A real estate contract is one agreement you do not want to sign without reading and understanding fully. Get it right, and you’ll likely have a smooth transaction. Miss something, and you’ll face delays, lost money, or even cancellation of the contract.
What Are Real Estate Purchase Agreements?
When buying a home, you’ll make your offer on a form standardized by your state known as a real estate purchase agreement (also commonly referred to as a real estate purchase contract, a real estate contract, a real estate sales contract, a home purchase contract, or a home contract). This legally binding agreement, in general, says the buyer will pay an agreed-on amount for the purchase of the property, and the seller will convey the title in exchange.
The purchase agreement, or contract, details the terms and conditions of the sale. The fundamentals include the parties in the transaction, a description of the property, the sales price, the closing date, and the date of the title transfer and possession.
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Who Prepares the Contract?
The initial offer is most often filled out by the buyer’s real estate agent and sent to the seller for review. Sellers can ask for adjustments to dates, reject or accept contingencies, negotiate the price and repairs, or even reject the offer altogether. The contract is considered a working document until both parties reach an agreement on terms. When signed by both parties, the terms are set and the contract becomes binding.
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Key Components of a Home Contract
There’s a lot of legal language in a home contract, but the core details are actually quite clear. These are essential details that both buyer and seller need to know so they can complete the transaction in a timely, legal manner.
1. Identity of the Parties
For a legal contract, full identification of the parties in the contract is required, and the parties to the contract must have the capacity to enter into the contract.
2. Property Details
The property must be described with certainty. This is a legal description of the property filed with the county recorder’s office.
3. Details, Rights, and Obligations
Buyers and sellers agree to certain responsibilities and obligations in entering into a real estate contract with each other.
• Good faith. Parties should act in good faith with each other, meaning neither party should act to destroy or injure the right of the other party to receive the benefits of the contract.
• Time is of the essence. Parties should understand that deadlines are absolute and must be met. If deadlines need to be adjusted, an addendum with the new dates can be submitted by one party to the other for consideration. A signature validates the change.
• Legal and tax counsel. All parties should understand the legal and tax ramifications of entering into a contract and may want to consult with appropriate experts.
4. Purchase Price and Financing
Sales price, amount of down payment, and payment method are outlined in the real estate contract. An amount of earnest money is also listed on the contract. Earnest money is a deposit held in escrow by a third party that signals to the seller that the buyer is putting forth a good-faith effort to complete the purchase of the home. Earnest money may be forfeitable to the seller if the buyer does not meet the conditions of the sale. It is also refundable to the buyer under the contingencies outlined in the contract.
5. Contingencies
A real estate sales contract usually includes contingencies, which are terms the buyer or seller sets that must be satisfactorily met for the contract to become binding. One of the most common contingencies is a home inspection. If something on the checklist for a home inspection is not to the buyer’s standards, they are able to cancel the contract and have their escrow money returned to them.
Some other common contingencies are:
• Financing
• Sale of the buyer’s home
• Title review
• Appraisal
• Survey
• Homeowners association document review
When competing against multiple offers in a hot market, buyers have been known to waive some or all contingencies.
6. Closing Date
The closing date is the day the transaction will be finalized. Buyers often wonder how long it takes to close on a house, and the answer can vary widely depending on the property and circumstances of the buyer and seller. If you’re looking for a definitive number, national statistics show an average of 45 days to close.
On the contract, parties will agree to a closing date, identify the title company, and disclose any other terms for the final transfer of the property. At the closing, final signing and transfer of the deed occurs, the transfer of title is recorded, and the buyer often receives the keys to the house (though possession can occur in subsequent days, as per the agreement between the buyer and seller).
7. Possession Date
The possession date is the first day the buyer can occupy the home. Possession can occur immediately after closing, at an earlier date, or at a later date that is agreed on by both parties. It is most often listed as the closing date or the day after closing.
8. What Is Included in the Sale
Buyers can negotiate what is included in the sale of the property. Common items listed are the washer and dryer, refrigerator, and other heavy items that are not easily moved.
9. Closing Costs
Though exact closing costs won’t be listed in the real estate purchase agreement, the contract can be written to name who will pay for closing costs. It’s common, for example, for a buyer to offer an amount over the list price of the property and then ask the seller to help cover the buyer’s closing costs with the overage amount. Wondering how much typical closing costs are? They average 2% to 5% of the loan principal.
10. Addendums
An addendum is an additional document to the real estate purchase agreement that includes more information or buyer requests that were not included in the original contract. It has the power to override the terms of the original contract.
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Can Purchase Agreements Be Canceled?
Canceling a contract is different for buyers and sellers. Buyers usually have contingency clauses built into the purchase agreements. If certain conditions of the sale are not met, the buyer can back out of the contract and have their earnest money returned. Some common reasons rest on:
• Financing
• Sale of their home
• A satisfactory home inspection
• An appraisal
• Title work
It’s common, for example, for a buyer to cancel the real estate contract if the home has serious issues found during a home inspection. Foundation, electrical, pest, mold, or any other issue found during the home inspection will allow the buyer to cancel the contract if an inspection contingency is in place.
Buyers can also walk away from the purchase agreement for any reason, but they risk losing their earnest money or face court action if the reason and timing for breaking the contract do not fall within the contingencies outlined in the contract.
A seller, on the other hand, has fewer options for canceling the purchase agreement. Sellers can cancel the contract if the buyer fails to meet the conditions and deadlines outlined in the contract. Sellers who default on the contract for other reasons may be forced to pay the buyer an amount equal to the earnest money deposit. They could also face a lawsuit from the buyer to enforce the contract.
The Takeaway
A real estate purchase contract can be lengthy but it’s important to read and understand what you are signing, whether you are buying or selling a property, and to keep on top of the deadline imposed by the closing date in the agreement. Being smart about the contract can protect you as a home changes hands.
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