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Be Aware That the Standard Realtor Contract Favors the Agent, not You

 For the most part, the "standard GAR contract", Georgia Association of Realtors contract, is a very good contract that tries to get a buyer and seller together with terms that are fair to both. The standard contract is used in probably 99% of the transactions that are done in Georgia.

Agents usually know the language well.  They usually take classes every year to understand all of the nuances and changes that take place. If you decide to use some different contract that you might have picked up at a real estate investment seminar, be aware that you'll start off on the wrong foot and make the seller and listing agent nervous. They'll wonderwhy you don't want to use the standard contract. To play it safe, they'll want to have a real estate attorney review it which is going to cost them money.

Right off the bat you will be making negotiations more difficult for fear of the unknown. So I would advise using the standard contract but you need to be aware of what you are signing.

Since the standard contract is written by Realtors, it's no surprise that it's going to be slightly advantageous to real estate agents. The one clause that I think is most important for a buyer to understand is Section C. 2. Default clause. In the clause for the Rights of Buyer or Seller, it says that:

"The non-defaulting party may pursue any lawful remedy against the defaulting party."

This just means that the buyer or seller can take the other one to court if a default occurs. The buyer should be aware that the seller doesn't have to accept the earnest money as damages. They can refuse the earnest money and try to get more damages by going to court i.e. "any lawful remedy".

Inthe clause for Rights of Broker it doesn't say that the broker needs to pursue any lawful remedy. Instead,the remedy is part of the written contract. The contract itself calls for thedefaulting party to pay the Brokers the full commission.

"In the event a party defaults under this Agreement, the defaulting party shall pay as liquidated damages to every broker involved in this transaction...an amount equal to the share of the commission the broker would have received had the transaction closed."

Let's consider a real life example. A young couplegets under contract for a $500,000 home with a closing date 45 days in the future. They havea 14 day due diligence period and a 28 day finance contingency. They put up $5000 in earnest money. All pretty standard.

After 30 days, everything is looking good. All the inspections are done and their loan is approved. But out of the blue, life happens.

What if the husband or wife gets a job transfer to another city? What if one of them loses their job? What if one of them dies? Since they are past all of the contingency periods, if they don't continue through with the purchase of the home, they will be in default of the contract.

They will not only forfeit the $5000 earnest money to the seller, but they will have to pay the full listing agent commission. A 6% commission on a $500,000 home would be $30,000.

That amount makes it worthwhile for the agents to pursue in court. Since it's clearly written in the contract,the judge is going to rule in favor of the agent. The buyer doesn't have a chance of avoiding the commission payment.

I understand losing the earnest money to the seller. That compensates them for having their home tied up and off the market during that contract time. They also might have lost deposits on wherever they were moving to.

Although the listing agent might have spent time negotiating and getting the parties together, they will probably be able to get it right back on the market and get it under contract with another buyer and earn another commission.

One can try to protect themselves in a variety of ways but none areperfect.

1. One can make the finance contingency run right up until the closing date. There are two problems with this approach. First, the seller will be hesitant to extend a contingency for so long. Second, this only protects the buyer if the event that causes the default also causes them to not qualify for the loan. If the buyer gets transferred, they still might be qualified to buy the home and therefore the finance contingency wouldn't help them.

2. One can make the due diligence period run right up until the closing date. Unless the closing date is less than 21 days away, this has almost zero chance of being accepted. No seller is going to agree to a 45 due diligence period that gives the buyer the right to walk away for any reason without penalty.

3.  One can try to get the seller to agreed to a special stipulation that removes the "Right's of Broker" clause from the contract. That's the most straight forward, upfront way to handle it. The negative side effect will be the red flag that might go up in the seller and listing agent's minds. They'll be wondering why a buyer is thinking about default ramifications? Is the buyer really committed? Is there something the buyer isn't telling them? Hopefully this can be overcome by explaining the reasoning in an email cover letter that is submitted with the offer. The buyer and buyer's agent need to be presented as competent, experienced parties who understand and respect the contract that they are submitting.

4. One can do nothing. The probabilities might be very low of such an event that causes default and the buyer might be in a position to be able to handle the financial consequences in the unlikely event that it does occur.

There's no right or wrong answer. I think that it's important for buyers to be aware of the possibilities. Unfortunately, I think most buyers are under the impression that only their earnest money is at risk. When you sign the contract you are agreeing to the terms, whether you understand them or not. You can't say that your agent never explained everything to you. Especially since the contract that you are signing says:

"If any party has any questions about his or her rights and obligations under any GAR form he or she should consult an attorney."

Contracts are a big deal. Understand the terms and conditions and treat them with respect.

Tim Maitski
Atlanta Communities
www.HomeAtlanta.com
404-216-0472

 

 

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All information about homes from the Atlanta MLS home search engine is input by thousands of individual real estate agents throughout Atlanta and is made available through a service called ListingBook. We provide access to this data for the convenience of our clients.  We have no control over this database.  All information on this web site is copyrighted and intellectual property of HomeAtlanta.com. It is deemed to be current and accurate, but is not warranted. 2002. Tim is a licensed Realtor with Atlanta Communities Real Estate Brokerage.

Tim Maitski is a member of the Atlanta Board of Realtors

 

01/07/2016