8 Critical Red Flags to Watch for in a Residential Real Estate Contract
Many purchasers believe that the contract is "standard" and "boilerplate", and that if anything goes wrong they’ll have the opportunity to make things right. In reality, the exact opposite is often the case. If you find a problem during inspection which the seller won’t fix, it’s the contract that decides what recourse you have.
The "standard contract" illusion
Most Florida home sales are governed by the FAR/BAR form, which is a cooperative effort of Florida realtors (who make their living when you buy the home), Florida real estate lawyers (who get their business when you buy the home), and Florida Bar attorneys (who also make their living when you buy the home) to create a form that protects buyers and sellers. In other words, the form is intended to balance both parties’ interests.
The FAR/BAR is really a set of guidelines. Everything in it is negotiable, and it’s not unusual for sellers to attach addenda that specifically negate buyer protections in the main contract. Maybe a seller addendum allows them to back out forever with no penalty to you, or to keep your closing costs if they can’t sell the home, or to completely avoid liability in the case of default. The fact that it’s all in the contract and documents you received may be little comfort when it comes time to actually read the fine print.
There’s also no three day cooling off period for standard residential home purchases in Florida. Once you sign and the seller signs, you’re legally bound by the contract. That’s why knowing what to look for before signing is so critical.
Short inspection windows
The inspection period is one of the most important tools at your disposal. It’s your opportunity to have licensed professionals examine the home, and to walk away without penalty if you don’t like what they find.
The problem is that sellers will often try to limit this period to five or seven days, and may even present it as a test of whether you’re a serious buyer. Don’t fall for it. There really is a need to have your general inspection, wind mitigation inspection, roof inspection, and pool or septic inspection if applicable. You can’t afford to hire and coordinate your inspector, pay for the inspections, get the reports, and make a decision in five days. You’ll end up rushing and doing a poor job.
The only inspection period that makes sense is the longest one they’ll agree to. You need at least ten to fifteen days, and if they won’t agree to that, ask yourself why. It could just be that they’re trying to close the deal quickly, but it could also be that they know there’s a problem and don’t want you to find it.
Vague financing contingency language
A financing contingency is there to protect you if you can’t get a mortgage, but only if it’s worded to do so. Vague language is one of the most common ways for buyers to get taken advantage of.
The financing contingency needs to specifically state the amount of the loan, the type of loan, and most importantly, the maximum interest rate you’re willing to accept. If the rate isn’t specified in the contract, your loan officer could come back with terms that are unacceptable to you, and you may not have recourse since the contingency wasn’t specifically worded. That means you either take the loan or lose your earnest money deposit.
The cut off date is also important. Your financing contingency needs to give you enough time to go through underwriting. Thirty days is standard, and anything less leaves you open to a lender delay that you can’t control.
Financing contingencies are the reason for about 21% of contract cancellations, according to the National Association of Realtors Confidence Index, and most of those could have been negotiated more favorably for the buyer.
Hidden HOA special assessments
When you buy a home in a community with an HOA, your contract should include an HOA/Condominium Addendum, which is a Florida specific disclosure that’s meant to give you a summary of the dues and rules for the association. What many buyers don’t realize is that this addendum can also contain hidden liabilities for the new owner.
The problem with most HOA contracts is that they don’t specifically state that the seller is responsible for any special assessments that come due during the sale. Special assessments are additional levies that are approved by the HOA when their operating budget isn’t enough to cover expenses. They can be as high as $20,000 to $50,000 per unit, and they’re completely unexpected by new buyers.
To protect yourself, your contract should specifically state that the seller will be responsible for any special assessments that are pending at the time of sale, or that the buyer will receive credit at settlement for any special assessments paid by the seller. You can’t just take the seller’s word for it – make sure their obligation to you is spelled out in the contract.
The "as-is" misconception
An as-is contract doesn’t protect the seller from anything, despite what many believe. This is what an as-is contract actually does: it tells you that the seller won’t be held responsible for repairs, but it doesn’t remove the seller’s obligation to disclose defects that aren’t readily apparent to the buyer.
Under Florida law, which is largely case law, the seller is obligated to disclose any latent defects that materially decrease the value of the property. In other words, if the seller knew about the leaky septic tank and it’s been leaking for years, they can’t get away with an as-is contract.
The bigger problem with as-is contracts is that they’re often used as an excuse for sellers not to provide disclosures in writing. A promise isn’t worth much if the seller isn’t willing to put it in writing, so advise your attorney and inspector if the seller refuses to complete a property disclosure form.
Ambiguous force majeure and hurricane provisions
Hurricanes are a fact of life in Florida, and if your contract doesn’t specifically address them, you’re taking on unnecessary risk.
A force majeure or act of God clause is meant to cover events outside the control of either party, and could include natural disasters like hurricanes as well as government actions like the declaration of an emergency.
The problem with most force majeure clauses is that they don’t actually protect the buyer. If your home is damaged by a hurricane while you’re under contract to buy it, most standard clauses will only extend the closing date.
What you want is language that specifically allows you to cancel the contract if the home is damaged by a hurricane. If the home is damaged after the effective date of the contract but before closing, who bears the risk of loss? If the damage exceeds a certain percentage, say one to five percent, may the buyer cancel the contract? If the home is damaged beyond the ability to obtain insurance at standard rates, is the contract cancelled?
These are all legitimate questions that have real world applications. A contract that doesn’t specifically address them puts you at risk of having to buy a damaged home, or of having to go to court to cancel the contract.
Unresolved permits and municipal liens
A standard title search will reveal recorded liens and encumbrances, but open or expired building permits and municipal code violations are a whole different ball game. In Florida, these defects can survive the sale of the home and become your problem.
If the previous owner replaced the roof, put in a family room addition, enclosed the garage, or upgraded the electrical service panels, but failed to get a final inspection, the permit for those improvements is still attached to the home. When you go to get permits for other improvements, like a pool or a workshop, the county will discover the expired permit for the work the previous owner did, and you may be obligated to bring that work up to code as well. In the worst case scenario, you may even have to remove the work the previous owner put in if it doesn’t meet code.
Your contract should specifically state that the seller must close out any open or expired permits and bring the home into compliance with municipal codes before closing. If there are permits that can’t be closed out in time for closing, the contract should specifically address those as well, either by allowing an escrow hold back, a credit at settlement, or an indemnification by the seller. If the contract doesn’t specifically address this and you discover an open permit after closing, you’re responsible for the cost of bringing the work up to code.
Experienced real estate attorneys, like those at Lulich & Attorneys, can help buyers review contracts for these and other defects, and can help negotiate language that protects the buyer before any money changes hands.
One sided default clauses
Make sure you understand what happens if you default on the contract. In many cases, the seller’s only recourse is the escrow deposit as liquidated damages. In other words, you lose the deposit when you default, and that’s the extent of the seller’s damages. You can’t take back the deposit, and the seller can’t claim any other damages.
Some contracts, particularly ones that use custom seller addenda, don’t specifically limit the seller’s damages to the escrow deposit, and may allow the seller to seek specific performance (a court order that you have to buy the home) and/or damages in addition to the escrow deposit. In a rising market, a seller may be able to take advantage of your default by claiming that they lost an opportunity to sell the home for a higher price.
Default clauses aren’t necessarily illegal, but you should at least be aware of them. A contract that allows the seller to seek specific performance while limiting your damages as the buyer to the escrow deposit is extremely one sided, and your attorney should be able to point it out and, hopefully, cut it out.
What to do before you sign
Home inspections are the reason for almost 18% of contract failures (National Association of Realtors), and financing issues account for another 21%. That’s nearly half of all contract failures that could be prevented by negotiating the right language or walking away.
A Florida home sale contract is a document you need to understand. It governs your deposit, your time frames, your rights, and your risks if anything goes wrong between signing and closing. The red flags discussed in this article don’t require you to know Latin, but knowing how to specifically word things in the contract to protect you when you sign does require legal expertise. That’s why you need an attorney who understands Florida law and how the courts interpret contract language. Read the whole thing, ask questions about the things you don’t understand, and hire an attorney before you cut the check, not after you get the lien letters.
