A new version of the Residential Real Estate Purchase Contract was released by the Columbus REALTORS® and the Columbus Bar Association in October 2016. The new release features major contract changes that are the culmination of two years of work by your Standard Forms Committee and the Columbus Bar Association’s Real Property Committee. The most significant changes are summarized in this article.
Reordering and Renumbering of Paragraphs
The number of paragraphs has increased from fourteen to sixteen. Old paragraphs 1.2 through 1.5 are either eliminated or relocated. Additional Terms and Conditions is relocated to the front page as new Paragraph 1.1. The Attorney Approval Clause moves to the front page as new Paragraph 2. Old Paragraphs 1.2 and 1.3 (Pre-Approval Letter and Loan Commitment) are eliminated and replaced by the new financing provisions contained in new Paragraph 3. All other paragraphs are renumbered to reflect the addition of these new paragraphs.
Financing Provisions (New Paragraph 3)
The contract provisions dealing with transaction financing were substantially revised to reflect changes in the marketplace, and particularly changes in the behavior of both lenders and borrowers. Most lenders do not issue “pre-approval” letters that conform to the requirements of old paragraph 1.2. Loan “commitments” issued by most lenders contain contingencies that effectively allow the lender to back away from the commitment any time before closing. Most importantly, most buyers simply cannot perform if for any reason their lender fails to finance the transaction. Taking all of the foregoing into account, the Standard Forms Committee endeavored to create a contract structure for financing that balances the interests of buyers who must obtain final loan approval to be able to close, with sellers who want some level of assurance that the buyer is working in good faith to obtain loan approval.
In new Paragraphs 3.1 and 3.2, buyers are required to state whether they intend to purchase the premises with cash or on credit. Cash buyers are required to present evidence of funds reasonably satisfactory to the seller. Buyers purchasing on credit can terminate the contract if they fail to obtain financing provided they “. . . provide information and documentation, and otherwise comply with all reasonable requests made by the lender and title insurance agent during the mortgage loan application and approval process.” However, buyers still must provide the seller with certain information and documentation during the loan approval process, including a prequalification letter (new Paragraph 3.2(a)), notice of the identity of the lender (new Paragraph 3.2(b)(i)), and a copy of the loan commitment (new Paragraph 3.2(c), all within stated deadlines. New Paragraph 3.2(d) inserts an appraisal contingency in response to the very large number of such contingencies that have been drafted by REALTORS® and inserted into contracts over the last several years. It provides both a time frame for exercising the contingency and a period of time in which the parties may renegotiate the contract based on a low appraisal if they so desire.
New paragraph 3.3 (Demand for Financing Evidence) protects sellers in the event buyers fail to provide the above-referenced notices and documentation within the stated time frames. Sellers have the right to terminate the contract if such financing evidence is not provided following written demand therefore. This “second chance” provision protects buyers and REALTORS® who forget to provide such evidence in a timely manner. Should the financing evidence not be provided upon demand, sellers can terminate, but are barred from taking legal action and consent to the release of the earnest money to the buyer.
Earnest Money Deposit (New Paragraph 12)
The Standard Forms Committee reworked this paragraph in response to two significant trends in the marketplace. First, many agents are now using electronic signature programs to obtain client signatures on contracts. As a result, earnest money deposits are not being collected until the contract is already in effect. Second, many agents are inserting provisions into the contract delaying the earnest money deposit until the request to remedy period has passed.
New Paragraph 12.1 retains the requirement that an amount of money be inserted for the remainder of the paragraph to be operative. Paragraph 12.1(a) gives buyers the choice between making the deposit not later than 3 calendar days following contract acceptance or three calendar days following expiration of the Agreement to Remedy Period (see New Paragraph 6.4(a)). New Paragraph 12.1(b) states that “[w]ithin three calendar days of the receipt of the earnest money, the Buyer or Buyer’s Broker shall notify the Seller or Seller’s Broker in writing that Buyer has made the earnest money deposit (the “Deposit Notice”).” If the Deposit Notice is not timely received by the seller or seller’s broker, the seller can issue a “Deposit Notice Demand.” The buyer’s failure to provide the Deposit Notice after receipt of the Deposit Notice Demand entitles the seller to hold the buyer in breach of contract, terminate the contract and take any desired legal action based on the breach. Note that failure to collect the earnest money deposit in a timely manner is a breach of the contract that is cured only if the seller waives enforcement of the provision.
Deadlines and Consequences
The Standard Forms Committee is mindful that the new contract provisions substantially increase the number and variety of deadlines that must be adhered to by all parties. To assist REALTORS® with managing transactions under the new contract provisions, the committee has created several new supplemental forms, the most important of which is the Transaction Time Line. The Transaction Time Line summarizes all important transaction information and deadlines in a single document that buyer and seller agents can share with each other, title agents and any attorneys that may be involved in a transaction. All of the new supplemental forms can be obtained online below.
This article only provides a brief summary of the most important contract changes. REALTORS® should familiarize themselves with other changes that, though less consequential, are important to know and understand. There will be numerous opportunities to attend continuing education courses ranging from one to three hours that more fully explain the changes. A copy of the new contract form with my explanatory annotations is available at here. The annotated contract provides explanations and useful information for all of the most important contract provisions.
Watch video of class here.