I’m updating my notes for a teaching assignment on Friday. I’ve been asked by the local Bar Association to speak to newly admitted lawyers about residential real estate. This isn’t my first go-round on this topic, so I intend to repeat a few “war stories” that illustrate my points. There’s one I always tell that scares the bejeebers out of most new (and a fair number of older) practitioners, so I thought I’d share the story here as well.
I got a frantic call from a colleague many years ago. We’d become professionally friendly after having a few transactions, and she desperately needed to know if I could help her out of a major bind.
She didn’t know how or why, but she had failed to be sure that a mortgage contingency clause was included in the contract her clients were signing to buy a home. (Many deals have a clause that conditions the transaction on buyers’ ability to obtain a mortgage, so a denial would enable buyers to get their downpayment back.)
Sure enough, after having every other deal she ever did go swimmingly, in this particular transaction her clients did not qualify for a mortgage and wanted to get their multi-thousand dollar downpayment back. After hearing from her clients that they’d been denied, but before calling the sellers’ attorney, she flipped through the contract looking for the contingency clause.
She flipped and she flipped without seeing the clause. And then she panicked when she realized the clause wasn’t hiding--it was non-existent. Like some crisis hotline counselor, she reached out to me with a plaintive “What will I do? Do I need to cover the downpayment so I don’t get sued for malpractice?”
Though I made a bunch of calls, I couldn’t help her find a lender willing to give her clients a mortgage. I advised her to see if she could negotiate with the sellers’ counsel, but Sellers refused to return the money. So sadly, my colleague had to write out a check for over $10,000 to reimburse her clients for her total brain lapse.
That story made me so nervous that right then and there I drew up a checklist that covered all the pertinent points of most real estate transactions. And in the 20 years or so that have elapsed, I use an updated version of that checklist each and every time I review a contract. This way, if the phone rings, or a client shows up, or I get a monster of a headache and have to leave my work behind for the rest of the day, all I have to do is see what is and what isn’t checked off on my checklist. One sheet of photocopied paper is a whole lot cheaper than covering a lost downpayment!