Now more than ever home buyers need to be alert to potential traps in the real estate contract.
For decades, local real estate attorneys have been working with realtors to develop a real estate contract that is buyer friendly. This contract assures the buyer that they have rights to inspection and attorney review of the contract. The contract is contingent on the buyer obtaining their mortgage approval or the earnest money will be returned. These rights are so protected that buyers and realtors take them for granted when they execute a real estate contract.
However, the economic downturn has affected the market greatly. In recent years, most of the real estate sales have been for homes that are either in foreclosure, short sales or under some similar distress. These transactions carry their own pitfalls that buyers should be aware of and protect themselves.
Most REO properties (Real Estate Owned by banks) are sold using the standard board-approved real estate contract. The buyer feels confident that they are protected. However, before the REO seller accepts this contract, they require the buyer to sign their company’s addendum. This addendum is usually about six to twelve pages long and materially changes the rights of the buyer as found in the standard contract. Some of these changes are to their rights to correct or modify the contract during attorney review. Sometimes, the addendum will have a paragraph called “Attorney Review,” so without reading further, the buyer believes they are protected. However, that paragraph may state that the buyer has already asked their attorney to review the contract, and by signing the addendum they are agreeing to the contract as it is without changes.
How can this result in a problem or loss of earnest money for the buyer?
- If the contract for some reason does not have a mortgage contingency and buyer does not realize it when they sign.
- The addendum may change the time period for mortgage contingency to a less than normal time to process the loan.
- The addendum may add penalties for not closing on time, such as non-refundable extension fees.
- The addendum can make the earnest money non-refundable.
- Some addendums assign some or all of the seller’s standard closing costs to buyer.
Any number of additional changes made from these addendums can be costly to the buyer.
How should the buyer protect themselves? The only way to protect yourself is to hire your attorney before you sign the addendum and send it back with your earnest money. There is usually a short period of time, such as 24-48 hours, to do this. But it is essential that you seek legal advice before signing any addendum from the REO seller. Through the use of email, our office can receive the contract and addendum when the buyer receives it. We can advise of any of the many hazards found in these documents before you make the commitment of signing and sending earnest money. In this new age of Buyer Beware, it is the buyer’s best defense to protect their earnest money. The wise buyer will secure a professional real estate attorney before they sign their contract. Then the buyer will have an attorney available to discuss their purchase before they get involved with the contract and addendum.
The purchase of a home is the largest, single investment most people make in their lifetimes, so taking the appropriate precautions is necessary.
For further information about this or any other real estate matter, contact Vicki Gonzalez at 847.823.9030 Ext: 220 or firstname.lastname@example.org and take advantage of her 20 years of experience in the field of real estate transactions.