Your Guide to a Real Estate Purchase Agreement
Meta Description: Buying or selling a home is a complicated and stressful prospect. Although there are certain generalities you may know and understand, there are some that you don't. What is a contingency period? Do you have to have a lender before signing a contract? This guide to a real estate purchase agreement may help. Stock Image: 21515189 Buying a home is exciting! It's something you've waited a while to do, and so you want to make sure you know what you're doing. You've got a realtor, and you've made an offer on a house you love. As you nervously wait for an answer, your realtor tells you the next step will be signing a real estate purchase agreement. While you're sure it will be explained to you when the time comes, you really would like to know what it all means in terms you can understand. Below is a comprehensive and easy-to-read guide to what goes into a standard real estate purchase contract. Standard Elements of a Real Estate Purchase Agreement 1. Four Ws and an H First and foremost, a purchase agreement sets forth the fundamentals of the transaction: Who: The parties who are entering into the contract. In the case of a real estate purchase agreement, this is the seller and the buyer. What: The property description includes the type of structure, if any, on the property, such as "a single-family home," or in the case of a vacant lot purchase or additional acreage purchase, the measurement of the property will be indicated (i.e., a 1-acre plot of land). This section also refers to a legal description which is attached to the contract. A legal description can be one of two things. First, it might be a reference to a recorded plat, a document which sets forth the location of a subdivision. It can also be a map or just a written description. The other option is a written metes and bounds which is done by a surveyor. It plots out the boundaries of a piece of property by using landmarks and coordinates. Where: The address of the property. If the property doesn't have an address, reference to the plat and lot number or metes and bounds description is used instead. When: There are two key dates indicated. The first is the date the agreement is signed. This date starts the clock for all of the other benchmarks in the contract. The second date is the closing date. Sometimes there is a date indicated, or the closing is set forth as a certain number of days after the contingencies are met. For example, it may say something like, "The closing of the property will take place 15 days after the buyer obtains financing." How much: This is the purchase price of the property. This number is subject to change as the contingency period goes on since issues may arise that affect it. In that case, the contract is amended to reflect the change. The earnest money deposit is also indicated here. This is a cash deposit made by the buyer which expresses the serious intentions the buyer has in purchasing the property. It is a "good-faith deposit." The money is held by the buyer's realtor or attorney and applied at closing. The deposit is usually a nominal amount depending on the purchase price. 2. Personal Property Included There are times when a seller agrees to leave behind extemporaneous items. Sellers usually only do this if a buyer requests these items or if the seller wants to sweeten the pot. Personal property includes any items that are not attached to or standard to a home. For instance, a seller can't claim the central air conditioning unit is personal property. A seller can, however, take a window or portable air conditioning unit. The latter is not considered attached to the home, and therefore, is not an expected inclusion in a sale. The buyer can ask that the portable A/C unit be included. A seller may agree, and the buyer may pay a fair price at closing. Personal property being conveyed must be listed on the purchase agreement. Examples of property frequently included in real estate purchases are refrigerators, washers, dryers and lawn care tools. 3. Important Contingencies The contingency section of a real estate purchase agreement is one of the most important sections, and both buyers and sellers need to pay particular attention to it. This section spells out all the events that must happen for the transaction to proceed and timelines for completing them. These are almost always the buyer's conditions to close and typically include the following: Financing Agreement One of the most critical conditions for a buyer being able to purchase property is having the funds to do so. If a buyer cannot obtain the money required to buy the property, the sale won't happen. Therefore, the first contingency in this section is typically the buyer's ability to secure cash or financing (a mortgage) for the purchase. If this condition can't be met, then the sale is dead, and the buyer gets the deposit back. Home or Site Inspection The buyer needs to secure a home or site inspection. In the case of a home purchase, this means retaining the services of a company who specializes in inspecting every aspect of a house to make sure everything is in working order. A home inspection points out any problems with critical components such as the electrical system, plumbing, roof and foundation. A home inspector will also test appliances, inspect flooring and lighting fixtures. The buyer has to pay for the inspection at the time it occurs. The buyer then receives a comprehensive report outlining all the shortcomings of the home. This report then becomes the basis for renegotiating terms of the contract. The buyer can ask the seller to remedy or fix any issue outlined in the report. The seller will then agree to fix it, counter with a purchase price reduction or even flat out refuse. It is then up to the buyer to decide to accept the seller's conditions. If the buyer is not happy with the seller's response to these requests, the buyer may terminate the contract and get the deposit back. Property Appraisal An appraisal of the property will be required if the buyer is financing the purchase, and the buyer pays the cost of the appraisal at the time it is performed. The lender usually engages the services of a third-party appraiser to inspect the home, the surrounding home sales, and the neighborhood to arrive at how much the house is worth. Lenders won't approve funds above the appraised amount. Therefore, if a real estate appraisal comes in too low, buyer and seller may renegotiate the terms of the contract. If new terms can't be reached, such as a reduction in purchase price or if the seller can't come up with the cash to bridge the gap in financing, the contract is canceled, and the deposit returned. Survey and Title Insurance A survey is essential in determining the exact boundaries and size of the property and any improvements on it. Mortgage lenders and title insurance require a recent survey. Title insurance gives a snapshot of the history of the property through the years. It lists all recorded encumbrances existing on the property. These include liens, encroachments, easements, deed restrictions and licenses. These encumbrances can stop a sale from happening. The survey helps title companies see if encroachments on the property exist. The most common example is a neighboring fence or structure straddling the property line. Liens are also a common encumbrance placed on a property. Deed restrictions or rules are enacted and enforced by a Homeowner's Association. If the property has had a recent survey performed in the last seven years or less, it will usually suffice. In this instance, a realtor or attorney will ask the original surveyor to re-certify it to bring the date current. The costs associated with the survey are the seller's responsibility. If the title company cannot release the property from the seller to the buyer due to encumbrances and liens, the sale is canceled and the deposit refunded. 4. Other Conditions There are times when additional terms exist for either the buyer or the seller to complete the transaction. A typical example is the buyer's ability to sell a current home or property. Likewise, closing may be affected if the seller can't obtain financing for a new home. Moving Past the Contingency Period to Closing Once the benchmarks and deadlines of the contingency period have passed, the deposit becomes non-refundable, and the transaction proceeds along. If the seller doesn't fulfill all obligations under the contract, such as fixing those items agreed upon by the parties, then the seller may cancel and get the deposit back. However, this is rare. The seller and buyer don't have much to do during this phase beyond curing any contingencies and working with the lender. On the day of closing, the seller traditionally has very few documents to execute. The buyer, on the other hand, will have a bulk of the documents to sign. If the buyer is financing, the loan closing documents will be executed at closing as well. Once all the closing documents are signed and the funds received by the seller, the transaction is closed, and the buyer gets the keys. The guidelines set forth herein give you the basic structure of a typical real estate purchase agreement. Other factors may alter the events of a purchase agreement, and those are dealt with on a case-by-case basis. Be sure to read and thoroughly understand every section of a contract before signing it. Don't be afraid to ask questions. Understanding what is expected of all parties makes an exciting and stressful process easier.