Private property sales make up a substantial amount of real estate transactions every year. While the vast majority of transactions happen with the help of agents on both sides, about 10% of sales happen through for-sale-by-owner (FSBO) transactions. When you conduct business without a realtor, you have to work much harder to ensure that everything is above board, legally enforceable, and fair.
Small mistakes in contracts or negotiations can lead to the entire deal coming apart and being reversed. Contracts are tricky, and without careful drafting and review, you could end up with legally enforceable terms that are contrary to what you actually intended.
Many people who choose to conduct private sale transactions still employ the help of a real estate attorney. This ensures that the contracts that form the foundation of your deal are valid.
Contingencies in a Private Sale Contract
There are many boilerplate contracts out there, but it’s important to realize that those rarely address the unique needs of a specific transaction. You must ensure that any contract you rely on has the contingencies and clauses necessary for your transaction, especially in real estate deals where there are hundreds of thousands of dollars at stake. Contingencies commonly included in FSBO contracts include:
- Financing: Financing contingencies are incredibly common, as they make the deal dependent on the buyer securing appropriate financing. This gives them a shot of getting their earnest money back if their financing falls through for some reason. This might seem like a one-sided contingency, but you can also protect yourself by considering which buyers you decide to work with. If you only spend time working with buyers who have gone through the preapproval process, you know that there’s a better chance of their financing coming through.
- Home sale: Some contracts make the deal reliant upon the buyer successfully selling their own home. However, that is becoming less and less common in today’s competitive real estate market. Sellers can’t afford to wait around on a buyer’s sale, especially when that sale is dependent on another sale and so on. A growing number of sellers are leaving out home sale clauses.
- Inspection: Many commercial and residential buyers will not agree to a deal unless the property passes an inspection. This contingency allows the buyer to back out without penalty if the property does not pass.
- Appraisal: Lenders will not finance a home if it’s not worth the loan amount. Appraisal contingencies give buyers an out if the home appraises for less than the purchase price.
Navigating legal concerns is complicated, and it’s helpful to keep these considerations in mind as you draft a contract:
- Local laws and regulations: Contracts must be compliant with local regulations. A contract that runs afoul of Maryland law is not legally enforceable and may be dismissed entirely. However, your contracts must also comply with all relevant federal statutes and regulations.
- Capacity and consent: The parties involved in a transaction must have the legal capacity to enter into a contract. For example, a transaction that involves an elderly dementia patient selling their home to a caretaker for $10,000 is likely not valid, as the patient may not be considered capable of consenting to such an agreement. When a contract intentionally takes advantage of someone without legal capacity, it is not a valid contract.
- Disclosures and representations: A contract must include all necessary disclosures. For example, any known defects of the house must be disclosed, lest the buyer discover the issues down the road and sue the seller. All representations made by the seller should be accurate if they do not want to be accused of fraud.
- Enforceability of clauses within the contract: This is perhaps one of the most important parts of drafting a contract. You must ensure that the clauses and contingencies you include are legally permitted. Furthermore, you may want to include a clause in the contract that keeps the rest of the contract intact even if one clause is found to be unenforceable.
How to Negotiate Fair Terms
Negotiating fair terms for a private sale contract requires an in-depth understanding of contract and real estate law. A contract must balance the interests of both parties; if it grossly favors one over the other, the court may not uphold it. You can keep a contract fair by addressing points of contention immediately. This allows you to either work through the problems or decide that the contentious point is a dealbreaker. Many buyers and sellers find it helpful to include dispute resolution mechanisms within their contracts to plan for any future issues that may arise.
There are dozens of factors to think about when drafting a contract for a private sale. Even if you choose to buy or sell without a realtor, consulting a real estate attorney in Maryland can help you iron out the legal side of your transaction.