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Overview of Real Estate Contracts
A contract to buy real estate in Florida is usually a standard ‘Contract for Purchase and Sale of Real Estate’ produced by the Florida Association of Realtors and by the Florida Bar Association. You should be wary if a seller doesn’t use the standard contract which can be tailored to your individual requirements and will be explained in detail by your buyer’s agent prior to making the offer to purchase a home. Note if your planning to purchase a new home or an off plan home then the contract used is typically from the builder/seller. The contract sets forth the legal description of the property, the purchase price and the terms of the payment. It also includes the time limit within which it must be accepted by the seller and the terms of financing. The contract also provides that the seller proves he owns title to the property and sets forth a closing date (see Closing Fact Sheet). It also includes any restrictions on the use of the house and any special clauses affecting the purchase. Note that verbal agreements aren’t enforceable by US law.
In Florida, a freehold title is usually called a ‘fee simple’. When a married couple purchases a property together, they own it as joint tenants (‘joint tenancy by the entities’) and upon the death of either partner, ownership automatically transfers to the other partner (‘called right of survivorship’) without the need for probate although there may be tax consequences. You should investigate the consequences of US income, gift and inheritance tax before buying a home in Florida, whether under joint ownership or any method. Note that if joint ownership is held other than as a husband and wife, it becomes a ‘tenancy in common’ and can have complicated legal ramifications.
Deposits
Usually a buyer pays an initial ‘good faith’ or binder deposit, e.g. $1,000 to $5,000 in the form of ‘earnest’ money, to show that means business.
Making an Offer
You should never make a sloppy offer in the expectation that it will be rejected, as if it’s accepted many important details may be unresolved or in an ambiguous state. Always make an offer with the expectation that it will be accepted, as when it is you can be legally bound by the terms and details of your offer. All offers should be made in writing and must be signed by all prospective buyers, e.g. a husband and wife. If the owner rejects it, he may make a counter-offer by changing some of the terms of the contract. Any changes made to the printed contract form must be initialed by all parties and changes instigated by a buyer must be obviously be made before the form is sent to the seller. This can on for several rounds until all parties agree or one of them rejects an offer. In some cases it’s better to deal directly with a seller and hammer out a deal face to face. Note that if you really want a particular property you must be prepared to haggle. All amendments and clauses to the contract must be agreed before it’s signed. Once signed, the contract is binding upon all parties and the seller is prohibited from selling the property to a third party while the contract is in force.
Inheritance & Capital Gaines Tax
Before registering the title deed for a Florida property, you should carefully consider the tax and inheritance consequences of the person(s) in whose name the deed will be registered. Property can be registered in one name; both names of a couple; joint buyers names; the name or names of children, giving a surviving parent sole use during his or her lifetime; or in the name of a US or foreign company. Whatever you decide, it should be done at the time of purchase, as it can be difficult or expensive to change later and may be even impossible. Consult a lawyer who’s experienced in US inheritance law (and gift, estate and capital gains taxes) before signing a contract.
Company Ownership
If you’re a non-resident, owning a Florida property through a foreign company may have significant tax advantages. For example, a sale can be affected simply by transferring the company shares, thus avoiding documentary stamps and recording fees, US Gift and Estate Taxes, US Capital Gains Tax and the 10% withholding. However, gift or inheritance tax may apply in the owner’s country of residence. Note that a mortgage or title insurance maybe more difficult to obtain for a property owned by an offshore company. If a property owned by a foreign company is let and you choose to pay taxes on a ‘net basis’, then rental income is subject to US Federal Corporation Income Tax (although it’s levied at a low rate and is deductible against Federal Tax). A foreign company may also be liable to taxation in another country. Buying and owning a Florida property through a foreign company requires expert advice and administration and is generally advisable only for very expensive properties and for individuals whose situation permits them to take maximum advantage of the tax benefits. It involves extra costs, both in setting up the company and in administration and running costs, although the tax advantages can be significant.
Basic Contract Details
The following basic details are contained in all real estate contracts
- Names of Parties: A contract (Contract for Purchase and Sale of Real Estate) contains the names of all parties to the contract, i.e. the buyers and sellers. The full names of all the sellers in whose name the title is held and all the buyers (e.g. a husband & wife) must be listed and each person named must sign the contract.
- Property Description: The identity of the property, which is its legal description not its address (which may also included). Properties in subdivided area (such as municipalities) are described by their lot and block number, the name of the subdivision; and the plat book and page number where there’s a graphic description of the property (a plat is a printed survey of an area that has been subdivided by a developer). A property may also described by meters and bounds, which are surveyor’s directions used to mark the boundaries of a property.
- Purchase Price: The total purchase price must be listed with a breakdown of where the money will come from, for example the deposit (NB. All monies used to purchase property in the US must have a paper trail. Funds taken from the Royal Mail Post Office paper less account will be rejected), owner financing, and the value of personal property or other real property that’s part of the agreement. Assumed mortgages or owner financing must be supported by official documentation.
- Extras & Options: Everything that’s included in a home purchase must be listed in the contract. This may include both standard items and any extras you have paid for, and applies equally to new or resale properties. Personal property which is to be included in a sale may include appliances, furniture, furnishings, pool equipment, garden ornaments, and even shrubs & trees. If you’re in doubt whether an item is an integral part of the property or personal property it’s advisable to list it as personal property. Fixtures which are part of the property should also be listed if there’s any doubt whether the seller may remove them. When you’re buying a new property, all standard features and options (and their specific quality or brand names) should be listed in a contract or added as an addendum, whether they are provided ‘free’ or at an additional cost.
- Closing Date: The closing or settlement date must be specified, which is the date when the final documents will be signed, contracts exchanged and the balance of the purchase price is paid. The date must allow sufficient time for both parties to perform anything required under the contract and for the buyer to obtain a mortgage (if necessary).
Standard Contract Clauses
Contracts usually include the following standard clauses, some of which may not be applicable. Standard clauses describe the obligations of both the seller and buyer with respect to such things as proof of title; surveying and termite inspection; expenses, fees and taxes; home inspection, maintenance and repair, risk of loss; requirements for escrow; and the closing procedure and place. If a clause involves the services of a third party, it should be stated in the contract who is to pay the fee. The actual content of each clause (and who pays any fees involved) is negotiable between parties.
- Acceptance: The time period, e.g. 24 to 48 hours, during which the seller must accept or reject an offer.
- Access: A contract may include an ingress and/or an egress clause; ingress means that you access to the property from a public road and egress to the public from the property. This could be a problem in rural areas when access to a property is via a third party’s land.
- Addendums & Riders: Some clauses are included in riders or addendums on order to keep the contract as short as possible. However, they must be referred to in the contract and be attached to it. Riders may refer to the withholding of 10% of the price by the buyer in lieu of capital gains tax when the seller is non-resident of Florida; condominium association rules; a list of items or options included in the sale; and permission to rebuild a property located in a coastal or other sensitive area after its destruction (e.g. by a hurricane).
- Assignability: Usually a buyer can assign his rights to a property to a third party, unless otherwise stated in the contract. For example, if you were unable to go through with the purchase after paying a hefty deposit, you could assign your rights to another buyer who would reimburse your deposit.
- Broker’s Commission: If a broker is involved there should be a clause recognizing his right to a commission, which is signed by the broker’s agent and the party who’s to pay the broker’s commission. Typically the seller or builder.
- Closing Documents: A list of documents required for closing, who’s to provide them and, most importantly, who’s to pay for their preparation. Usually the seller pays for documents he signs (such as the deed and bill of sale) and buyer for those he signs, e.g. loan documents.
- Closing Venue: Typically the Title Companies office or Lawyer’s office.
- Conveyance: The contract should state that the seller ‘convey the property by statutory warranty deed’, which means that the seller owns the property and has the right to sell it. A buyer must never accept a quit claim deed instead of a warranty deed, as this merely transfers the seller’s interest in the property, which could be zero.
- Deadline: A contract may include a ‘time is of the essence’ clause, which simply means the failure to meet a deadline stated in the contract is a default of the contract.
- Deposits: The escrow agent should verify in the contract the receipt of any monies deposited with him.
- Easements, Limitations & Restrictions: A contract should contain a clause stating that there are no easements (third party rights to us or access a property), limitations, or other restrictions that would prohibit the use of the property for whatever purposes you have in mind. These may include zoning, building or subdivision restrictions, payment of taxes, assumed or new mortgages, or defects. The contract should require the seller to correct any breaches prior to closing. A survey maybe necessary to determine whether a property is free of easements, limitations an restrictions.
- Inspections & Repairs: The seller must certify in writing that a property is in good condition and that all equipment is in working order (A Sellers Disclosure is presented to the potential buyer prior to making an offer). Special facilities or equipment (e.g. swimming pool) should be specially mentioned. It’s advisable to hire a home inspection company to establish the condition of a property before closing.
- Legal Fees: There’s usually a clause in the contract stating that in the event of a lawsuit over the contract, the winner of the lawsuit can recover his lawyer’s fees and legal costs from the loser.
- Liens: A property must be free and clear of any liens (debts) at closing and the seller should provide testimony to this effect.
- Loss: The contact should state that the seller bears the risk of loss should the property be damaged or destroyed prior to closing. You should check the state of the property immediately prior to closing to make sure it has not fallen into disrepair or damaged.
- Mortgages: When the buyer is taking out a mortgage to finance a purchase or assuming the seller’s mortgage, the purchase must be contingent upon the buyer obtaining financing.
- Occupancy: Usually a buyer will have sole occupancy of a property after closing. If another agreement is made, for example the seller or a tenant will be permitted to remain after closing or the buyer is permitted to move-in before the closing (which is not advisable as the contract can be cancelled for any number of reasons), this is must be included in the contract.
- Other Agreements: Contracts usually contain a clause stating that this agreement and not other is the legal document between the parties. This nullifies any subsequent claims regarding a previous verbal or written agreement.
- Payment & Closing: The contract provides that monies due to the seller (or buyer) be paid in cash or by certified cheque (check). Typically a certified check from the title company.
- Prorations: The annual expense on a property such as property taxes, interest on assumed mortgages and special assessments are usually divided between the buyer and seller on the day of sale takes place, termed prorating the expenses, or prorations. The daily (or ‘per diem’) rate is calculated and multiplied by the number of days assigned to each party. The amount due to the buyer as it’s the buyer’s responsibility to pay them, is credited to him and deducted from his closing costs.
- Special Assessment Liens: An special assessment liens on a property at the time of closing should be paid by the seller and this should be stated in the contract.
- Termite Inspection: You should have a termite inspection on a resale single family home in Florida, where it isn’t unusual to find termite damage. A termite inspection is often required by lenders. If any damage is discovered, the contract should state that the seller must pay an amount equal to percentage (typically 1.5%) of the purchase price to repair the damage. If this clause is rejected by the seller it should encourage the buyer to consider another property.
- Title: The seller must prove that he has clear and good title to the property from third party claims. He provides his ‘Abstract of Title’ as proof of ownership, which is the document outlining all deeds and other legal events affecting the property. This may be checked by a title company or lawyer who will issue ‘title insurance’ provided it’s ‘clear’, i.e. valid and free of any encumbrances. If you apply for mortgage your lender will require title insurance to protect his loan, although this doesn’t protect the buyer. It’s advisable (but not a legal requirement in Florida) for a buyer to have owner’s title insurance to protect himself against a claim on the title held by third party. Who pays for the owner’s title insurance is usually negotiable.
Contingency Contract Clauses
A contract usually contains a number of conditions, called contingencies or riders which must be met before it becomes valid and binding. Contingency clauses state that if certain conditions or events aren’t met the contract can be suspended or cancelled by one or both parties without penalty. Clauses may include deadlines in the contract if the failure to meet them permits cancellation without penalty (otherwise deadlines aren’t considered to be contingencies and may result in the loss of a deposit or legal redress). Contingency clauses are designed to permit either party to enter into a contract without being sure that he can do everything necessary to complete the sale (such as obtain a mortgage) or when certain facts won’t be known until later e.g. after a home inspection. Both parties can agree to contract to do anything that’s legal and contracts can be contingent on any number of events. The most common contingency clauses include the following:
- Appraisal: A lender will make an appraisal (valuation) of a property before agreeing to a loan. The contract must be contingent on the appraisal not being below the agreed purchase price. In certain cases a lender may insist on two appraisals to prevent fraud. An appraisal is typically ordered by the lender.
- Approval by Third Parties: If either party requires the approval from a third party (perhaps tied to financial assistance), the sale should be contingent on obtaining the approval. For example, a co-operative association may be able to veto a sale or exercise a first right of refusal and a buyer may want to obtain approval from a family member before going ahead.
- Financing: This clause is applicable when the buyer needs to obtain a mortgage or to assume a mortgage from the seller. The buyer must usually apply within 5 to 10 days an must be turned down by the lender for the contract to be cancelled, i.e. he cannot reject a mortgage offer if it meets the criteria stated in the contract.
- Home Inspection: When buying a resale home, it’s always advisable to make a contract contingent on a satisfactory home inspection (called a survey in some countries). The inspection can apply to a few items or the whole house. The buyer is responsible to pay for the inspection. The contract should state a percentage or a fixed amount for the necessary repairs.
- Sale or Buyer’s House: If you need to sell a home in order to complete a purchase, this must be included as a contingency clause in the contract. A seller may be wary of agreeing to this unless the makes some concessions (or the seller is desperate).
- Survey: In Florida, a survey simply indemnifies a property by reference to map and its legal description and doesn’t refer to an inspection of the buildings located on the land. It costs from $300 upwards and is usually paid by the buyer.
- Other contingencies: There are numerous other possible contingencies such as a seller needing to remove a tenant before closing, re-zoning for an extension, approval of repairs made by the seller and proof of certain rights. When buying a community property, you may wish to include a clause relating to restrictions and covenants such as those concerning renting, the keeping of pets or visitors. This protects you if you discover a restrictive covenant after signing the contract that would have deterred you from buying.
Disclaimer: For information purposes only. Contact us for up to date information
info@tampahomes-info.com
Special thanks to Survivor Books and Buy Association UK
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