Real Estate Purchase Agreements Overview
A real estate purchase agreement is a legally binding contract between the buyer and seller of the property. In Tennessee, it is typically drawn up by a licensed real estate agent or attorney and must be signed and agreed to by both the buyer and seller in order to be legally enforceable. A real estate purchase agreement has two parts: the agreement between the agent, buyer and seller and the actual contract to buy the property. The agreement between the buyer, seller and agent is essentially an agreement for services and outlines the responsibilities of each party. The contract itself details the property being purchased, the sales price, closing date and what items are included with the property . In most cases, the real estate agent will use a standard purchase agreement that simply fills in the particulars of the real estate transaction. It is important for both the buyer and seller to read the agreement thoroughly and ensure that all of the details are correct and as expected. A misrepresentation on any side can do serious damage to the buying and selling process, such as an increased sales price or unexpected closing date. Buyer and seller should always retain the services of an experienced Tennessee real estate attorney when dealing with a sale of property in order to ensure that all parties are adequately protected.
Tennessee Legal Requirements
In Tennessee, real estate purchase agreements are governed by both federal and state real estate law. While most of the fundamental legal requirements associated with real estate transactions are fairly uniform across the United States, state law plays an integral role in real estate law. This can include such details as the particular terms of the contract, clauses that must be included, who is responsible for the legal fees, leins, titles and ownership, and mandatory disclosures required by the state.
Some of the more common requirements for a Tennessee purchase agreement include warranties and representations concerning title. The seller should promise that he legally possesses the property and has the right to sell it. A clause should also be added concerning the legal description of the property, stating that the buyer is satisfied with the legal description provided, which prevails over the description included in the deed.
If you are buying a house, added provisions may be required, including:
Real estate purchase agreements are also subject to the Statute of Frauds, which requires a written agreement for any transaction involving a real estate purchase of more than $25. These contracts do not have to be executed at the same time, but they must reference or refer to each other.
However, while written contracts are not required for all contracts concerning land, it is highly advisable to do so as the statute of frauds is typically used as a defense in many legal disputes arising from oral agreements. Either party in a dispute involving an oral contract can present parol evidence to prove the existence of a contract, but this type of evidence is not permitted for the modification of a written contract.
Steps for Drafting a Purchase Agreement
To draft a valid real estate purchase agreement in Tennessee, a seller and a buyer should follow several steps. First, they should agree on the terms of the purchase. The terms include the purchase price, the amount of the down payment, ongoing payment terms such as monthly payments or a balloon payment, the property boundaries, and the closing date. The seller and the buyer should decide what is included in the sale. In Tennessee, fixtures are generally included in the sale, unless the seller expressly excludes them. Fixtures are items that are permanently attached to the real estate. An example of a fixture is light fixture.
The parties will then review the Tennessee Association of Realtors’ (TAR) standard form purchase contract and fill out the appropriate sections. The seller and buyer should then sign the purchase contract. They will need to have the agreement notarized in order to make it legally binding. If either party fails to comply with the purchase agreement, the other party has the right to file a breach of contract lawsuit. A buyer may seek a remedy including a return of the earnest money deposit made to secure the property, Specific Performance to force the buyer to go through with the deal, or money damages for any damages the failing party causes.
Common Mistakes in Purchase Agreements
With so much at stake, it should come as no surprise that there are numerous ways to botch a real estate purchase agreement, especially with the intensely competitive nature of the Tennessee real estate market. As a potential buyer or seller, you need to be familiar with some common pitfalls in order to protect yourself and your assets. For starters, you do not want to limit yourself in any way. One of the most critical mistakes you can make is failing to research the market and identify if there are other buyers making similar offers on a property. In addition, especially in a hot real estate market, it’s often the case that a potential buyer needs to make a strong second offer when the first bid is not accepted. The last thing you want to happen is to have a poorly-written purchase agreement that protects neither buyer nor seller, or to set yourself up for potential litigation by prior contract buyers. Likewise, you should not treat the purchase agreement casually. Just because it is being created in order to facilitate a purchase does not mean it is simply a formality to seal the deal. It is a binding contract, and that means you should ensure that there is enough information included so that the buyer and seller know exactly what is expected by both parties throughout the agreement. It may be necessary to add details to the contract to increase your protection against litigation – or even to increase the chance that you’ll actually be able to close the deal if it’s signed by the other party. You also want to avoid simply copying and pasting from another purchase agreement. There are different forms you will use for purchasing a condominium, a house, undeveloped land, a 1031 exchange and more. Using the wrong form can leave you open to liability or cost you an opportunity to purchase a property in the manner you’d prefer. In addition to ensuring the form you’re using is applicable to your situation, you should also double-check to make sure the purchase agreement is governed by the laws of the state of Tennessee. Finally, you must be sure you identify who the agent is when drafting a purchase agreement. An on-site salesperson, the owner of the home, another professional in the industry or even you yourself (if you’re not represented by anyone) could be the person who is representing the property, and as such, you must identify them in the contract.
Negotiating Purchase Agreement Terms
Negotiating the terms and conditions of a purchase agreement can be one of the most challenging aspects of a real estate transaction. From price to contingencies and everything in between, the process involves intense and careful planning to reduce the risk of future litigation. The most important consideration when negotiating price is how much you as the buyer are willing and/or able to pay. This means that you have to conduct your due diligence on the property prior to making an offer. Once you have determined what you can afford to offer, do some research on what other similar properties have sold for in the area. Of course, the more information you can gather on the property comparable properties, the better. Once you have made an offer, it is important to know how to read a contract. More specifically, you need to look up the definitions of key words used throughout the contract. For example, when the contract refers to "escrow," that does not mean the same thing as the word "escrow" in everyday vernacular. Escrow refers to handling an item of value for two parties until the completion of certain conditions. In the context of a contract, it could refer to a closing agent holding funds for proper distribution . The best way to protect yourself during negotiations is to know exactly what you are getting into. Contingencies are also critical aspects of a contract. A contingency refers to a condition which must be met before the contract becomes binding. For example, if a contract is contingent upon the buyer getting financing, and the buyer is unable to secure financing, then the deal falls through with no liability to the seller. A contract can also be contingent upon a satisfactory home inspection. Understanding how contingencies work can help you negotiate the best deal possible. You need to determine at the outset if there are certain things that must be protected via contingency, or if it is something that you would like to leave open for negotiation. Of course, there are various other aspects of the contract that you can negotiate, including the date of closing, earnest money deposit, date of possession, closing costs and more. Realtors have training in the art of negotiation, which is helpful, but it is always wise to consult with an experienced attorney about all the different options available to ensure you are protected to the fullest extent.
Role of Real Estate Agents and Attorneys
The real estate transaction in Tennessee is generally a trip consisting of four parts: Real Estate agents, whether for the buyer or seller, are typically responsible for drafting the purchase agreement. Real estate agents have endless forms at their disposal and, in most cases, use a fill-in-the-blanks form to create the agreement for the sale of their clients’ real estate. However, a real estate agent cannot practice law and, if there is any special language that is needed in the purchase agreement, they must defer to their client’s attorney to add this provision. The same is true for the seller’s attorney who can add language into the Contract (at the request of the client) that helps protect the sellers’ interest in the sale of the property. However, and much to the chagrin of a real estate agent or real estate attorney, the Contract may become their responsibility to enforce, as well. While agents and attorney’s will work diligently to enforce the Contract on behalf of their clients, if there is a dispute, many times the parties to the contract will end up in a court of law. Real estate agents and attorneys will review the Contract for any opportunity for dispute before getting the parties to sign. This avoids a possible lawsuit.
Professional guidance allows for the purchase contract to contain information that a party may overlook; can help avoid costly mistakes; and can provide peace of mind to the buyer and seller of the real estate property.
Resolving Disputes and Breaches
Disputes arise on real estate purchase agreements for a variety of reasons, not always of course. A common example of a dispute is when the seller refuses to sell, or a buyer decides not to buy. Or, the seller wants to keep the earnest money deposit, but the buyer wants it back. Alternatively, it is possible that a buyer or seller has suffered damages caused by the other party’s breach. Whatever the case may be, how the parties must resolve the dispute is dictated by the agreement. Some agreements will provide for binding arbitration or mediation, while others may require nothing more than the filing of a complaint in court. If there is no specific provision addressing disputes in the purchase agreement, state and federal law will provide a default set of procedures.
Binding arbitration is often more cost-effective than pursuing a dispute through the courts. Though there are several different types of dispute resolution clauses under Tennessee law, a developed arbitration clause contains the following basic components: Other important elements of an arbitration clause include: A well-drafted arbitration clause may also maximize the parties’ control over the appointment of the arbitrator, and the manner of arbitration itself. Absent a well-developed arbitration clause, a party should make every attempt to refer to the Commercial Rules of the American Arbitration Association, or the Rules of the Supreme Court of Tennessee. An experienced real estate attorney can better craft such a clause, as well as ensure its validity . There are a number of penalties associated with a purchaser’s failure to pay consideration under the contract, such as purchase price increase for late payments, forfeiture of all or a portion of earnest money deposit, payment of costs/attorney’s fees by breaching party, and/or forfeiture of the purchase/sale agreement. The seller is entitled to enforce the purchase/sale agreement if there is a failure to close due to the failure of the buyer to meet any contractual conditions for closing. However, the seller may be required to mitigate damages. A seller has a duty to mitigate, or minimize, the amount of damages resulting from a breach of contract. For instance, it is a breach of contract for a seller to "sit on the property" until the market improves or conditions become more favorable. In the event of a breach, the non-breaching party is entitled to all damages allowed by law, including loss of bargain costs, consequential damages, emotional distress damages, and punitive damages. Interestingly enough, the burden of proof for breach of contract falls upon the party asserting the breach. Because the non-breaching party has the burden of proof, it is imperative that all terms, conditions, and/or contingencies be neatly outlined in the agreement. A party signing an agreement is presumed to have done so with full knowledge of what it entails, and is bound by the terms. Dispute Resolution and Breach of Contract: Duties of the Non-Breaching Party Respectively, the non-breaching party has a duty to mitigate or minimize the amount of damages resulting from the breach. The non-breaching party is also entitled to all damages the law allows, but no more.
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