In today’s post, Patrick Lineberry of Forrest Firm, a full service law firm right here in the Triad, is discussing Real Estate contracts with us.
In the age of the internet, there is lots of information at your fingertips, but when it comes to your real estate transactions, relying on what you can find for yourself on the internet may be a costly mistake.
The question comes up from time to time: “Don’t you have a form contract I can use?” When I get asked for a “form” or a “simple” contract, what the person asking really wants to know is if I, as an attorney, need to be that involved in the drafting of the contract.
I get it! An attorney-drafted contract is costly, and many of my clients are held accountable for every penny they spend. For many transactions, the use of a form approved by the North Carolina Bar Association for a purchase of commercial real estate can be a good place to start, but using self-serve contracts downloaded from the Internet can be a costly mistake!
There is a relatively new group of online vendors who provide form real estate contracts for free or for a (comparatively) minimal fee. The cost of these services is enticing. A low-cost document can provide a level of comfort to get you through the transaction, but it’s worthless if it doesn’t have teeth to keep the parties on track to close. Often you don’t know you need a contract until something goes south! I have been involved in disputes involving these kinds of contracts, and I have yet to see one that protected the party who ordered it. When push comes to shove, self-serve form contracts have a tendency to drastically underperform.
Anyone can access the forms from online vendors, and all anyone needs to do to generate a contract is plug in the parties’ info, purchase price, address of the real property, and a couple other details. This ease of access gives the impression that the forms can work for anyone, that they are a one-size-fits-all solution to a potentially complicated transaction. This can be a horrible assumption. First, the forms themselves tend to be woefully incomplete. Online vendors market their forms throughout the United States, and the forms do not adequately account for state-specific laws for different types of real estate assets or for variations in local customs for real estate transactions. Moreover, commercial real estate transactions are going to be more complicated than the “simple” forms you will find from online vendors. CRE transactions require answers to more than who the parties are, what the price of the property is, and what property is being conveyed. Answers to questions involving all the other aspects of a transaction can only be comfortably determined after consulting with a licensed commercial broker and an attorney.
The cost of a lost opportunity or unmet expectation from the use of an ill-suited form contract will usually be far, far greater than paying the extra money on the front end to have a properly drafted real estate contract.
Some try to save money by pulling a form contract from the Internet to fill out and then ask an attorney review it. Because publicly available self-serve form contracts are so poorly drafted, the reality is that it costs as much, if not more, for an attorney to review and modify one of these than it does to draft one from scratch.
North Carolina Bar Association Real Estate Forms
But not all form contracts are created equal. The North Carolina Bar Association (a non-profit organization, not to be confused with the State licensing agency, the North Carolina State Bar) and the North Carolina Association of REALTORS® publish and update form contracts for residential and commercial real estate transactions. NCBA-NCAR forms are drafted by real estate professionals to address many legal and customary issues that are particular to transactions in North Carolina. They can be prepared by licensed real estate brokers and real estate attorneys.
But even the NCBA-NCAR forms are only the starting point for many real estate transactions. These forms have set provisions dealing with earnest money, permitted title exceptions, contingencies, party representations, and other bedrock issues that do not match many parties’ preferences. The NCBA-NCAR forms are aware of this! If the purchase and sale contract does not adequately address the negotiated terms of the deal, an addendum amending the form, with additional or modified terms, may be incorporated into the contract as an attached exhibit.
Real estate professionals are in the best position to determine whether the use of the NCBA-NCAR form is appropriate for their clients, and whether an addendum should be drafted to amend or supplement the contract. Only a North Carolina licensed attorney, however, may draft an addendum. In my experience, the NCBA-NCAR forms are a good place to start for deals that are roughly less than $750,000, do not involve development or substantial repairs to existing structures, and do not involve the purchase of business assets or ongoing concerns. These forms are also going to be a decent place to start the discussion for clients who have not developed a standardized set of transaction preferences.
Keep in mind, the only way to know that the NCBA-NCAR forms with an addendum will be a good fit for you is to consult a North Carolina licensed real estate broker and an attorney. You don’t want to end up paying an attorney to draft an addendum that essentially rewrites the NCBA-NCAR form you are trying just to modify.
It’s not uncommon that I suggest an investor use an appropriate NCBA-NCAR form, usually supplemented by an attorney-drafted addendum. However, larger deals, contracts for developers, and seasoned clients usually require individualized purchase and sale contracts. By nature, the terms of these deals are going to be more particular. A client who is in the business of purchasing commercial real estate will be able to work with an attorney to develop a template contract that will be particular to that client’s preferences and a good fit for his or her deals. While there is not a one-size-fits-all contract for every client and every transaction out there, there can be a one-size-fits-all contract for a particular client’s dealings. The cost of drafting a template contract can be heavy on the front end, but usually the front-end cost pays for itself after three or four transactions. Furthermore, with the front-end cost of a well drafted contract, you can rest easy, knowing that the transaction will be done on your terms with no surprises. In my experience, there is no substitute for a well drafted attorney contract! And a contract does not have to be long to be well drafted, it just needs to fully cover all of the bases for a client in a particular transaction. Some of the best drafted contracts I have seen are also some of the shortest.
The only time you should feel comfortable looking for a self-serve “form” contract is if you trust that your deal will go through- money will change hands, and you will end up with the property you want. But for such a high degree of confidence, you might as well not have a contract. If you do not have a close, prior relationship with the party on the other side of your transaction, you need to talk to a North Carolina licensed broker and attorney to determine what kind of contract provisions will best protect your interests. After all, there is no such thing as a one-size-fits all real estate contract!
Need help putting together a contract for your next real estate transaction? We would love to help!