You want to purchase your first home.
You find your dream house, decide to make an offer, and expect your realtor to pick up the phone and close the sale, just like that.
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But real-life isn’t like HGTV.
In reality, your real estate agent presents you with a stack of papers to sign. This small tree is your real estate purchase agreement.
Don’t rush through the process and be one of the 25% of Americans who report not feeling financially secure after purchasing their home.
To sign with confidence, you should have some understanding of the elements of a contract first.
Elements of a Contract for Real Estate Agreements
A purchase agreement outlines the terms, prices, and requirements for the sale of real estate.
They may come across as wordy and redundant, but contracts are vital to protect all parties involved.
1. Capable Parties
The first thing you’ll find in a real estate purchase agreement is information that identifies the buyers and outlines the property at stake.
The contract will provide the address of the property in clear, legal terms.
Each party must be legally competent, including being of legal age and mentally competent when entering the contract.
Then, the buyers will identify themselves as joint tenants or tenants in common. If one tenant dies, a joint tenant immediately retains the property.
2. Price and Terms
The next component to look for is the offered price and acceptance. Not only do you provide the offered price, but you must explain how you will pay. For example, you may pay in full with cash or opt for a cash downpayment and enter into a mortgage.
No matter the arrangement, the agreement will need to outline the buyer’s plan to purchase the property.
This section is also where earnest money requirements come in. This money is used to solidify the contract. Buyers must put down the cash (usually over $1,000), which is usually applied to the downpayment.
In some cases, the contract will state that the seller gets to keep the earnest money if the sale does not go through for one reason or another.
3. Closing Costs and Date
Each state sets their requirements for types of closing costs and stipulating which part is responsible.
Closing costs are typically within 2-5% of the property’s purchase price. These costs include any fees related to transferring ownership of the property (such as the recording of the deed or paying the title company).
The 2-5% just mentioned does not include any commission – a real estate agent’s commission is usually an additional 6% of the purchase price.
All real estate sales contracts will also include the closing date. After this agreement is signed, parties will have to submit changes to the closing in writing. It is common practice that the property belongs to the buyer upon the agreed-upon closing date and time.
The closing date is crucial as it marks the transfer of the title from the seller to the buyer.
4. Taxes and Special Assessments
It’s common for taxes and other fees to be prorated as of the date of closing. If the parties can’t immediately assess the property taxes, agents will list them in an addendum.
Before the closing date, the seller is still responsible for the cost of special assessments, such as maintenance and homeowners’ association fees.
5. Outlined Items
Thorough agreements include a detailed list of items that will be included or excluded from the estate.
The list if often exhausting, as it includes structures as well as items attached, such as:
- Doors
- Built-in kitchen appliances
- Bathroom fixtures
- Light fixtures
- Heating and cooling equipment
- Windows and window treatments
This section is important. If certain things are on display when buyers walk through the property, they may expect them to remain. It’s crucial to highlight excluded items in a purchase agreement to alleviate any confusion between parties.
6. Consent
Consent is an agreement of offer and acceptance. The contract outlines the buyer’s offer to purchase, then the approval of that offer by the seller.
The U.S. common law statute of frauds requires that specific contracts are in writing to be valid. This law includes real estate agreements. If the deal is not written and signed by both parties, it is not enforceable.
If you’re acting as your own agent, consider using an available real estate contract template.
7. Necessary Disclosures
It is illegal not to disclose information that may interfere with the property’s safety or future value. You can’t conceal known defects if you are selling a property. It is even more crucial if the defects will put potential buyers at risk.
In some states, disclosure laws require buyers to inspect certain elements, such as:
- Well disclosure
- Lead paint disclosure
- Methamphetamine disclosure
- Termite damage
- Radon gas
- and more.
Disclosure laws vary widely by state.
8. Contingencies
In particular circumstances, the buyer in a real estate transaction might wish to include contingencies in a real estate agreement.
A buyer might include a loan contingency, which allows them to get out of a contract if they are unable to obtain the required financing.
An inspection contingency might be implemented that allows the buyer to pull out of the contract if a house fails inspection. Although, a home inspection is required before a final purchase contract in some states.
Another common contingency is one where the sale depends on a buyer selling their home before completing the purchase.
Most mortgage companies require the buyer to purchase an appraisal to determine the true worth of the property.
9. Offer Expiration
When making an offer on a property, the buyer expects to get a response within a reasonable amount of time.
The real estate purchase agreement will outline precisely when the offer will expire if not accepted by the seller. It also stipulates how long the buyer has to retract the offer if it’s not accepted.
If the seller accepts the terms of the agreement, the acceptance is communicated. Once this is communicated, the offer is considered a legally binding contract.
10. Default
There are several opportunities for buyers and sellers to cancel purchase agreements. However, cancellation is only justified if it occurs within the terms of the contract.
If the buyer or seller fails to uphold certain parts of the contract, they may be considered in default of it. Here are situations that are known to cause default:
- The buyer doesn’t fulfill an earnest money requirement
- The seller doesn’t complete contractually obligated work
- One party doesn’t return signed disclosure forms on time
- The seller isn’t out of the property on time
If one party defaults on the purchase agreement, they may face litigation from the other party.
Sign Away!
It’s essential to educate yourself on the elements of a contract, especially when entering into a purchase agreement. But don’t let the lengthy paragraphs and legal jargon scare you away.
Go ahead, make that offer and feel confident about signing your name.
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