10 Legal Mistakes to Avoid When Selling your House

For Sale by Owner

Thousands of people nationwide sell their house every week without using a real estate agent. Unfortunately, many of these people make costly mistakes by not having a professional help them through this process. Kirk Halpin, Managing Partner of the Law Offices of Kirk Halpin & Associates, is not only a real estate broker, but also a real estate attorney that brings more than 14 years experience in helping his clients sell their home without using a realtor.

The following is a list of the top 10 legal mistakes that people frequently make when selling their house when they don't have professional assistance:

1. Using a Template Contract Purchased Online
2. Not Provided Required Disclosures to Buyer
3. Not Providing a Complete Resale Package to the Buyer
4. Agreeing to Finance a Portion of the Purchase Price without Separate Documentation
5. Agreeing to an Earnest Money Deposit that is Too Low
6. Not Screening the Prospective Buyer Before Signing the Contract
7. Hiding or Not Disclosing Latent Defects
8. Not Having a Contingency Plan if You aren't Able to Find a New Home
9. Not Reviewing the HUD-1 Settlement Statement Prior to Closing
10. Not Involving a Real Estate Attorney to Protect Your Interests

1. Using a Template Contract Purchased Online

The State of Maryland has provisions which are legally required to be included in a contract of sale to sell your home. Further, most counties throughout Maryland also have additional provisions which are typically provided in addenda. Finally, some cities and other municipalities in Maryland also have some additional provisions that are required. Not all template contracts purchased through the internet are a mistake to use, however many of them don't have all of these required provisions or addenda. The failure to include these provisions or addenda can make your contract voidable at the buyer's option.

2. Not Provided Required Disclosures to Buyer

The State of Maryland has a required Residential Property Disclosure and Disclaimer Statement which must be provided to a buyer either on or before the date the Contract of Sale is signed. To the extent that the Residential Property Disclosure and Disclaimer Statement is not provided, then the buyer may rescind the contract of sale under certain circumstances. As this Residential Property Disclosure and Disclaimer Statement is occasionally updated, you should check with the State of Maryland to ensure that you have and are using the most up-to-date version.

3. Not Providing a Complete Resale Package to the Buyer

To the extent that your home is part of a homeowner's association or a condominium association, then you are legally required to provide copies of the articles of incorporation, the declaration, all recorded covenants and restrictions, the bylaws, and any other rules of the development. Further, you are required to provide various disclosures such as the current monthly fees or assessments; the total amount of fees, assessments and other charges during the prior fiscal year; the name, address and phone number of the management agent or other authorized representative; among other disclosures. Again, failure to provide copies of these documents and all necessary disclosures provides the buyer with another opportunity to terminate the contract and receive a full refund of the earnest money deposit.

4. Agreeing to Finance a Portion of the Purchase Price without Separate Documentation

In this real estate market, buyers frequently need additional assistance and sometimes ask the seller to defer receipt of a portion of the purchase price through use of "take-back financing". To properly memorialize this arrangement and protect the seller, you should ensure that the buyer signs a separate promissory note at settlement and the title company agrees to record a subordinate mortgage on the property. Without a promissory note and subordinate mortgage, the seller may be left with no legal recourse against the buyer for failure to make required payments.

5. Agreeing to an Earnest Money Deposit that is Too Low

While there is no bright line rule with regard to the proper amount of the earnest money deposit that should be posted by the buyer, it should represent a sufficient amount of money to help motivate the buyer to proceed to closing. To the extent that the buyer does not proceed to settlement for any reason or no reason, the earnest money deposit typically serves as the maximum amount of money that the seller will receive for the buyer's default under the contract. Some say that the earnest money deposit should range from a minimum of 3% to 5%. A buyer typically would not be willing to walk away from a $15,000 deposit on a $300,000 townhome. Further, if the buyer is unable to come up with the 3% to 5% deposit, then this may not be the ideal buyer (see item #6 below).

6. Not Screening the Prospective Buyer Before Signing the Contract

If a buyer has a 30-day finance period and a 45-day home inspection contingency and then 60 days to close, and the buyer is not qualified at the outset to purchase your home, then you may spend 3 to 4 months wasting your time. To the extent that the buyer has difficulty coming up with 3% to 5% for an earnest money deposit, then you should ask the buyer how they intend to come up with the down payment. You should ask for a copy of the buyer's pre-approval letter and not accept just a pre-qualification letter. A pre-qualification letter is basically an opinion by a lender that states that they believe it is "likely" that your buyer will be able to qualify for a loan. As a pre-qualification letter is provided on the basis of unverified information it is subject to many contingencies. However, a pre-approval letter is issued after a much more rigorous process once all of the information from the buyer is verified.

7. Hiding or Not Disclosing Latent Defects

You are required to disclose all latent defects to the buyer including any actual knowledge that the seller has related to (a) water and sewer systems; (b) insulation; (c) structural systems; (d) plumbing, electrical, heating & air conditioning systems; (e) infestation of wood-destroying insects; (f) land use matters; (g) hazardous or regulated materials; (h) any other material defect of which the seller has actual knowledge; (i) whether the smoke detectors will provide an alarm in the event of a power outage; and (j) if the property relies on the combustion of fossil fuel for heat, ventilation, hot water or clothes dryer operation, whether a carbon monoxide alarm is installed on the property. A "latent defect" means material defects in real property or an improvement to real property that: (1) a buyer would not reasonably be expected to ascertain or observe by a careful visual inspection of the real property; and (2) would pose a direct threat to the health or safety of the purchaser or an occupant of the real property including a tenant.

8. Not Having a Contingency Plan if You aren't Able to Find a New Home

As a seller, what are your plans with regard to finding a new home? Do you need to include a provision allowing you to remain in your house after the sale for a short period of time? Or do you need to include a contingency providing that the contract to sell your current house is not valid until and unless you find a new house? A new client recently sold their home without any contingencies and ended up putting all of his furniture in storage and moving his family into a hotel because the seller of their new house changed their mind at the last minute. It turned out that the buyer didn't need to be in the house for several weeks and ended up moving back in under a license arrangement through the buyer.

9. Not Reviewing the HUD-1 Settlement Statement Prior to Closing

After the contract of sale is signed, the buyer will engage a title company to perform a title search on your property and will determine what liens and judgments are outstanding. You should gather your last mortgage statements prior to closing and determine how much you believe you owe. At least 2 days prior to closing, you should contact the title company and request to see a draft of the HUD-1 settlement statement to see what fees, costs and charges are being deducted from the purchase price. The title company will pro-rate real estate taxes, your HOA/condo fee, and any other items that you may have paid in advance. You should double check the math and the adjustments to ensure they are correct.

10. Not Involving a Real Estate Attorney to Protect Your Interests

The Law Offices of Kirk Halpin & Associates, P.A. regularly assists clients in selling their house without the need for a real estate agent or real estate broker through fixed-price packages. Contact us today by calling Kirk Halpin at (410) 531-1700 or by emailing him at [email protected] or learn more by visiting our website at www.halpinlawfirm.com.