Understanding a real estate contract or purchase agreement
In this article:
What defines a real estate contract? Every real estate contract meets four requirements to be valid:
- A valid home purchase agreement must be in writing
- The contract must contain an offer and an acceptance
- The purpose of the agreement must be legal
- There must be an exchange of things of value (usually, it’s money for property)
In addition, all parties signing must be legally competent. If you sell a house to a 12-year-old and he backs out, you probably won’t be able to enforce your contract.Verify your new rate (Dec 8th, 2019)
A real estate contract is the key to your transaction
Buying a home is serious business. It involves a lot of money and a valued property. Hence, it’s important that legal safeguards are in place. A purchase and sale agreement/contract provides these protections for both the buyer and seller.
But these contracts can be complex. They can be hard to read and understand. Your real estate agent and/or attorney can serve as guides. Yet it’s crucial that you understand what you’re committing to.
Learn how this contract works. Know what to look for and what your duties as the buyer are. Be mindful of deadlines. Ask questions about anything you don’t get. Remember: it’s easy to sign your name. But it’s hard to break a contract.
Defining a purchase and sale agreement
A purchase and sale agreement is a real estate contract. It’s a written agreement between buyer and seller to transact real estate. The buyer agrees to pay an agreed-upon amount for the property. The seller agrees to convey the deed to the property.
“The deed is a legal instrument. It denotes ownership and description of the property owned,” says Brian D. Swan, real estate attorney and Realtor with Swan Realty in Sandy, Utah.
A real estate contract often includes:
- Sales/closing target date
- Deadline by which the offer expires
- Earnest money deposit amount
- Details about who pays for inspections, survey, title insurance, etc.
- Details about adjusting utilities, property taxes and other fees
- For example, an attorney must review and the buyer must have a final walk-through inspection
- Contingencies, known as conditions that must be fulfilled for the contract to proceed.
Contingencies give buyers a chance to back out of the purchase. “They allow them to do so without penalty and have their initial deposit refunded,” Zachary D. Schorr, real estate attorney with Schorr Law, says. For instance, an offer is subject to the buyer obtaining financing. Another is getting a favorable report from a licensed home inspector.
How the contract works
In many states, the initial offer is in the form of a contract. If the seller accepts, that converts the offer into a binding agreement. If rejected, the seller can counter the offer. Both parties can count as many times as they want until they sign a mutual agreement or one party stops responding.
In some states, according to Nolo.com, the listing itself is considered an offer, and if a buyer accepts it by coming in at full price and with no contingencies, the seller must either sell to that buyer or take the house off the market.
When buyer and seller each sign, the contract becomes legally binding for both.
“A contract is important. It aims to prevent possible problems,” Swan says. Without clearly defined terms, he adds, “the agreement can turn south. By creating a solid written contract, much confusion is cleared up.”
Bruce Ailion, real estate attorney and Realtor with RE/MAX Town and Country in Atlanta, agrees.
“This mutually accepted agreement is the blueprint of the transaction. It creates legal rights and responsibilities for both parties.”
Who provides the contract
Schorr says the buyer’s agent usually creates the contract.
“Many Realtor associations in different states have developed form contracts,” says Schorr. “They provide the agent with a starting point from which they can customize the contract for the specific deal. It’s always smart to get a lawyer to review the contract. The lawyer has specialized training in contract formation and interpretation.”
Note that an agent isn’t normally allowed to draft a contract from scratch, because that would be practicing law. However, an owner seller on his or her behalf can do this.
“States have granted agents the power only to fill in the blanks of a contract that’s been drafted by an attorney. These contracts are standardized for use by all real estate agents.
“But each individual deal could create a situation where an agent’s filling in the blanks plays a critical role. It could not only make or break the deal; bad drafting could also create problems,” Swan adds.
What to look for in a contract
It’s important to review a contract thoroughly. If anything is unclear, ask your agent and attorney.
“The key info to watch for has to do with buyer contingencies,” says Schorr. “These allow the buyer to make up their mind on the purchase based on two things. The first is their own investigation of the property.
“The second is formal disclosures the seller gives the buyer through escrow. Once contingencies are removed, the buyer can no longer back out of the purchase without penalty.”
Ailion says there are many red flags to watch for in a contract.
“Be wary of custom contracts,” says Ailion. “Look closely at contracts with lots of additional stipulations. Extra provisions can strip away your rights, too.”
Consider deadlines carefully as well.
“Be realistic about time frames,” cautions Schorr. “It can be very hard to get a loan in less than 60 days. And most contracts call for a 30 or 45-day escrow. That can be too short for many buyers.”
Before signing that agreement
Prior to signing a contract, consider:
- Whether you have the money and mortgage to complete the transaction.
- How long of a contingency period you’ll need. “Will you have enough time to inspect the property?” Schorr asks. “Will you have enough time to get it appraised and receive a preliminary loan approval?”
- Your commitment to buying the property. “It can be stressful to meet relevant deadlines,” adds Schorr. “Can you get loan financing and manage the process as a whole?”
- Your requirement to act in good faith. “Changing your mind after signing the contract could result in the loss of your earnest money,” says Ailion.
Speed up the process by getting pre-approved for your mortgage. Buyers with a pre-approved mortgage with no outstanding conditions can close on any property in their price range that meets the lender’s requirements. That’s what serious buyers do when they want to be taken seriously by sellers and close without a hitch.Verify your new rate (Dec 8th, 2019)