21 contract terms every agent should be able to explain with ease

A cheat sheet for those who aren’t fluent in “Realtor speak”

Whether you’re a rookie agent, a rising team leader or an established veteran broker, we can all benefit from sharpening our skills. Follow our “Back to Basics” series to learn fundamental strategies, tactics, philosophies and more from real estate pros across the industry.

Nicole Solari is a top-producing broker-owner in Northern California whose regular bimonthly column, which covers real estate marketing, selling strategies and working with clients, publishes on Tuesdays. 

As we go about our business, we sometimes forget that clients might not be familiar with common terms agents throw around without thinking (aka Realtor speak).

We think any Realtor worth their salt should be able to explain every word of a purchase agreement (aka contact). However, some terms are more crucial to setting the stage for a smooth transaction than others. Here are the 21 terms we consider most crucial for agents to explain to buyers and sellers without benefit of crib notes.

1. Agency

This is the first disclosure that pops up in the offer package in California. Agency and dual agency are explained in detail, but sellers and buyers alike think the person they’re looking at is their agent. The state considers their broker their legal representative. Once they get that, they understand dual agency a good deal better.

2. Closing escrow

Sellers seem to be more confused about this term than buyers, maybe because buyers are facing a due date to fork over a large amount of cash. However, both buyers and sellers often think they have to actually do something on the date escrow closes.

You have to explain that everything — including the signing of any loan and transfer documents — has to be done  a couple of days before the scheduled date a sale is recorded. So, if they’re planning a big trip around that time, they need to tell you now! Otherwise, you too could be trying to arrange a signing at the American Embassy in Mexico during Easter week!

3. Contingencies

These come in three varieties:

Inspection contingency: The contract provides a default number of days to complete inspections and request repairs or compensation for major flaws uncovered by inspectors. If we have clients in a competitive bidding, we often shorten inspection periods to 10 days. If we’re getting well inspections or a geologic survey, we ask for more time because those inspections are never fast.

Loan and appraisal contingency: As listing agents, we provide supporting materials for the prices of properties and a list of all unseen improvements. If we believe there’s any chance a property won’t appraise for the offer price, we prepare our sellers ahead of time. They don’t have to come up with a response until that actually happens. But the more they know ahead of time, the less freaked out sellers and buyers get when something like a low appraisal occurs.

Contingency for sale of another property: Many sellers sat on the sidelines until prices for their property recovered from the housing downturn. So we’re seeing more contingent sales since that recovery took place. A contingent sale almost always requires a separate form that spells out seller and buyer responsibilities during the period one sale remains contingent on another sale.

4. Contractual timeline

The contract specifies deadlines for inspection and other contingency to be released, appraisals to finished, loan approvals granted and so forth. Our transaction coordinators extract this timeline and provide it to all involved parties. Having an electronic copy and a hard copy helps clients who bother to keep their timeline visible.

For seller and buyer peace of mind, we also send “here’s what to expect this week” notices to our clients.

5. Counter offer

Clients understands the concept of an offer; they’re less clear on counter offers. When we’re dealing with sellers who receive an offer that’s not quite up to their expectations, we let them know that any counter offer they make, by definition, is a rejection of the offer in hand. If they counter it, their buyer could find a property they like better, get cold feet or simply decide to walk away from a seller who refuses their original offer.

Buyers, by contrast, need to be aware that a counter offer leaves the seller in a position to accept other offers if they do not respond favorably to the counter fairly immediately.

6. Cancellation of contract

While all parties have ways to walk away from a deal, the most frequent cause of cancellations is buyers getting inspection reports that reveal major flaws the seller is unwilling to address. However, during the inspection contingency, buyers can back out without fear of losing any part of their deposit (provided all inspectors are paid).

Sellers have less flexibility to back out of a sale. But it can certainly happen if their buyer fails to meet deadlines on the contractual timeline. You’d be amazed how often we have to hound buyers to make their earnest money deposits!

7. Disclosures

Disclosures come in two categories:

Standard disclosures: Preprinted forms that address general, local and statewide conditions, and known local hazards (like earthquakes, fire danger, the presence of radon, etc.).

Property specific disclosures: In California, that’s the Transfer Disclosure Statement (TDS) and Seller Property Questionnaire (SPQ). If sellers wonder whether they should disclose a specific condition, we generally answer “yes.”

The exception is the disclosure requirement for a death on the property in California. If it occurred more than three years ago, such passings do not have to be disclosed.

8. Earnest money deposit (EMD)

The EMD is commonly a percentage of the sales price held in escrow until buyers complete or cancel a purchase. In California, the liquidated damages clause in the purchase agreement protects deposits up to 3 percent of the purchase price provided buyers back out before all contingencies are released.

Disputes arise over monies held in escrow when buyers back out after releasing all contingencies. It’s essential that buyers clearly understand up front what the penalty can be for backing out of a deal at the last minute. It never ends well.

9. Exclusions and inclusions

These are items the contract doesn’t compel the seller to leave at the property. Appliances and other items included or excluded from the sale may be written into the listing agreement and/or purchase agreement.

The important thing is to label included and excluded items clearly to avoid post-sale disputes over something like a towel bar or mirror.

10. Escrow holder, title officer and escrow attorney

California buyers’ and sellers’ transactions are handled through title companies. Escrow attorneys handle transactions in other states. In any case, it’s important that sellers and buyers understand that there are intermediaries who ensure that the exchange of funds and recording of a new deed are performed in a neutral and timely manner.

In California, Realtors might recommend a specific escrow company and officer, but the choice is entirely the buyer’s. Your state might be different.

11. Legal name(s)

Over the course of many deals, we’ve learned that it’s prudent to request the clients’ legal names very early for use on all documents. If names and spelling aren’t checked up front, they can hold up a deal at the worst possible moment.

12. Mediation/arbitration

California buyers and sellers are compelled by law to submit any disputes to mediation. It is buyer’s or seller’s choice whether to select arbitration as the default next step should mediation fail. Most sellers let buyers decide whether to pre-select this step.

13. Mortgage/mortgage lender

Your buyers might select a lender and receive a pre-qualification letter from that lender before you ever connect with them. If not, getting them pre-qualified is the first step in the buying process. We might provide an introduction to a lender to get that all-important pre-qualification letter done. And we also ask those lenders to attest that the buyer has funds sufficient to close in their pre-qualification letter as this information is a requirement of the contract.

14. Notice to perform

This is the remedy when one of the parties to the contract fails to meet a contractual deadline.

15. Pricing properties

Contrary to critics who accuse Realtors of driving up prices, sellers set the offering price of their property, and buyers offer the price they’re willing to pay. Supply and demand work in every market. So, if everyone is realistic, those numbers will be close together. If one party or the other is unrealistic, there will not be the all-important “meeting of the minds” that must occur to strike a deal.

16. Prelim

The preliminary title report provides an early warning of any trouble spots in the chain of title. Agents — along with escrow holders — should go through the prelim carefully to ensure no title issues exist.

Finding an unpaid lien or other “cloud” on the title at closing is an ugly surprise. Avoid it!

17. Property taxes and other pro-rated items

Your escrow officer will explain pro-rated items in detail when they draw up closing documents for review. But there’s so much information to process and so many foreign concepts to become aware of that clients can easily be overwhelmed. You can head off some of that overwhelm by discussing these things up front.

18. Title policy and closing costs

As early in the process as possible, ask the lender and escrow holder to give your clients a general idea of how much closing costs will amount to. For buyers who take out a mortgage, loan fees add significantly to their closing costs. So they need to be aware of that early on.

19. Title

Defer to the escrow officer and do not try to “help” your clients decide how to hold title. The only thing you ought to do to “help” is determine early on if they’re purchasing the property on behalf of a trust. If so, they need to talk with the escrow officer about which trust documents will be required from them.

20. Walkthrough

The final walkthrough is a crucial step to ensure that any repairs promised by the seller have been made and that the property is essentially in the same condition (with the exception of those repairs) it was when buyers made their offer.

This is not the time to try to extract additional concessions. You can note, on the Verification of Condition form, if promised repairs remain unfinished. But advise your client not to hold up closing if work is in progress but not yet complete. If they refuse to close until repairs are complete, they should be prepared for an extended stay in a hotel room accommodating themselves, their kids, his mother-in-law and their dog.

21. Warranty

Regardless of how glowing inspections are, something always goes wrong with an appliance or system in the first year after a purchase. Having a warranty to cover such unforeseeable events benefits buyers and sellers — and their agents — alike.

In addition to their obvious benefits, home warranties can immunize sellers from accusations that they “must have known” about some defect the new buyer faces soon after close. The old adage “forewarned is forearmed” has never been more relevant than when a property is sold.

Just as home warranties are an ideal way to deter drama, getting clients familiar with all these terms as their deal progresses is the best way to avoid seller or buyer meltdowns.

And who doesn’t want that?

Nicole Solari is owner and managing broker of The Solari Group in Solano and Napa Counties in Northern California. Nicole runs one of the highest producing brokerages in all of Northern California.

Share This