Worthless Real Estate Agreements

The real estate closing table — that place where broken deals lie scattered like carcasses in a vulture’s den. Many a deal has fallen apart at the closing table. Many a buyer has had to ante up more money than expected and many a seller has walked away with less.

I’m sure we’ve all heard tales of horror stories at the closing table, but how does it happen and what can you do to protect yourself?

The first thing to remember and this is key — The Contract Is Boss. They can tell you whatever they want. They can make all kinds of promises and assurances. They can argue until the cows come home but if it’s not in your written contract, that critical document that the buyer and seller sign when the deal is first struck, and if it’s not in a written and signed by all parties addendum to the written contract, then it’s just a worthless agreement.

Let me say this again because I can’t say it loud enough: Whatever agreement you have with your real estate buyer or seller, if that agreement is not spelled out clearly in the written and signed real estate contract, then you have no recourse to make the other party honor the agreement. An agreement that’s not in writing is absolutely worthless. Go into a courtroom or tune into Judge Judy or Judge Brown on TV and see how often the phrase, “But he said…. but she told me…. but he promised….” comes up. Watch the judge’s reaction. While the judge may sympathize, unless you can offer solid proof to validate your claim, there’s not much the judge can do for you.

Let me give you an example. I’ll take you back to my very first real estate closing. I was your average first-time home buyer. I knew nothing about buying real estate — not one thing. I was as green as they come. We had a real estate contract between me and the seller, and we had a lender and a realtor overseeing the sale.

One day the realtor called me up and said, “We’ve got a small problem. The lender needs a real estate appraisal and the seller is supposed to take care of it, but they don’t have the money right now. If we don’t get a property appraisal, we can’t close. If you could put up the money for the appraisal you’ll get the money back at closing. I promise.” It sounded like a valid issue so I agreed to front the money for the real estate appraisal.

The realtor came to my house and I wrote him a check for the appraisal but before I would hand over the check, I wanted his signature on a document I had prepared. The document stated that the appraisal money would be returned to me at closing or, if a closing didn’t happen, it would be returned to me when the deal fell through. The realtor and I both signed and dated it. The phrase I used was, “Under any and all circumstances.”

It wasn’t that I didn’t trust the realtor. I believed that he believed his promise, but I have this knack of seeing the worst case scenario in any given situation, and I just wanted to make sure that I got my money back no matter what happened.

Closing day came and I studied the settlement statement. The sellers were not intending to reimburse me for the real estate appraisal I’d paid for. My stubborn face took over and I whipped out the signed agreement between me and the realtor promising that I’d get the money back under any and all circumstances.

The closing attorney did everything in his power to convince me that I was supposed to pay for the appraisal and that the realtor never should have promised that I’d get the money back. All I knew was that the realtor had made a promise and signed it. After a lot of huffing and puffing and threatening to walk out without buying the house, I got my money back. The realtor had to give it to me out of his commission.

Apparently the contract had stated that I was supposed to pay for the appraisal but the realtor had told me otherwise, and instead of reading the contract at the time I signed it, I had simply trusted what the realtor had told me.

Since then I’ve thoroughly read every document before signing it and all of my closings have gone smoothly — or rather, they went smoothly until I worked with a realtor again. I had become very familiar with real estate contracts and most of my deals did not involve realtors. They were directly between me and the buyer or seller so I used my own contract which was clear, concise and offered no hidden surprises for either party.

It wasn’t until I bought a house where a realtor was involved that another sticky closing occurred. The next realtor-related closing I partook of did not go well. If you poked a stick into a hornet’s nest you’d be attacked by a swarm of furious hornets. That sums up the seller’s frame of mind at the end of the closing. Me? I wasn’t furious — I was just disgusted.

The strange part of it was that we both got what we expected to get. I paid what I expected to pay, and the seller received what he expected to receive. So what went wrong?

The real estate contract that appeared at the closing table went wrong. We had all agreed on what we wanted, but the realtor’s contract did not accurately reflect our agreement. The realtor was bound and determined that I sign, at the closing table, a new version of the contract that I hadn’t seen before that included changes from the original contract we had signed. One of those changes involved property taxes.

I had agreed to pay the current year’s property taxes, but no taxes prior to that. No back taxes. Our original agreement said the property taxes would be prorated. The new agreement, the one that appeared at the closing table, said they would NOT be prorated — period. That meant I’d be liable for any and all taxes including back taxes from previous years.

It was explained to me that the seller — a real estate investor who was flipping the house to me — could not have purchased the property if back taxes were owed. That is simply not true. You can purchase a property and take on the debt of back taxes. It’s done all the time, especially where real estate investors are involved. Not all exchanges of property follow the traditional path.

A document was produced that was supposed to prove to me that the taxes were paid through the previous year. I know that documents can be forged and I simply wasn’t willing to take a risk. Everyone kept saying, “There are no back taxes owed so it doesn’t matter what the contract says. It’s a moot point.”

“It doesn’t matter what the contract says.” If someone tries to lay this line on you, you better watch your back, folks. Remember: The Contract Is Boss. What the contract says is the ONLY thing that matters.

The vision loomed large before me of a closing day where I’d be selling the house at which I’d discover thousands of dollars in unpaid taxes. In my vision I’d go back to the closing attorney of purchase and ask, “What gives? I’m not supposed to owe all this…” and the closing attorney would pull out the contract of purchase which said, “Real estate property taxes shall not be prorated.” If the property taxes were not prorated it meant that the seller would not be crediting me for the portion of the taxes owed before our closing date. In other words I’d be liable for all taxes owed, period. No exceptions.

Much to the anger of everyone involved I refused to sign a new real estate contract until it clearly stated that I agreed to be liable for the current year’s taxes only, but not any taxes prior to the current year.

The moral of the story is: Read and understand every document that you sign. Make sure that every aspect of your verbal agreement is spelled out clearly in the written real estate contract. Remember: If the agreement isn’t in writing — it’s a worthless agreement. The Contract Is Boss. — Article copyright 1997 under the name The Contract is King.

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