How to create a great real estate purchase agreement
You and your broker have been looking at houses for months, and you finally got the right one. The home is right, the property is good, and the neighborhood feels great.
The seller gave you an asking price, and it is your turn to make a bid and let them know you’re interested in making a home purchase agreement.
Your bid might be below, at, or above the asking price, depending on the market. This process can go for a few rounds, but finally you, and the seller, agree on a price. This is where it’s time to make a purchase agreement.
What is a real estate purchase contract?
Known by many names, such as a purchase contract, real estate purchase and sale agreement, real estate sales agreement, home purchase contract, house contract, or even home sale contract and house purchase agreement, the property purchase agreement is a bilateral and binding agreement between at least two parties which have the legal capacity for the transfer, be it exchange or purchase, of real estate property.
The real estate purchase agreement template is based on a consideration, which is what is exchanged for the real estate. Commonly, it’s money. You can also have other property as consideration when you have an exchange, or a promise to pay.
The US Statute of Frauds requires that the real estate purchase agreement form is signed by both the buyer and seller in order for it to be enforceable. It is basically a contract to purchase real estate, so, logically, both must sign it.
Now that you know what is a purchase agreement, let’s see what real estate contracts must contain, among other details.
- The parties, property and agreed price’s identification
- Any essential rights and obligations of the contract
- Conditions or contingencies of the purchase agreement for house that must be met
- What condition the property is, and what is and isn’t included
- The property’s legal description, which typically comes from the county recorder’s office
- The deposit’s amount
- What the closing costs are, and who pays what
- What the closing date is, as well as when the offer was made, and when it will take place if accepted
- The offering price
- Both parties’ respective signatures
- Terms of possession
Among the contingencies, you might find getting an appraisal, getting a mortgage, having a professional inspect the home, or even needing to sell the buyer’s home before they can afford to buy the new one.
Now, there are other things you can also sort in the initial agreement, such as some critical aspects which may include inspections, warranties, escrow and title requirements.
What is an earnest money deposit?
This deposit is commonly made when the buyer signs the contract. The money is held in escrow, usually by the seller’s title company or lawyer, until the closing.
It is often a fraction of the price, but it has to be specified in the contract. This deposit is a credit towards the final price.
What happens if the buyer gives up?
This will cost you the deposit, and this is the best case scenario. There’s also the possibility of being sued, so if you want to get out, do that while the contingencies are being met.
These contingencies are commonly seen as escape hatches, and you can use them legitimately. However, know that there is no contingency for cold feet.
The most common way to get out is because of finances. If the buyer is turned down for financing, the contract gets canceled and nobody is to blame.
There are many things that can go wrong, and just because the buyer is pre-approved by the lender, this doesn’t mean they will come out of it successfully.
Another out is the inspection contingency. They commonly find defects, and if the buyer thinks that the defects are too much for them to deal with, or he or she can’t agree with the seller on repairs, the parties can cancel the contract with nobody to blame.
Can you cancel the real estate purchase contract?
In its most plain form, it is just that – a contract. So, whether or not you can cancel it depends on many factors.
The initial offer is usually good for a pre-specified duration, and if the offer isn’t yet accepted, it is commonly possible for it to be withdrawn, and the other parties notified.
However, if you want to go this route, make sure you’re as thorough as possible. It is important to contact everyone else as soon as possible, as this might be crucial to document the withdrawal.
However, if the offer is already accepted, cancelation is a much more complicated matter. You should first see if there are any procedures for cancelation, and if there are, you will need to work within the set boundaries if you want to get out.
If there aren’t any, reach out to everyone else involved in the contract. For example, if the seller has multiple or better offers, they might not have a problem with releasing you from any contractual obligations.
What would happen in case there are any disputes over the agreement?
Just like with any other legal dispute, in case of a disagreement, there are a few routes to take. First, it’s best that you consult an attorney. If you haven’t been through this before, legal guidance is essential.
These situations are commonly settled through a court by arbitration, or by both parties choosing mediation. What option is best? Well, it depends on your specific situation.
Conditions that you must include in the real estate contracts
The finance terms
If you think you won’t be able to buy the home without a mortgage, you should make sure to state in the contract that the offer is contingent upon obtaining financing at an interest rate you will specify.
Researching interest rates and trying to get pre-approved might be beneficial. For example, if you know you can’t afford any financing with an interest rate higher than 6%, don’t put 6.5% in the offer.
If you do that, and can’t get the 6% you can afford, your earnest deposit stays with the buyer when you’re forced to back out.
The closing costs and who pays what
There are common fees associated with this kind of purchase, such as title search fees, escrow fees, notary fees etc.
You should specify in the agreement whether the buyer or the seller pays these costs. A good real estate agent can give you an advice on who customarily pays these fees in your area.
The home inspection contingency
Unless you’re buying something you’ll tear down, a home inspection contingency is a must. This lets you walk away if the inspection finds flaws that are significant, or too expensive to repair the structure.
For example, if the home needs a new roof which costs $20,000, this kind of contingency lets you walk away with no harm done.
Who gets the appliances and fixtures
If you also want to get the dishwasher, oven, stove or refrigerator with the house, assuming anything, or even relying on a verbal agreement isn’t enough. Use the contract to specify everything that is included in the purchase.
The closing date
How much do you think you will need to complete the transaction? Some common time frames are 30, 45 or 60 days, and there are issues that might affect this time frame.
These issues may include but are not limited to the remaining term on the lease if you’re renting at the moment, how much time you’ll need to relocate if you have a job you’re moving from etc.
Ending thoughts on a real estate purchase agreement
These forms are usually standardized and fairly common. However, a good real estate agent won’t let you leave out any important things.
Even so, it’s a good idea to know what goes into a real estate agreement, in order to be informed in case you need to make one.
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