From a purchase contract to a lease agreement, if you are buying or managing real estate, you’ll need to learn to spot common problems in your real estate contracts.
One reason you’ll see mistakes is that a real estate contract may not have been drafted by a lawyer. Most real estate forms are readily available to non-lawyers. Sample real estate contracts and free real estate contract forms are everywhere on the Internet. A residential lease agreement is a good example.
Despite easy access, it’s still a good idea to ask an attorney to review your document before you place it in service. Working with attorneys can be frustrating — in fact, that’s a full blog topic all by itself. If you choose someone with the right experience, and rein in the fee, the extra precaution can save you thousands of dollars.
Real Estate Contract Mistakes Take a Toll
Mistake #1: Do You Get It? When negotiating a real estate contract with another party, it’s important to end up with an agreement that you could explain to a third party. One common misconception is that if you don’t understand something in the contract, that’s okay — nobody does. Besides, you don’t want to look stupid. The truth is that if you don’t understand it, there’s something wrong with the way it’s drafted, and that will come back to haunt you later.
Mistake #2: Throw in the Kitchen Sink. Everything you want to have in the contract needs to be in the contract. Even your attorney won’t catch this mistake unless he or she was involved in the negotiation process. It is true that verbal contracts can be binding in some situations, including a short-term lease agreement. But, once you’ve committed to putting something down in writing, that ‘writing’ has to be complete. Otherwise, you won’t be able to prove that it was part of the deal.
Mistake #3: Beginning Your Real Estate Contract at the End
Never try to use the real estate contract form itself to negotiate terms. One of the worst mistake you can make is starting with the “final” draft and then sending it back and forth to mark up.
As the agreement changes, the existing real estate contract language becomes incongruent. You can’t simply cross out a paragraph in a lease agreement, for instance, without fixing other paragraphs throughout the document. Contradictory language can end with the entire real estate contract getting tossed by a judge. The other party may also get angry when they see something in the agreement that was never discussed. You’ll make then feel like you are trying to rip them off.
Mistake #4: “1,2,4.” Another common mistake with real estate contracts is missing pages. If exhibits, like rules or a smoke-free addendum to a residential lease agreement are to be added, they should be referenced in the main body of the contract. The contents of those pages are intended to become part of the agreement. Do the math and make sure all the pages and exhibit numbers are there. How can a tenant abide by the terms of a rental lease agreement if parts are missing?
Mistake #5: Let’s Agree to Agree. Vague terms are problematic in a real estate contract. An agreement-to-agree is really just an unfinished negotiation. The terms have to be specific enough that a judge could easily determine what it is that each party is getting and giving up in order to find the real estate contract valid. If you haven’t nailed that down yet, don’t leave the negotiating table.
Mistake #6. History Repeats. A new contract can impact previous agreements between the parties. For instance, if you add a new tenant to an existing lease by using a new lease agreement form, that may impact the legal relationship with the existing tenants. Be sure to address any outstanding obligations in the new contract, and make the intent clear. It is possible to draft provisions that outline how previous terms are to be treated. The trick — as with any real estate contract — is to take away the guesswork.