April 13, 2011
By HunterMaclean Attorneys, published on April 13, 2011, in Business in Savannah.
Each year the Georgia Association of Realtors (GAR) modifies, updates and revises the forms used for residential real estate transactions in an effort to provide protection for both buyers and sellers from current real estate market concerns. Major changes to these residential forms are now in effect and include amendments to the purchase and sales agreement, unilateral notice to terminate, seller’s property disclosure statement, exclusive buyer brokerage agreement and mutual settlement agreement.
To provide some background, GAR recommends for residential real estate transactions the use of a uniform and standard purchase and sale agreement. Using a standardized uniform purchase and sale agreement should help insure that residential real estate agents, buyers and sellers have standardized and consistent expectations with regards to basic contract terms and enforceability and clearly understand the agreement. The overall purpose of the new modifications is to simplify the process of buying and selling a piece of residential property.
Included in the 2011 GAR changes is a new procedure for the disbursement of earnest money when a party terminates the uniform and standard residential purchase and sale agreement. The earnest money holder (usually the real estate broker) must offer to disburse the earnest money to the seller by check if: (i) it has been determined that the seller terminated the agreement due to the buyer’s default, and, (ii) the earnest money holder has sent the required 15 day notice to the buyer and seller that the earnest money will be disbursed to the seller. Once the seller accepts and deposits the check, the seller waives any right to sue or to settle with the buyer for additional damages.
However, if the seller refuses to accept the earnest money, the agreement provides that the earnest money holder shall give the buyer and seller 15 days notice of the proposed return of the earnest money to the buyer. In that instance, the buyer can receive and retain the earnest money even if he or she is in default; however, the seller retains the ability to sue or settle with buyer for damages for buyer’s default.
Another major change occurred in the default provision of the GAR uniform and standard purchase and sale agreement. In response to court rulings in 2010, the new default terms say that whichever party defaults under the purchase and sale agreement is liable for payment of the brokerage commission that otherwise would have been paid to the real estate brokers had the transaction closed. However, if the broker has a written agreement stipulating as to the payment of compensation, then the terms of that agreement will supersede the terms of the purchase agreement.
Some of the new GAR changes to residential real estate forms provide better protection for sellers. The answers on the new Seller Disclosure Statement that accompanies a purchase and sale agreement are now limited to the best of the seller’s knowledge. The idea behind this change is to allow seller’s some leeway if they inadvertently answer something incorrectly and the buyer later suffers damages because of seller’s incorrect answer. Buyers should be careful and not rely solely on the seller’s disclosures – Georgia is a “Buyer Beware” state, thus all buyers need to perform their own due diligence.
A similar modification appears in the lead-based paint portion of the purchase and sale agreement. The GAR uniform and standard residential purchase and sale agreement now provides that the lead-based paint statement is limited “to the best of the seller’s knowledge.” To clarify, if any portion of the residential building was built prior to 1978, it is possible that lead-based paints or products were used in the construction, creating a health hazard, particularly for children. Under this new section, the seller can assert that he or she did not have actual knowledge of any lead-based paint used on the property. In addition, a disclaimer has been created to note that any repair work in which lead-based paint is disturbed should be done in accordance with the EPA Renovate Right brochure and other related materials and requirements.
In regards to financing, GAR has combined the appraisal contingency exhibit, financing contingency exhibit and the source of buyer’s funds exhibit into a conventional financing exhibit. The FHA loan and VA loan exhibits have been similarly combined as well.
The new conventional financing exhibit creates additional deadlines and duties for the buyer. First, the buyer has a “mortgage loan application period” in which to apply for a loan and give the seller a “good faith estimate” or letter from the lender showing the date when the buyer completed the loan application. Second, the buyer has a “financing contingency period” to determine if the buyer has the ability to obtain the loan. If the buyer does not provide the evidence within the requisite time periods, the seller may terminate the agreement following proper default notice to the buyer. This gives sellers the ability to terminate a purchase and sale agreement when a buyer is unable to obtain financing.
The buyer also retains some leverage regarding the appraised value of the property. If the property appraises for less than the purchase price, the buyer can ask the seller, within a designated time limit, to reduce the sale price to the appraised value. If the seller declines to reduce the sale price the buyer has the right to terminate the purchase and sale agreement.
In addition, a new short sale contingency exhibit has been developed. A short sale is a process where a bank or mortgage lender agrees to discount a loan balance because of financial hardship on the part of a seller. This typically arises in a situation where the fair market value of the property is less than the balance owed by the seller on the property’s loan.
The new exhibit makes the purchase and sale agreement contingent upon the seller’s lenders /lien holders accepting a reduced pay off amount such that the seller will not have to pay any additional sums at closing to its lenders, and will be released from any claim, cause of action or suit for any deficiency or other monetary amount. This puts the buyer at risk as it provides the seller with a means to back out on as short as one day’s notice. The short sale contingency is only for arm’s length transactions in order to prevent mortgage fraud.
