The Residential Real Estate Contracts in Florida
Whenever a residential property is sold for value, some sort of real estate contract, outlining the rights and duties of each party, will be drafted and signed. In the past, every attorney and every real estate broker had some type of preferred contract to be employed in residential transactions. Fortunately, things have changed and It is now common practice in Florida to use one of the two standard residential contracts jointly developed by the Florida Bar and the Florida Realtors. The first and oldest of these contracts is the “regular”* Residential Contract for Sale and Purchase. The second and more recent contract is the “AS IS” Residential Contract for Sale and Purchase. The most important difference between the two contracts is the way they handle the property inspections and repairs, and permits related to improvements made to the property. The “AS IS” contract is the overwhelming choice of real estate professionals in Florida these days, and most likely, the one that will be used in your residential transactions. Nevertheless, we will discuss both contracts to illustrate their differences.
Conditions of the property and the “regular”* Residential Contract for Sale and Purchase
The “regular”* Residential Contract for Sale and Purchase establishes the extent of responsibility of the seller of the property for the repairs that may be required by a general inspection and by a wood destroying organism inspection. The contract outlines the items that may be inspected and the repairs that may be allowed. In other words, not all the conditions or repairs that may result from the inspections may be required to be repaired by the seller. For example, the ceiling, roof, walls, doors, windows and foundation must be free of leaks, water damage or structural damage. Numerous other items need only be in “working condition”, that is, operating in the manner in which the item was designed to operate. Cosmetic conditions are normally not required to be repaired. In addition, the contract calls for the inspection for detection of wood destroying organisms, such as termites and wood-decaying fungus, among others. The contract allows for limits in the responsibility of seller for repairs, the default being 1.5 percent of the purchase price for general repairs, and 1.5 percent for wood destroying organism repairs. If the cost of repairs exceed the agreed limits, then the contract provides for remedies, including termination of the contract.
In addition, the “regular”* Residential Contract for Sale and Purchase outlines a procedure to determine if there are any open or expired permits and allows for a monetary limit to seller’s responsibility, usually 1.5 percent of the purchase price for closing any open or expired permits, as well as for obtaining required permits for improvements made without permit.
The above inspections and reports must be made and presented to seller within a certain time period, (default being 15 days after the Effective Date of the contract) or the right to inspections and repairs will be waived.
Conditions of the property and the “AS IS” Residential Contract for Sale and Purchase
The “AS IS” Residential Contract for Sale and Purchase provides for an Inspection Period (default being 15 days after the Effective Date of the contract) in which the buyer may perform such inspections of the property as the buyer may desire and to withdraw from the contract by giving written notice of termination to seller within said period. If buyer fails to make the inspections or fails to terminate the contract within the Inspection Period, then the Buyer must accept the property in its physical condition, including any governmental and building violations.
As we indicated above, the “AS IS” Residential Contract is so prevalent these days, that the use of this contract has practically become the norm in Florida.
Some basic terms and concepts common to both contracts
Effective Date. The effective date of the contract is the date in which the last one of the buyer and seller has signed or initialed and delivered the offer or final counter-offer. Normally, the buyer will prepare the contract with his terms, which is the offer, and deliver it to the seller, who may accept it, at which point we would have an accepted contract; or the seller may change some terms, which would constitute a counter-offer. All changes to the contract are initialed to signify their acceptance by each of the parties.
Closing Date. The closing is defined in the contract as the time when all funds required for closing are received and all the required documents are delivered. The contract will normally specify a date when this exchange of funds and documents is scheduled to take place.
Deposit. The deposit, or earnest money, consists of funds that the buyer advances to guarantee buyer’s performance of the contract. There may be an initial deposit and subsequent additional deposits. These funds are not given to the seller, but instead, they are held in trust, or escrow, until the time of closing. The amounts advanced as deposits are part of the purchase price and will reduce the final balance due to close the transaction. If the buyer defaults under the terms of the contract the deposit may be forfeited.
Possession. It is customary to deliver possession of the property at the time that the funds are delivered to the seller, or funding, unless the property is rented. Under certain circumstances, the parties may have agreed that the seller might remain in possession for a specific period of time after closing.
Financing Contingency. In many occasions the buyer does not have all the funds required to purchase the property and financing is required. In this case, it is important to indicate in the contract the amount or percentage of the purchase price that is being financed. It is also important that the financing contingency paragraph of the contract be filled out completely, including the period within which the loan is to be approved, or Loan Approval Period. The buyer must be diligent and use good faith to obtain the loan approval within the Loan Approval Period (30 days unless a different time period is specified), or the buyer may be in default under the contract. If the buyer is not able to obtain loan approval within the Loan Approval Period, the buyer may terminate the contract by delivering notice of termination to the seller prior to the expiration of the loan approval period. Failure to do so may result in the contract being considered an all cash transaction, without financing contingency. Many buyers are approved within 30 days, but others may require more time, depending on their circumstances. In these cases, if a period longer than 30 days was not initially specified, an extension should be negotiated before the end of the Loan Approval Period.
Closing Costs. Although all closing costs may be subject to negotiation, unless a change is actually made at the time the parties enter into the contract, the costs of each party will be those pre-established in the contract, the most important of which are:
Seller’s costs: Documentary stamps and surtax, if applicable; real estate commissions, real estate taxes up to the date of closing.
Buyer’s costs: Taxes and recording fees on note and mortgage; mortgagee title insurance; survey; inspections.
Either party: Costs such as owner’s title insurance; special assessments; title search and lien search may be paid by either party depending on the selections made in the contract.
The owner’s title insurance policy is customarily paid by the buyer in Miami-Dade and Broward counties and by the seller in all other counties.
We must emphasize again that all closing costs may be negotiated at the time of entering into the contract, although most frequently they are not.
FIRPTA Retention. The Foreign Investment in Real Property Tax Act (FIRPTA) requires that in the event the seller is a foreign person, the buyer withhold up to 15 percent of the amount realized by the seller and remit the same to the Internal Revenue Service.
Default. If the buyer fails to perform any of its obligations under the contract, the seller may be entitled to all deposits as damages. If the Seller fails to perform its obligations under the contract, the buyer may be entitled to damages or to seek the specific performance of the contract by the Seller.
Disputes. All disputes between buyer and seller will be submitted to mediation, and if not resolved through mediation, then the dispute must be tried in the courts. The prevailing party will be entitled to reasonable attorney’s fees and expenses.
*NOTE: We have added the word “regular” to the Residential Contract for Sale and Purchase to make it easier to distinguish from the “AS IS” Residential Contract for Sale and Purchase.