
Real estate assignments are another common type of real estate contracts. A real estate assignment is a contract with which an interest in property is sold to a third party. In wholesaling residential real estate, a real estate investor will usually tie up the property under a real estate purchase agreement with a contract rider. When employing this technique, the wholesaler searches for an investor buyer for the property. The investor buyer and the wholesaler then agree to enter into a real estate assignment contract in which the wholesaler agrees to assign their rights and responsibilities from the original purchase agreement to the investor buyer. The investor buyer then takes over the performance of the original purchase agreement with the original seller.
The investor buyer pays the wholesaler an assignment fee at closing. The wholesaler then assigns their right to purchase or acquire the property to the investor buyer. The wholesaler can expect to pay earnest money, appraisal, home inspection, closing, and other costs associated with purchasing the property, and they may negotiate his compensation and costs with the investor buyer.
Wholesalers take great risks when looking for fast flips on properties, and often make large sums of money. During great real estate market booms – such as was seen in Houston between 2000-2008 – the investors can turn over properties within days of acquiring them, making huge profits. However, wholesaling is very risky in a down market, such as that seen in Houston from 2008-2015. Preserving their capital during lean times, many investor buyers only look to the Houston real estate assignment market for investment opportunities when the market is at its lowest. If you are considering investing in a property through a real estate assignment contract, it is important to vet any wholesaler you may do business with.
Options to Purchase Contracts
An option to purchase contract gives a buyer the option to buy property sometime in the future and usually during a specific period of time. Sometimes the buyer is obligated to purchase the property at a stated price during a certain period of time. The buyer pays a non-refundable fee for the option. If the buyer elects to buy , the fee is applied to the purchase price or may be added to the down payment.
Example:
For example, a buyer desires to purchase a house but is not sure if he wants to do so now. The buyer arranges with the seller to buy the house in a year and pays a $500 option fee for the year to decide for himself.
Land (Owner Financed) Contracts
Another creative interest in real estate is the Land Contract or "Contract for Deed." A Land Contract is a form of owner financing, where the seller agrees to sell the property to the buyer but the buyer does not actually receive title to the property until the end of the land contract period. During the period between the signing of the land contract and the transfer of legal title, the buyer is the equitable owner of the property and is generally entitled to all of the privileges of ownership, including occupying the property, obtaining a mortgage, making improvements and rents from the property. When buying on a land contract, the buyer makes periodic payments to the seller (similar to a mortgage), typically on a month to month basis, until the purchase price is paid in full.
Because the seller only conveys occupancy and not title, the seller will generally require a larger down payment than a normal sale, and the buyer will pay a higher interest rate. The period of time it will take for a buyer to acquire legal title will also be longer. In these instances, the true nature of the transaction should be disclosed to the parties so they can understand the terms and consequences of their agreement.
There may also be more potential for more serious disputes in the land contract context. By its very nature, a land contract does not result in the immediate transfer of title, so a seller may refuse to relinquish possession despite the buyer’s legal right to possess upon payment of the full purchase price. A buyer may want to improve the property before taking title but a seller who is nervous about the buyer’s ability to make future payments may object to any improvements that will permanently fix the property to the buyer’s interior design. If a buyer decides to finance his purchase through a mortgage lender, the buyer may not be motivated to maintain insurance because the property will not be in the lender’s name until the loan is paid off.
Depending on the situation, a land contract may be a perfect solution for a particular buyer and seller, however a negotiated purchase agreement with a properly funded mortgage loan in the buyer’s name is often a much simpler option for all parties involved.
Real Estate Power of Attorney
A power of attorney is a written document that gives authority to a person (the agent) to act on behalf of another (the principal) in an agreed-upon capacity such as for business or financial matters. The power of attorney, also known as an agency relationship, may be granted to a real estate salesperson or broker to conduct a real estate transaction on behalf of a principal. A real estate power of attorney is often granted by property owners to their real estate agent(s) during the listing period. A property owner may also give a real estate power of attorney to the buyer’s real estate broker to transact the closing of the sale in his or her absence. This is particularly helpful when the property owner resides in another state or country.
Deciding on the Right Contract
When deciding on the type of contract to use in a particular real estate transaction, there are several factors that should be taken into consideration. First, the parties involved are important. Are the seller and buyer individuals or corporations? Buyers and sellers who are corporations will usually be more comfortable using an APA or OPA, while individuals are likely to do so using an APA or EPC. Which parties are involved may also affect how the transaction is treated for tax purposes.
Second, the circumstances surrounding the transaction are pertinent. Does the seller have credit problems? If so, an option to purchase may be the best choice, as it does not need to be disclosed to creditors. On the other hand, if the parties want to disclose their agreement, perhaps because they are negotiating with a lender, an APA may be the best option . Will the seller be receiving any payment on closing? A vendor take back mortgage will often reduce the purchase price and offer the buyer incentives to maintain the property. Will the purchase price be paid in installments? Is the buyer an heir or former spouse of the vendor? The answers to these questions may affect which type of contract is appropriate.
Finally, the type of financing offered by lenders can also affect the choice of contract. Some lenders will refuse to accept a property subject to an EPC or OPA, so if the buyer is seeking financing through a bank, more traditional contracts may be needed. However, some lenders will not provide mortgages on properties sold using an OPA or vendor take back, as these contracts are inherently more risky for the lender.
