Selling a home, while not fraught with the same financial risks as buying a home, carries significant financial and legal implications as well as the emotional consequences of parting ways with your house. If you have made the decision to sell your home, there are six legal issues to bear in mind as you approach the selling process.
1. Key Provisions of the Contract of Sale
Any contract of sale can have varying terms and may be drafted by either the buyer or the seller (or their respective agents or attorneys). The contract can include many provisions, but could reasonably be expected to include many or all of the following items*:
- The date of the contract
- The purchase price of the home
- The amount of the down payment
- The date when the deed will be transferred (or the closing date)
- A legal description of the property
- A provision stating that the seller will provide a good title to the home
- Any restriction or limitations that could affect the title
- A provision for a walk-through inspection within a specified period before the date of closing
- All fixtures to be included in the sale (i.e. appliances, wall-to-wall carpeting, etc.)
- A discussion of any items seemingly attached to the property that the parties wish to be excluded from the sale
- A mortgage contingency clause (if the buyer intends to apply for a loan)
- An inspection rider
- An attorney-approval rider for both the buyer and the seller if either or both parties are signing the contract before it is reviewed by their respective attorneys
- A provision for who is responsible for maintaining insurance until the closing
- A provision for paying utility bills, property taxes and similar expenses through the closing date
- A provision for return of the buyer's earnest money deposit if the sale is not completed
- The terms of any escrow agreement
- A provision for taking possession
- Signatures of the parties
*The above list is not intended to be exhaustive, and particular circumstances and conditions (and state law) may warrant the inclusion of additional terms (or the exclusion of one or more of the above terms).
2. Disclosure Obligations
The disclosure obligations that attend the sale of your home will depend on state law. In certain states, as a seller, you may be required to fill out a lengthy form stating explicitly whether you have knowledge of various potential material defects in your home. Certain states require that the seller identify known defects, ranging from unsafe concentrations of radon gas to roof leaks. Other states’ forms question the condition of various parts of the home. In other states, completion of disclosure forms is not required, but sellers are required to disclose known defects in certain equipment, such as the home’s furnace, hot-water heater or the central air conditioning unit. Many states, however, do not require disclosure. In these states, any problems identified by the new owner after occupying the home are the homeowner’s concern. Under such circumstances, it is the buyer’s responsibility to ask specific questions about defects, and the seller has no affirmative obligation to volunteer knowledge of any defects.
As a seller, however, you may want to consider disclosing known material defects that affect the home’s value, even if not mandated under applicable state law. Many lawsuits that arise in connection with home sale transactions involve the seller’s alleged failure to disclose defects. If you err or the side of over-disclosure, even concerning an issue that may not rise to the level of a defect, you can avoid having that same issue discovered as an unwelcome surprise through an inspection after receiving and then accepting a purchase offer.
3. Financing Contingency
The contract of sale frequently includes a financing contingency. This clause can protect a seller’s vital interests. If a prospective buyer cannot advance the entirety of their offer as a cash purchase, they will need to obtain mortgage financing to cover the remaining balance of the offer. The buyer has until the date specified in the financing contingency to terminate the contract or request an extension, which must be agreed to in writing by the seller.
If the buyer does not obtain mortgage financing by the deadline and provide affirmative proof of the same, and you have another qualified buyer waiting in the wings, you may cancel the first buyer/prospect’s offer without penalty. For added security, you can make the buyer’s offer contingent on their supplying a pre-approval letter within 72 hours of your acceptance of the buyer’s offer, which will ensure that your prospective buyer can obtain financing.
4. Inspection of the Home
The contract of sale will typically include an inspection contingency, providing that the buyer retains the right to renege on the transaction in the event that the home inspection should reveal serious defects with your property. Two types of inspection rider are typically used.
The first gives the buyer the right to an inspection by an inspector that is selected and paid for by the buyer. If the inspector identifies defects, the buyer obtains a time-limited right to cancel the contract of sale. If you strongly disagree with an inspection obtained by a buyer, you may want to obtain your own written inspection, copies of which can be provided to prospective buyers.
The second type is less draconian in its implications. As opposed to giving the buyer a right to cancel the sale, the second common inspection rider will give the seller time to repair defects uncovered by the inspector or, alternatively, to pay for the cost of making the repairs. Between these two types of inspection riders, the latter often gives rise to much more back-and-forth interaction between the buyer and seller. Thus, while more draconian in its nature, giving the buyer the right of cancellation can be simpler and more efficient, leading to a quicker closing process on the home (or a quicker parting of the ways between the parties).
5. Fair Housing Act
The Fair Housing Act of 1968 prohibits housing discrimination. It mandates that home sellers may not refuse to sell their property on the basis of race, religion, gender, color or national origin. In certain jurisdictions, local ordinances or laws also prohibit discrimination in the sale of housing based on sexual orientation.
A homeowner can face serious financial penalties if found in violation of the Fair Housing Act. The potential buyer can sue for actual monetary damages as well as attorney fees and punitive damages. However, a homeowner may lawfully decline to accept a particular prospective buyer’s offer on economic grounds; sellers may, in general, refuse the bid of a buyer with a poor credit rating or on the grounds of an inability to obtain a loan.
6. Sale-of-Home Contingency
Some contracts of sale, when drafted by the buyer, contain a contingency that the purchase be made contingent on the buyer selling his or her current home. If a potential buyer is also thus trying to sell his or her current home contemporaneously with closing on your home, you can request the inclusion of a clause in the contract of sale that allows you to continue to market your property and to accept secondary offers. In certain jurisdictions, if a seller accepts a secondary offer, the common practice is for the seller to give the initial buyer notice of the secondary offer; the buyer would then receive a period of time to decide whether to waive the sale-of-home contingency.
The above information is neither legal advice nor a guide for selling a home nor a substitute for reference to applicable state law, and instead provides general information.