If you’re a first-time homebuyer or seller, you’re probably not that familiar with a real estate purchase contract. Once a buyer has his offer accepted by a seller, the buyer’s real estate agent presents the home purchase agreement. No matter which end of the sale you are on, it’s imperative that you understand every aspect of this document. If you have questions, ask your attorney or real estate agent for clarification. For his protection, a seller should always have a lawyer review the contract.
Real Estate Sales Agreement
Although the items in a real estate sales contract may vary according to the state, there are certain elements present in every such agreement. First, it will include the price the buyer agreed to pay, which the seller accepted. Keep in mind that this amount is not set in stone, as issues down the line may affect the price prior to the closing date. For example, if the appraisal does not come in as high as the purchase price, the buyer’s lender will not approve the mortgage. Unless the dwelling is unique, and therefore there are no real comparables that the appraiser uses to determine the home's value, the seller is in a bind. If the seller doesn't negotiate with the buyer and lower the price, the seller will risk not only losing this sale but also a future sale of the property.
The home purchase agreement includes the amount of earnest money the buyer must deposit with a third party, such as the title company, within a few days of signing the contract. Earnest money shows that the buyer is serious, and the amount is generally between 1 and 2 percent of the agreed-upon purchase price. The check is not cashed until the closing, and the closing date is also listed in the agreement. Circumstances, however, may cause this date to change. The contract will include title insurance information because the seller must provide a clear title to the property in order for the sale to proceed.
Real Estate Sales Agreement Contingencies
Every home purchase agreement will contain contingencies. Such contingencies can protect the buyer because if he backs out of a sale for a reason not included among the contingencies, he risks losing his earnest money deposit. Common contingencies include mortgage approval, a home inspection and a home appraisal. The buyer should also include whether he needs a specific type of mortgage loan, such as the low down payment loans offered by the FHA or a limit on a mortgage interest rate. Presumably, buyers have done their homework prior to making an offer on a house and have some idea about financing, knowing they can afford a loan at a certain interest rate but not above that amount.
The buyer may also want to include a contingency that he must sell his present home before buying the new one. In a hot market, that’s a contingency that many sellers would rather not have to deal with, so a buyer who agrees to purchase a home without such a requirement is at a competitive advantage. If a buyer does want such a contingency, it could mean that the seller potentially waits months before she, in turn, can move out of her home. One way for the seller to avoid this trap is by including a contingency that the house stays on the market, and if she receives another offer, she can take it unless the first buyer waives the contingency. Rather than risk losing the house, it is advisable that such a buyer contingency is limited to one to two months.
The buyer who is most attractive to a seller is one who can pay cash for the house. That means a mortgage contingency is not necessary. Other contingencies may include receiving a good report from the home inspector. If the home inspector finds, for example, that the roof is in poor condition or the septic system needs replacement, the buyer can then either walk away from the deal or negotiate a lower price with the seller to replace the roof or septic system.
Who Pays for What
The real estate purchase contract should spell out exactly who is paying for what when it comes to closing costs. There are many fees associated with closing costs, and who generally pays for what may vary according to region. That doesn’t mean some negotiation isn’t possible, especially in a buyer’s market. If the seller wants to make sure the transaction is completed in a slow market, he may prove to be more willing to agree to pay for certain costs, such as survey fees or title insurance. If the seller agrees to assist the buyer with specific expenses, that is included in the real estate purchase contract. The amount is included as either a percentage of the home price, usually 3 percent, or the exact dollar amount.
Appliances and Fixtures
A real estate sales contract is a written agreement, and even if a seller tells a buyer that something is included in the sale, if it’s not in the contract, then there’s no legal way to enforce it. Never assume that something is included with the house. Even if your state mandates that a dwelling must include a stove at the time of sale, that doesn’t automatically mean that the brand-new Viking range is staying with the house. It’s crucial that both parties agree on what appliances and fixtures are staying with the home and which are not. Perhaps you fell in love with the beautiful crystal chandelier in the dining room. Maybe the seller intends to take it with her, but it’s possible you can negotiate a separate price for the item. The last thing either party wants to have happen is a disagreement just before the closing because the buyers did a final walk-through and something they thought was included in the purchase is already gone.
Closing Date and Possession Date
While the closing date, also known as the settlement date, is included in the contract, in many cases, agreeing to a possession date other than the closing date can close a deal with the seller. Just as the buyer may need to sell his current home to buy this one, the seller may also need the money from this sale to buy her new abode. It might take the seller some additional time to find a new dwelling, but if she can rent her old house for a month or two from the new owner, it may make her life easier. If the house for sale is already vacant, then the owner may allow the buyer to move in prior to the closing date, agreeing to paying rent until the time of purchase.
Purchase Agreement Red Flags
Read the contract thoroughly before signing and keep an eye out for potential red flags. The more customized the contract, the more likely it is that there’s a provision that can trip up the buyer or seller. You also want to make sure that the contract includes realistic time frames. If the buyer must obtain financing, a 45-day escrow period, which is the time between signing the contract and closing, is probably too short. At least 60 days is a better alternative.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.