Now you know — Paragraph 19

Paragraph 19 of the Residential Contract of Sale

More often than not, sellers and buyers pay little attention to what they are signing when entering into a real estate transaction.  Your agent will go over your contract, but when your body language and sighing reveal your impatience, they may gloss over the fine points just to finish their required duty—explaining everything in the contract you are about the sign.  Buyers make and sellers receive offers via a “residential contract of sale,” which has sixty paragraphs on eleven pages.  This does not include the required multiple addenda which could add another thirty pages or more.

This article is the first in a series addressing the most common provisions that catch buyers and sellers off guard — that WTF moment.  I call these articles “now you know.”

Virtually every real estate agent in Maryland uses the standardized Maryland Realtors “Residential Contract of Sale” for residential properties. This article will focus on paragraph 19 of that contract.

Paragraph 19, entitled Wood Destroying Insect Inspection, addresses what happens when there is evidence of termite or other wood-destroying infestation. If there is evidence of infestation or prior damage caused by such infestation the seller is required, at seller’s expense, to have any present infestation treated by a licensed pest control company and make necessary repairs. If the cost of repairs exceeds 2% of the purchase price, the seller may, at seller’s option, cancel the contract unless the buyer agrees to cover the cost of treatment and repair that exceeds 2% of the contract price.  There are time limits on notices and responses.  Paragraph 19 is specifically excluded from ‘As-Is’ contracts.

Imagine you are selling your house and ultimately settle on the price of $250K.  It wasn’t what you were hoping for but you’re satisfied. The buyer orders a home inspection and finds issues that both you and buyer agree will be repaired.  The cost for those repairs totals $3500. Yikes!  You’re tired and want to get it over with, and you’ve convinced yourself that you would have fixed them anyway if you had noticed them beforehand.  So you agree to make the repairs.

But then the buyer orders a separate termite inspection that reveals termite infestation and damage not noticed by the home inspector.  The cost for that repair is $5200.  Your cost as the seller (at 2% of the purchase price) is $5000.  Unless the buyer refuses to pony up the additional $200, you’re on the hook for that $5000 expense—over and above the other repairs you’ve already agreed to—or you’re in breach of contract.

You don’t recall your agent going over paragraph 19, but they’re explaining it now. If you had known about and understood the provisions of paragraph 19, you might have a) negotiated harder on the sales price or the price of the other repairs; b) inspected the house for termite damage before listing it; or c) maybe done nothing differently.  But at least you wouldn’t have been surprised.  The agent you hired to sell your house is not totally at fault.  That’s because the listing agreement you signed (also known as the “exclusive right to sell residential brokerage agreement”) doesn’t address any of the possibilities mentioned in paragraph 19 of the sales contract.

But now you know.

I’m Greg Bridges with Long & Foster Real Estate.  I sell and write about real estate in the Baltimore area.  Office 410-889-9800, Mobile 410-215-0565 or g.bridges@lnf.com