Cover Your Bases: Typical Key Clauses Found in a Real Estate Contract for Homebuyers
Buying
Though buying a home is an extremely exciting time, a recent survey has found that it’s actually more stressful than having a child, changing jobs or getting married. While you’re probably fretting over home inspections and overwhelmed about packing up your house, guess what? You’re going to be faced with a very large stack of papers to sign, too. While we can’t help you pack up your house, we can help you navigate through the uncharted territory of the Real Estate Contract phase by helping you understand some of the key clauses.
In the Real Estate Contract Phase
Preparation is everything. You need to take time to read the real estate contract thoroughly, your agent will know it inside and out…you should too. Otherwise, you may be faced with some less-than-favorable surprises down the line. Read it before you sign it.
Let’s take a look at a few things you can expect to find inside a typical real estate contract:
Terms of The Deal
The real estate contract is also known as the purchase and sales agreement. It establishes the legal rights and obligations for both the buyer and the seller in regard to the property and real estate transaction. The legal details of the contract will often depend on the state, and generally include the following:
- buyers and sellers name
- address and description of the property
- purchase price and how it will be paid, including earnest money
- type of deed
- condition and form of the title to be delivered
- list of any covenants, conditions, and clauses* see below
- conditions of mortgage financing
- specific timelines including the completion of the property inspection, loan commitments, and the projected date of closing
- provisions for the damage or destruction of property between the signing date and the closing date
- dated signatures of all parties involved
- financing and inspection contingency clauses
Contingencies
Contingencies are considered the “terms of the deal”. In a typical real estate contract typically you’ll see two contingencies, a financing and an inspection contingency. The financing contingency states that the buyer will apply for a mortgage in good faith. Yet they aren’t obligated to buy the house if they can’t get one. The inspection contingency allows a buyer to bring in a third party to inspect the home and make sure that the major systems of the property are in working condition.
Beyond legalities, other key clauses are commonly negotiated.
Key Clauses
Because a contract is negotiated, each side can include different protective and escape clauses as long as the other side agrees to it. Also called a rider, the terms make the entire agreement subject to, or contingent upon, their fulfillment. Useful contingencies to consider include:
Earnest Money
–If you give the seller a check to show them you’re serious about buying, that earnest money will be deposited in a trust account or with a neutral third party. Be sure to set out any conditions for return of your money if the offer expires or you withdraw it for some reason.
Deed Conditions and Title Costs
– When the payments are made and the contract ends, the seller must transfer the title to the buyer. Although the buyer typically pays the title costs in a real estate transaction, the contract will ultimately dictate which party is responsible for the charges. All of this should be made clear in the contract.
Financing
– Your offer should be contingent on the terms of the loan and conditions of any seller financing should be specifically set out in the contract as well.
Settlement and Possession Dates
– Settlement often correlates with the amount of time it takes for a title search and mortgage approval (typically 45-60 days). Immediately after settlement, possession takes place.
Prorating
– Some things, such as property taxes, will be prorated to the closing date.
Current Residence Sale
– If the future home purchase is contingent on the sale of a previous home, this should be clearly stated in the contract.
Timing
– The contract should state that the seller accepts the offer in writing within a certain timeline – typically no longer than 48 hours, or the offer will be voided.
Remedies
– Just because a home or piece of property is under contract doesn’t necessarily mean that the deal will close. Sometimes the buyer or seller gets cold feet, called a default. In the real estate contract, you’ll usually find a section indicating what the other party can do if that happens. For example, the contract might state that if the seller decides at the last minute not to sell the home, then the buyer would be able to get their security deposit back within a specified timeline.
Inspections
– Home inspection clauses give you the right to have the property inspected and withdraw your offer if the report isn’t satisfactory. It may also allow room for price adjustments if repairs are necessary.
Testing
– A clause may include that the property be tested for environmental toxins such as radon, lead paint, asbestos, etc.
Termites
– Many real estate contracts require that the seller order and pay for a termite inspection. If yours doesn’t include that, consider adding it.
Furnishing
– Define what comes along with the house. Furnishings such as rugs, appliances, curtains, should all be specified.
Condition of House
– At the time of settlement, specific what must be in working order, verified during a walk-through.
Read the Fine Print
Buying (and selling) a home involves a lot of paperwork and many real estate contracts can be confusing. Signing your name on the dotted lines is not something to be taken lightly; never hesitate to ask your realtor to explain the language to you.
