Buying or selling a house may be the biggest financial transaction of your life. A lot is at stake when you enter a real estate contract, and the legal documents can be intimidating.
The legally binding contract between a home’s buyer and seller is known as the purchase and sales agreement and is usually prepared by the buyer’s agent. When you make an offer on a home, you and your agent are sending a proposed contract to the seller. If the seller accepts and signs the offer, you’ve both entered a legal agreement.
For buyers and sellers alike, it’s essential to understand the clauses in a real estate contract. Purchase agreements can be long and full of technical language, and you need to know what you’re signing up for. The following are some of the most common clauses and terms included in real estate contracts:
Buyer and Seller
The purchase agreement should begin with clear identification of the buyer and seller, including their current addresses. Both parties must be named in the contract for it to be legally binding.
Property Description
Your contract will include a description of the property you’re buying or selling that identifies it with certainty. The description will include the house’s address and a legal description with measurements, property boundaries, and any additional fixtures included in the sale, such as appliances or furniture.
Purchase Price and Terms
The purchase agreement will include the sale price of the property and the amount of your earnest money deposit. Your contract should state how and when you’ll pay the earnest money. For example, the agreement could say that you’ll pay the earnest money by a personal check within five days of the contract being signed.
Financing
If you’re using a mortgage to purchase the house, the contract will include information about your financing. It should state who your mortgage lender is, what type of mortgage you have, and how much you plan to make for a down payment.
Conveyance of Title
In real estate, conveyance is the process of transferring ownership of a property from one party to another. For the transfer of the title to happen, the buyer must receive a warranty deed, which is a guarantee that the title is free from claims or disputes about the ownership of the home. A free and clear title is also known as a marketable title.
The contract will include a date that the title will be transferred from the buyer to the seller. It may also include a clause that allows the buyer to exit the agreement if the seller can’t provide a marketable title within a certain time frame.
Disclosures
Most states require sellers to disclose known issues with their homes to buyers. For instance, sellers may be required by state law to disclose that their house contains lead-based paint or a history of infestation. The specific problems that must be disclosed vary from state to state, though.
In many states, sellers are required to provide the disclosures before the property goes under contract. If you live in a state where this is the case, the contract should include an acknowledgement from the buyer that they’ve received the disclosures.
Contingencies
Most real estate contracts include at least one contingency, which is a condition that must be met in order for closing to happen. If the contingency isn’t met, the buyer or seller can back out of the deal without penalties.
Here are a few of the most common contingencies you’ll see in a purchase agreement:
Financing
A financing contingency requires the buyer to obtain financing for the home as a condition of the contract. If the buyer can’t get a home loan, they can exit the agreement.
Inspection
An inspection contingency states that the buyer has the right to hire a home inspector and that they can renegotiate or exit the contract if the inspection reveals problems with the home. The clause may include a deadline for the inspection and a deadline for the buyer to notify the seller in writing if the results of the inspection aren’t satisfactory.
Appraisal
An appraisal contingency allows the buyer to renegotiate or exit the contract if the house appraises for less than the purchase price. Like the home inspection contingency, the appraisal clause should have a firm deadline.
Sale of Current Home
This contingency makes closing dependent on the buyer selling their current home. If the buyer can’t sell their house by a certain date, they can delay closing or walk away from the agreement.
Prorations
Prorations are costs that are split between the buyer and seller and are calculated based on the date of closing. This can apply to expenses like property taxes, utilities, or HOA fees. Your purchase agreement should include which expenses will be prorated at closing and when and how the seller will be credited for payments they’ve already made.
For instance, homeowners often pay property taxes twice per year. If you sell your house in June but have paid your taxes through September, you’ll receive back the amount you paid for June through September’s taxes. The buyer will pay a prorated amount to cover the taxes from June to September.
Seller Assist
A seller assist, also referred to as seller concessions, is an agreement for the seller to cover part of the buyer’s closing costs. The amount of the seller’s contribution can either be a percentage of the sale price or a flat dollar amount, but it must be included in the contract. A seller assist can help with title insurance, taxes, attorney fees, origination fees, or other costs.
Time Is of the Essence
The phrase “time is of the essence” in a purchase agreement means that there are time limits for each party’s contractual responsibilities. Failing to meet these deadlines is considered a breach of contract.
Default and Termination
Default and termination provisions explain what will happen if the buyer or seller fails to uphold their end of the contract. For example, the contract may state that the seller can keep the earnest money deposit if the buyer backs out of the deal.
Your contract may also include a process for remedying the situation if one party breaches the contract. For instance, the contract could state that the party in breach of contract has 10 days to remedy the breach.
Making Sense of Purchase Agreements
Purchase agreements can be overwhelming, but both the buyer and seller should be fully informed on every line of the contract. If you have any questions or concerns about a purchase agreement, your real estate agent should be your top resource. Never sign a contract without thoroughly reviewing every section, and don’t hesitate to reach out to your agent for clarification. Their job is to support you through the process, and they’ll be happy to lend their expertise.