When you close on a property, you spend about an hour signing your name more times than you probably have in your entire life. By the end of the contract, you may wonder if you knew what half of that was, but your hand is too tired for you to go back and change any of it.
Rather than go into your contract unaware, we’ve broken down the real estate purchase agreement into manageable sections. Let’s start with what the purchase agreement actually is.
What is a real estate purchase agreement?
A real estate purchase agreement is the contract in which the seller of the home agrees on the terms of sale with the home buyer. In times past a handshake would have been sufficient. However, the law now requires the terms of the agreement to be outlined in writing and both parties to sign in the document and for the contract to be notarized.
What is outlined in the real estate purchase agreement?
- Both parties are identified: both the buyer and seller are named in the contract
- Purchase Price: The amount agreed upon by both the buyer and seller in exchange for the property
- Closing Date: The date that the sale closes and the purchase agreement is finalized
- Offer expiry: If the terms of the agreement are not met by this date, the offer expires. If an extension of the contract is going to be made, it must be signed before this date.
- Who Pays What: The details for who is going to pay the escrow fees, inspection fees, appraisal fees, surveyor fees, and other closing costs
- Any Contingencies: All contingencies are outlined and resolved
- Earnest Money: The amount of earnest money as agreed upon
- Proration of Occupancy Charges: How the utilities, mortgage, and other fees are divided up at the time of sale.
- Possession Date: outlines the amount of time and the date when the buyer officially possesses the property.
The number that buyers usually focus on when purchasing a house is the amount of money they are purchasing the house for. While the purchase price is very important, but they are going to have to shell out some cash in advance. Earnest money is a spot holder that tells the seller that you are serious about going through with the deal. If you break the contract for any reason not discussed in the contingencies, you may forfeit your earnest money.
Earnest money is usually 1% to 2% of the sale price. Upon closing, the earnest money goes toward the purchase price of the house.
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Contingencies are situations that must be met in order for the contract to be valid and the buyer and seller to go through with the sale. Some of these contingencies include mortgage approval, selling the buyer’s home, as well as the home inspection and appraisal.
For example, Bob and Susie are buying a house. They are preapproved for $300,000 and put an offer on a house for $273,500. Although they were pre-approved, an underwriter still needs to approve the loan before they can go to closing. Rather than committing to pay the $273,500 upfront, their agent writes in the contract that the offer is contingent upon them getting the loan. If Bob and Susie don’t get the loan, for some reason, they can back out of the deal and receive their earnest money back (if agreed upon) because it was in the contract.
The possession date determines when the seller needs to be out of the home so the buyer can occupy it. On vacant houses, the possession date is usually within 24 hours of closing on the property. If the seller needs some time to close on a new place to live, however, the buyer can put a 45-day possession date. This possession date might sweeten the deal and get the seller to choose that offer out of similar ones!
Getting Out of a Real Estate Purchase Agreement
If you want out of the deal, it’s best to do so before the contingencies are met. Jumping ship after all the contingencies are meant could mean losing your earnest money at the very least, and getting sued at the most. Before you sign off on those contingencies, make sure you really want to go through with the house.
Who draws up the real estate purchase agreement?
The buyer’s agent is usually the one that draws up the agreement. It’s important for you as the buyer to choose an experienced agent to make sure the contract is drawn up correctly. You especially want an agent that is experienced in the type of sale you are completing. If the home is selling via short sale, it is imperative that you choose an experienced agent to write up the contract complete with contingencies. The process of closing on a short sale is a long one, so you want to make sure if you find another house that is better suited to your needs, that you’re able to pounce on it.
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What if I am not working with a real estate agent?
If you choose not to work with a real estate agent when purchasing a house, it may be tempting to buy a generic real estate purchase agreement online. You are definitely within your rights to do that, but remember how much money you are working with. If something goes wrong and the contract ends up being something you disagree with after it’s signed, you may be stuck. Rather than purchasing a completed agreement-- or even writing one yourself-- that you hire a real estate lawyer or real estate agent specifically to draft your contract. When you use a professional that is completely on board with your goals, you can rest assured that the contract will be reflective of those goals.
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