Posted 06/07/2018

by Pete Gerardo

Pete Gerardo is a business writer whose work has appeared in The New York Times and numerous trade magazines. Connect with Pete on LinkedIn.

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Watch out for these pitfalls in your real estate purchase agreement

Potential Landmines in a Real Estate Purchase Contract

Pete Gerardo

The Mortgage Reports Contributor

In this article:

You cannot legally buy real estate in the US without a written real estate purchase agreement. That document may vary by state and can be changed with additional forms by the parties involved.

  1. Both buyer and seller must be in agreement before the contract is valid
  2. The contract will have target dates both parties must meet
  3. Ignoring a contract’s provisions can cause you to forfeit your rights or your money

Most real estate contract forms are pretty uniform, but even standard clauses can trip you up. And that goes double for special extras called addenda. Pay attention to what’ filled in those blanks.

Verify your new rate (Aug 18th, 2018)

Navigating a real estate purchase agreement

Unless you’re a lawyer (or get divorced), you may never see a contract as complex — or landmine-laden — as a real estate purchase agreement.

Before you sign, learn exactly what you’re agreeing to — and try to make changes if you don’t like the terms.

Also known as a real estate purchase contract, a real estate purchase agreement is a must for a home sale. In the U.S., homes cannot be legally bought and sold without a written agreement signed by all the buyers and sellers.

(For example, if the house is jointly owned by a couple, but one refuses to sign the purchase contract, the deal is off.)

Related: Do I need a real estate agent to buy a home?

When it comes to real estate purchases contracts, the devil really is in the details. If you’re more of a “big picture person,” have your agent or a real estate attorney explain the details.

To protect your interests, these advisors may suggest inserting addenda to the contract. (Typically, an addendum is a separate document that clarifies or modifies certain terms.)

If you’re not careful, vague language or a missed detail could cost you a lot of money.

If you breach the contract, you could lose your earnest money. Some courts have even forced buyers to purchase houses they no longer wanted.

What’s in a real estate purchase agreement?

The standard purchase contract features a laundry list of details. These include:

  • The names of the parties, a  description of the property, and the purchase price
  • The rights and obligations of the parties
  • The condition of the property, including what is – and is not – included in the sale
  • The amount of the earnest money deposit
  • The proposed closing date
  • The terms under which the buyer can take possession of the property

A typical purchase contract also includes contingencies – actions the parties must perform for the deal to close.

Most deals are contingent on the buyer getting a mortgage by a certain deadline, as well as a home inspection that doesn’t turn up big defects.

Related: Is it safe to waive real estate contingencies when you buy a house?

In some cases, an appraiser must value the home at (or near) the proposed purchase price. In other cases, the deal may hinge on whether the buyer can first sell her old home.

Once the real estate purchase agreement is signed, it’s legally binding. And if all the contingencies are met, canceling the deal can be difficult.

Can I cancel a real estate purchase contract?

Yes, but it probably won’t be easy unless you have a valid reason. (Simply changing your mind is not a valid reason.)

Almost every contract includes “earnest money” that you pay upfront when you enter escrow. Earnest money is designed to make sure you perform your contractual obligations.  If you don’t, and you don’t have a good cause, the buyer can keep that money.

That’s called “liquidated damages,” and in most areas, forfeiting your earnest money gets you out of the deal, with no further repercussions.

Related: earnest money, down payment and closing costs (when are they due)

If you get cold feet and don’t want to lose that money, pray that the seller can’t meet one of the contingencies.

For example, if you learn that the seller misrepresented the property (she didn’t mention that it sits atop a toxic waste dump), you’re saved.

The same is true if the home inspector turns up defects that you can reasonably refuse to pay for, or if your financing falls through.

Related: Should I bail after a really bad home inspection?

The best way to back out is to cancel the deal before signing a purchase agreement. Failing that, you could try to insert “escape clauses” in the contract that make it easier to cancel. The seller (or her attorney) will probably balk, but it can’t hurt to try.

Harsher consequences

Not every state lets you get out of your contract by simply giving up the earnest money. While rare, you could end up in a nightmare battle over a failed transaction.

If all contingencies are met, pain-free cancellation may be impossible. In some jurisdictions, real estate contracts are “specific performance” agreements. This means that all the parties are required to complete the contract.

Many buyers will let you cancel if you ask them, (the average person doesn’t like forcing a sale).

But if the seller refuses to cancel, and you still back out, he or she could file a lawsuit. If so, a judge could find you in breach of contract and compel you to buy the house.

(If a seller tries to get out of a contract without good cause, a buyer can also force a sale by filing suit for “specific performance.”)

Mistakes to avoid

Many real estate purchase agreements are drafted from standard templates and contain standard language.

But this doesn’t mean that they’ll protect you if you find yourself in court.

A few years ago, a Florida couple contracted to buy a house for $620,000. The purchase contract stipulated that the sale was contingent on the house being appraised for “no less than $620,000.”

Two appraisals were done. One arranged by the buyers came in at $560,000, but the sellers’ appraisal valued the house at $635,000.

The buyers refused to close. The sellers sued for breach of contract but lost. The judge ruled that the phrase “appraising for no less than $620,000” meant that no appraisal – not one – could be less than $620,000.

Before signing a contract, make sure the language is clear enough and specific enough to safeguard your interests.

Related: How to get out of your real estate contract

And never make assumptions. One common buyer mistake is assuming that the house comes with all the major appliances – from refrigerators and stoves to washer-dryer sets.

Imagine their disappointment on move-in day when they discover an empty kitchen and utility room.

To avoid this scenario, some buyers insert an addendum that includes such personal property in the purchase price. That’s another mistake.

Mortgage lenders finance homes, not refrigerators, washers and hot tubs. To keep from endangering your loan, an addendum for personal property should clearly state that this property has no effect on the real estate’s value estimate.

To avoid this (and other) mistakes, familiarize yourself with real estate purchase agreements before making an offer. Find a template online or ask your agent to give you a sample agreement to review.

Verify your new rate (Aug 18th, 2018)

Pete Gerardo

The Mortgage Reports Contributor

Pete Gerardo is a business writer whose work has appeared in The New York Times and numerous trade magazines. Connect with Pete on LinkedIn.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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