PURCHASING A HOME? WHAT A BUYER SHOULD KNOW BEFORE SIGNING ON THE DOTTED LINE
You just found your dream home. The perfect location, near all the best schools, close to work, and at least 42 feet above flood stage. Now it's time to negotiate the largest purchase of your life -- your first home. The sellers have accepted your offer and it is time to sign the purchase agreement. What is this document? Which realtor represents me? What happens if something goes wrong with the house after I sign the purchase agreement or after the purchase? These are just a few examples of the many questions people have prior to purchasing a first home. This article examines the purchase agreement, the role of the realtors, and what a purchaser can do if she has problems with a house after the purchase.
What is a purchase agreement? In order for a contract for the sale and purchase of a home to be legally binding, it must be in writing. A purchase agreement, sometimes called an earnest money agreement or an escrow agreement, is the written contract in which the buyer and seller set forth their understanding of the terms of the sale. A purchase agreement can take many forms and include a wide variety of terms and conditions. However, it must contain the names of both the buyer and seller, an adequate description of the property, the purchase price and the signatures of both the seller and the buyer in order to be enforceable. Perhaps the most common purchase agreement used locally is the Fargo/Moorhead Area Association of Realtors Purchase Agreement. Most realtors in the Fargo/Moorhead area will insist on using this form. The FMAAR Purchase Agreement is a "fill in the blank" form addressing a number of standard terms, such as the parties, legal description, the purchase price, taxes and agency disclosure. It also has a number of additional addendums addressing many more issues, such as arbitration, financing, new construction, and contingent sales.
The purchase agreement also typically sets forth the items of personal property to be included with the sale such as plants, trees and shrubs, dishwashers and other appliances. A number of items of personal property are not included in the FMAAR form. These items include fireplace equipment (fireplace screens, doors and heat circulating inserts are included), draperies and curtains, work benches, security systems, and shelving.
The purchase agreement should also contain the financial terms of the purchase. Typically a buyer will deposit an amount of money, in trust, with the listing broker to be returned to the buyer if the purchase agreement is not accepted by the seller. Usually the earnest money is part payment for the purchase of the property. A buyer should consider specifying an interest bearing trust account and specifying application of the interest to the purchase price.
The purchase agreement also should set forth the manner in which the buyer plans to finance the property. Typically, the purchase agreement is made contingent upon the buyer obtaining financing. In both North Dakota and Minnesota, the buyer has an obligation to use good faith efforts to obtain the financing. However, a buyer has no obligation to make multiple applications for financing.
For existing homes, the purchase agreement should also disclose any problems or defects the owner of the home knows to exist at the time the property is listed for sale. This may include problems such as a leaky roof, water in the basement, problems with the furnace or any other defect the owner has personal knowledge of. These disclosures are typically set forth on a separate document, called a disclosure statement. Even though this document sets forth the condition of the real estate, the law is unclear as to whether or not a disclosure statement contains representations or warranties upon which a buyer may rely. The FMAAR purchase agreement contains a warranty that appliances, heating, air conditioning, wiring and plumbing systems will be in "working order" as of the date of closing. However this warranty does not ensure that the above items will continue to remain in good working order after purchase. If the condition of the appliances or other aspects of the house is a concern, a buyer should consider purchasing a "home warranty". A number of companies offer home warranties to buyers at the time of closing. A realtor or lender can give a buyer more information about the cost and scope of the various home warranties available.
Which realtor represents me? Even though a realtor may have shown you a number of homes, that realtor may not necessarily be representing you when it comes to filling out and executing the purchase agreement. Typically a real estate agent must disclose whom she represents prior to execution of the purchase agreement.
If a realtor represents both the seller and the buyer of the property involved in the transaction, this creates a "dual agency." This means that the realtor owes a fiduciary duty to both the seller and the buyer. Since a seller and a buyer may have conflicting interests, a "dual agency" realtor is prohibited from being an advocate for either party. In both North Dakota and Minnesota, a realtor cannot act as a dual agent in a transaction without the consent of both the seller and the buyer.
What happens if something goes wrong? In a perfect world, every possible contingency will be addressed in the purchase agreement and the purchase of your new home will be problem free. However, in real life things sometimes go wrong. For instance, after buying your new home you may discover the "brand new" roof leaks, the house gets water in the basement every spring, or the furnace does not work. Additionally, you could discover problems with the house after you execute the purchase agreement but before you close on the purchase of the house. In these instances, a buyer has only a limited number of options available to remedy the situation.
If a buyer discovers a problem after signing the purchase agreement but before closing, a buyer may decide to not go through with the purchase. Depending on the circumstances, a buyer may or may not be justified in not purchasing the house. If a buyer decides not to purchase the house, the seller may refuse to give the earnest money back, or could possibly bring a lawsuit to force the buyer to purchase the house, or to pay the seller for any damages or costs the seller may have incurred as a result of the buyer's failure to purchase the house. Since the consequences of a buyer wrongfully breaching a purchase agreement can be severe, a buyer should always consult an attorney prior to breaching a purchase agreement.
If a buyer discovers a previously undisclosed defect in the house (which may have been known by the seller) after she has paid the money to the seller, the buyer's remedies are even more limited. Since the seller has already received the money, a buyer's only real remedy is an action to recover her money or to set aside the purchase of the house. Because a buyer's legal options after purchase are limited, it is vitally important that as many foreseeable issues as possible are addressed in the purchase agreement.
Purchasing a new home is a significant step for most people. A buyer must be careful to make sure she understands the terms and conditions contained in the purchase agreement. She also must make sure that the conditions which are important to her (such as draperies, curtains, shelving, etc.) are included in the purchase agreement. Understanding your rights and obligations as a buyer, will increase the likelihood of making you a happy home owner.
Michelle Donarski is an attorney with the Anderson & Bottrell law firm, State Bank Center, 3100 13th Avenue Southwest, Suite 302, Fargo, North Dakota, (701) 235-3300.