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Ten Common Mistakes in Real Estate Contracts

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  1. No late fee clause, or too little/too late. A late fee should be large enough to encourage prompt payment and provide a penalty for tardiness. The recommended the late fee is 10% of the payment amount, applied after either seven or ten days.

  2. No title insurance. Doing a "homemade closings" in order to save the title insurance and title company closing fee can really come back to haunt you, and the risks are too great.

  3. No third-party escrow servicing company. Using an escrow company is well worth the small cost. In New Mexico, a deed must be delivered during the lifetimes of the grantor and grantee in order to be valid. By placing deeds in escrow, this requirement is satisfied. Using an escrow company alleviates the problem of finding the buyer after completing the payments. Also, the accounting and IRS reporting services provided by an escrow company are benefical for each party. If a seller ever wants to cash in the contract, it makes that process much smoother if an escrow company has been involved.

  4. Not using standard forms. Why re-invent the wheel? In New Mexico, there is much case law regarding issues addressed in common forms of real estate contracts. If you use an unusual form, the risks are increased that a judge may interpret a clause other than how it was intended.

  5. Using something other than a 30 day curative period. In order to terminate a real estate contract, one must first issue a Notice of Default/Demand to Cure letter, which includes a curative period. Anything less than 30 days could backfire ("shock the conscience of the court") and any more than 30 days is an unnecessary delay.

  6. No credit report on the buyer and a small down payment. The Seller is providing financing for the Buyer and therefore has every right to know of their credit worthiness. This is more important on improved property than on vacant land, and more critical when the down payment is small.

  7. Hazard insurance is not included in the monthly payment. Most Buyers really prefer to pay a portion of the insurance along with the monthly principal/interest payments, so they don't have to come up with a large sum when renewal time rolls around. And the coverage is much more likely to lapse if its left up to the Buyer to pay the large renewal premium in one lump sum than if they're paying a portion each month.

  8. Failure to require adequate hazard insurance on the insurable improvements. This sounds like such a no-brainer, yet it is not unusual to see blanks on the forms which were never filled in or the amount is too small.

  9. Failure to record the real estate contract with the County Clerk's office in the county in which the property is located. This seems to happen much more frequently with home-made contracts, for obvious reasons, but it can occur even when using a title company to close. This can cause all kinds of legal problems.

  10. Improper "wraps". If there is a prior, un-paid loan or contract or other encumbrance on the property left in place and "wrapped" by the new contract, make sure:

    1. This is not a violation of the prior encumbrance subjecting it to acceleration, and
    2. The terms of the new contract are adequate to retire the prior encumbrance.

  11. Failure to reference a mobile home in the real estate contract if one was included in the transaction, and/or failure to escrow the proper title documents for the mobile home.

  12. Failure to protect the seller. A checkbox is provided on standard forms which gives the seller the right to approve or disapprove of a resale. This is commonly referred to as the "due on sale" clause. If this choice is not taken, the buyer is free to resell later to anyone even if, for example, they have an IRS lien which can seriously complicate your life. You need and deserve the control provided by this clause.

Oops! We were only going to list the ten most common mistakes in writing real estate contracts. Here we are up to 12, and we're was just getting warmed up. Hopefully it has now become obvious to use professionals, give them complete information, carefully review the documents before signing and, if there are still questions, don't hesitate to ask for advice.

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