A successful closing is dependent on the buyer and seller reaching an agreement as to the terms of the sale. We all know that the parties need to agree as to the subject property, sales price, closing date, and likely a whole list of other details to the transaction.
Of course, the best way for both parties to remember what they agreed to is to memorialize the terms into a written document, whether that is a document called a sales contract, purchase and sale agreement or simply a document titled “agreement.”
In the overwhelming majority of states, a real estate sales contract is binding once it is fully-executed by the parties and contains the required elements. But in just a couple of states, it is possible for a party to have their attorney review a contract after it has been executed, and then to request changes without fear of penalty. Such as, for example, loss of the earnest money deposit.
Again, there is no required format or template that must be used to memorialize an agreement. The type and format of what is a typical or customary agreement varies by jurisdiction. For example, in some states, a sales contract approved by the local realtor association is the predominate form. That is the case in Georgia, where I live, though parties are free to use another document, even if not drafted by an attorney or real estate agent.
But in New Jersey, the preparation of contracts has been considered to be the practice of law. The New Jersey State Bar Association filed suit seeking to stop non-attorneys (such as real estate agents) from preparing contracts on the basis that doing so was the unauthorized practice of law. Ultimately a settlement was reached and approved by the New Jersey Supreme Court to allow for an attorney-review period. Such a contract clause allows for an agent to prepare the sales contract, and then each of the buyer and seller to be allotted three (3) business days after contract execution to seek legal advice. The downside is that either party can come back to the other and request changes to terms that the other party believed to be final, but the upside is that the people most directly involved in a purchase and sale can come to a written agreement without the need of waiting to first speak with an attorney. If either party’s attorney disapproves of a portion of the sales contract, then notice is to be provided to the other party with an opportunity to re-negotiate. If neither party disapproves within the three-business day period, then the agreement becomes binding.
In Illinois, another state in which our firm represents REO sellers, the attorney review period lasts five (5) business days, and customarily is built-into the local contract version. Here, typically the buyer’s attorney sends the seller’s attorney a letter identifying 1) provisions they would like to see in all contracts but for whatever reason are not a part of the local standard contract; 2) changes or requests specific to the subject contract; and 3) questions or requests about the property that technically are not relevant to the contract. There are exchanges back and forth, with the ultimate goal of renegotiating parts of the contract. Ultimately, if there isn’t a re-agreement, then either party can terminate the contract without penalty.
For our REO clients, such a post-contract review period is the exception and not universally known. Here are some key items to take into account when processing contracts these states:
- The contract is not binding once it is signed. The contract is binding once the review period passes if neither party has raised objections to or disapproved any provision of the contract, or once the parties renegotiate and come to a “new” agreement;
- An REO buyer’s earnest money is not at risk until the attorney review period has concluded; and
- The contract timelines and deadlines depend on the date the contract is approved. The time clock doesn’t start ticking once the REO seller signs, but rather once the buyer’s attorney approves the contract or such approval has been waived due to time.