In the midst of the excitement of buying or selling a home, few consumers want to take the time to read a lengthy document filled with legal terms that can be difficult to understand by someone without a law degree. In September 2006, the Realtor associations of the Washington area, including the Northern Virginia Association of Realtors (NVAR) and the Greater Capital Area Association of Realtors (GCAAR) introduced a new regional sales contract that simplifies the language of earlier contracts to make it easier to comprehend.
"The biggest difference between earlier contracts and this one is the clarity for consumers," says Marcus Simon, an attorney with Hunzeker, Lyon & Leggett and manager of the McLean office of MBH Settlement Group.
"The contract spells out exactly what they need to do and has been designed to make it easier to understand," Mr. Simon says. "Even the font has been made larger to make it easier to read."
In part because of the larger typeface, but also because of additional educational portions, the new regional sales contract is longer than the previous version.
For instance, consumers are reminded that the settlement date is not optional, that the keys must be delivered at settlement and that "sellers need to keep their utilities on even if they have moved out so that inspections can be done," Mr. Simon says.
The added length may make the contract seem complicated, but the simplified language should make the document more comprehensible for both buyers and sellers.
Adrian Hunnings, an associate broker and managing broker of Weichert, Realtors in Bethesda, says, "The hardest time to read the contract is when someone has fallen in love with a house. It's important that as soon as a buyer has located a buyer's agent they ask to see an advance copy of the contract. Any time an agent takes a listing, they should provide the seller with a copy of a sample contract to make sure they understand it."
Mr. Hunnings recommends that consumers who do not understand the contract talk to an attorney before an offer is made to be certain they know the consequences of their actions.
Christopher Darby, an attorney and director of the District's operations for Universal Settlements, says consumers need to understand that the sales contract is a legally binding contract, which means that both buyers and sellers need to be as informed as soon as possible, before an offer is made.
Donald DeBragga, a Realtor with Keller Williams Fairfax Gateway office, who chairs the NVAR Standard Forms Committee, says regional committee members worked on the new contract for three years to determine what would be most helpful to clients if they had a weak agent.
"We developed a contract that could actually be read by a buyer or seller so they can understand the deadlines that need to be met and protect their earnest money deposit and the value of the home," Mr. DeBragga says.
"During the boom market, some of the new start-up companies did not have the knowledge and experience to do contracts correctly. We need to do everything possible to safeguard our clients' position and to protect all consumers," he says. "The new contract has less legal mumbo-jumbo, so there are fewer surprises at the settlement table for buyers and sellers."
Mr. DeBragga says that he believes the old contract was lopsided toward buyers and that this one is more neutral.
Mr. Darby thinks both the old and new regional contracts are neutral.
"The old contract was not intentionally ambiguous, but now there is not much room for misunderstanding," says Mr. Darby. "The contract can be slanted in favor of the buyer or the seller, but that requires agreement between the two sides. Fewer contingencies favor the seller, while more contingencies mean a contract is skewed to the buyer."
The most important difference between the old contract and the new contract is the separation and clarification of the meaning of making the purchase offer contingent on the purchaser obtaining financing and on the property appraising for the amount of the offer.
Mr. Hunnings says that separating the financing and appraisal contingencies allows them to be dealt with independently, which reflects the fact that loan approvals can often be accomplished very quickly in today's market, while appraisals can take longer.
Mr. Darby says, "In the old contract, appraisal contingencies were built in to every contract but not in a definite term, which often ended up by being more of a problem.
"The financing contingency also changed," he says. "It used to be removed by virtue of a letter from a purchaser to a seller from the lender. Now the form requires the purchasers to check a box which says they understand that their deposit is at risk and that if they don't get the loan they are in default and can lose their deposit."
Mr. DeBragga says that the new contract incorporates language that should provide a fair warning to buyer and seller and stimulate a conversation between the two sides, which will resolve problems early enough for settlement to take place.
"From the sellers' point of view, the new contract offers protection because the sellers want to know the contract is solid ASAP," Mr. Hunnings says.
"The buyers want to protect their earnest money deposit right up to the settlement day. Both parties can use the financing and appraisal contingencies as a negotiating tool," he says. "If the buyers have all their financing in place and offer to waive the financing contingency, they may be able to negotiate a better price since they represent less risk to the seller."
Understanding the consequences of choosing option 1 or option 2 for each of the appraisal and financing contingencies in terms of an overall home-buying strategy is crucial for buyers.
Mr. Simon says, "If you are a buyer who has lots of money, you might want to consider waiving the contingency because you could get a better price for the home. Sometimes overprotecting yourself is not necessary."
Mr. Simon says that there was no place in the previous contract to waive an appraisal contingency but that during the 2003 to 2005 market, people were willing to waive this contingency by writing an addendum to the contract.
During that rapidly accelerating market, buyers believed that even if the home appraised for less than their offer, they could quickly recoup the additional money spent because of the anticipated increase in home value.
"Now there is a check box on the contract for waiving the appraisal contingency, which makes it clear to buyers that if the price of the home is greater than the appraised value they will be in default if they cannot come up with the difference in money," Mr. Simon says.
Lenders will not approve a mortgage that exceeds the value of a house.
"If a buyer is relying on financing to pay for their purchase of the property, they need a good appraisal to get into the house," Mr. Simon says. "In a flat market, buyers may not be willing to make up the difference in cash since they are less certain that the home will quickly increase in value."
In addition to the important appraisal and contingency waivers, some smaller items have also been addressed in the new contract.
"Now we have what I call the 'plasma TV clause,' which discusses whether the plasma TV is a fixture or not," Mr. Simon says. "Earlier, no one would have considered the necessity of a television contingency, but now it is clear that a plasma TV does not convey unless otherwise specified."
Mr. Simon says the list of conveyances has now been simplified by listing items alphabetically rather than by room, since so many larger homes now have more than one refrigerator. The list makes it simpler to convey more than one of any item.
Mr. DeBragga reminds consumers that they should always check the bottom of each page of the contract to make sure it has a 2006 copyright, since some Realtors occasionally forget to use the new regional sales contract.
Sample copies of the regional sales contract and the Maryland Association of Realtors' contract are available online (www.universalsettlements.net) as part of the home buyer's guide.