As a licensed Realtor, mortgage lender, or Title Company escrow officer, you see various real estate contract language that has you cringing. It also has you wondering WHY someone would structure a deal a certain way. Sometimes there is a direct intent, sometimes not. There are many ways to create transactions through language, but others that create not only confusion and stress for the parties involved. The other potential major issue is other “ramifications” down the road for the Realtor and/or clients.
It goes like this—the Title Company gets an addendum to the purchase contract stating the buyer agent has negotiated money ($1000, $5000, $10,000 etc.) from the seller to be paid directly to a contractor (not the buyer) for repair work to be done on the home. Though real estate transactions are closed with this language there are right ways, and wrong (red flag) that have the Title Company (Fiduciary) making an ugly face. In this blog, I want to cover what this means for all parties and the correct way to close them. I also want to discuss how this can get the Realtor, his/her clients, and the contractor in hot water.
Why These are Headaches
As you can imagine, I’m creating this blog after having many stressful nights thinking about my client’s transactions and why they chose this route. I look at these deals as a way to get to the finish line, but instead of running directly to the end, the Realtor takes the most out of the way possible then kicks and screams to the end. As a neutral 3rd party to a transaction, yet the fiduciary, we play a role where we provide the “news” and offer solutions where needed. We also walk a thin line of telling a client how to run their business. Not easy…hence the stress.
When money is negotiated from a seller directly to a contractor for “work to be completed” there are hoops that now come into play.
- We need a W-9 form completed from the contractor and returned to the Title Company
- The contractor has to be licensed, bonded, and insured. A real person and company that exists
- A Lien Waiver has to be signed by the contractor as in the state of Virginia a contractor has 90 days after work is completed to file a lien against the home. The waiver protects the buyer as they want to own a home knowing they are protected from a lien being filed against it within 3 months of ownership. It protects the buyer agent as they are protecting their clients by having the waiver signed. And of course, it protects the Title Company. We aren’t going to issue clear Title on the home without it being signed.
- In most cases, mortgage lenders will NOT escrow the money as work is being completed. If the work is NOT completed before closing, we will need a “scope of work agreement” in place between the buyer and the contractor. If the work is set to be completed before closing, the agreement is usually not needed. The money is being paid directly to the contractor–$10,000 for example. What if the job is $4000? If you have hired a licensed contractor before, they send a proposal for their scope of work and you both agree to it. Same applies here. Then the deal closes, all parties part ways, and there is a Tile policy on the home. What happens to the leftover $6000? If a Realtor fights you on the scope of work agreement, that is a red flag.
The seller provides a credit or concession to the buyer in the amount of XYZ dollars and the numbers are disclosed on the CD. The buyer gets the money from the seller and hires his/her own contractor after closing and the work is completed to their satisfaction on their own timeline. Simple. Done. This makes the transaction very transparent and smooth. You can see how this simple solution is far easier than having a Realtor pick a contractor instead of the buyer and have the money paid directly to the contractor from the seller.
As a Realtor, if you are looking to structure real estate contract language this way, I would consult a Title attorney before submitting your offer. Our goal is to make things as smooth as possible for all parties, yet want to educate on the best route to closing. We want to avoid the Realtor kicking and screaming to the end after they have to jump through several necessary hoops to the finish line.
In my “real life scenario” with my client, it ended with him being very upset, especially when we told him that a scope of work agreement was needed between the buyer and contractor in order to close the deal. The reason he was upset still concerns me because I know what the true intention might have been without the agreement. I don’t even want to go there.
There is the real possibility that Realtor will never send us a deal again. With that said, the deal closed after everything mentioned above was completed, protecting everyone involved.
As a Title Company, our job is to solve problems and to report the news. We also need to make sure transactions are closed the right way that protects everyone involved. Hope this has been helpful and can be educational to Realtors in other markets as well.