What Are the Most Common Pitfalls in Real Estate Contracts?

Real estate contracts are legally binding agreements that outline the terms of a property transaction. While they offer flexibility, they also carry legal and financial risks that require careful navigation. Understanding potential pitfalls is essential to protecting your investment and ensuring a smooth process. At The Jana Caudill Team, we leverage our experience to help you reach an agreement that upholds your best interests, so you can focus on the excitement of your next chapter.

Before signing on the dotted line, be aware of these common challenges:

• The Due-on-Sale Clause: An often-overlooked mortgage provision that can have significant consequences.
• Buyer Default: What happens when a buyer suddenly stops making payments.
• Legal Non-Compliance: The risks of not structuring your contract according to regulations.

What Is a Due-on-Sale Clause?

One of the most significant risks in a real estate contract is the due-on-sale clause, a provision found in most mortgages. This clause gives the lender the right to demand full repayment of the loan if they discover the property has been sold through owner financing, such as a wraparound real estate contract. Although enforcement is not common, it can happen, especially if interest rates are rising and lenders want to eliminate older, low-rate mortgages.

To reduce this risk, sellers can take several preventative steps:

• Ensure Consistent Payments: Lenders are less likely to investigate if mortgage payments are made consistently and on time.
• Maintain Financial Reserves: Keep backup funds available in case the lender calls the loan unexpectedly. This ensures you can handle the situation without financial distress.

What Happens if the Buyer Defaults?

Another major pitfall is buyer default. Even with an upfront down payment and a history of timely payments, a buyer might suddenly stop paying due to unforeseen circumstances like job loss, divorce or illness. While the default rate for most mortgages is low, it’s crucial to be financially prepared for this possibility.

Protect yourself from the impact of buyer default with these strategies:

• Secure a Financial Cushion: If a buyer stops paying, it can take months to regain possession of the property, make repairs and find a new buyer. Having savings or a reserve account helps cover these costs without stress.
• Stay Ahead on Mortgage Payments: If you have an underlying mortgage, keep several months of payments in reserve. This buffer ensures you can continue meeting your obligations even if the buyer defaults.

How Can I Ensure My Contract Is Legally Compliant?

Beyond financial risks, failing to structure a real estate contract legally can lead to serious complications. Seller-financed transactions are subject to specific lending and real estate regulations. Overlooking these rules can result in legal disputes, fines or even the requirement to refund all payments to the buyer.

Working with an experienced real estate professional is the best way to ensure compliance. The Jana Caudill Team guides you through the complicated paperwork, leveraging our unparalleled market knowledge to protect your interests. Our team has the grit and grace to manage every detail, making your transaction seamless so you can focus on this exciting transition.

Let Us Guide You Through Your Next Transaction

Understanding the pitfalls of real estate contracts, from due-on-sale clauses to buyer defaults, is the first step toward a secure and successful transaction. By taking preventative measures and working with a trusted team, you can navigate these challenges with confidence. The Jana Caudill Team is here to ensure your contract is structured for success. Contact us today to learn how we can help you stay ahead of the competition.