How to Decipher a Real Estate Contract: Key Terms for Buyers to Grasp
Buying
The legalese in a real estate contract can be headache-inducing, especially when you’re aiming to sign on the dotted line for buying a house.
As you scan the document, you’re sure to see words that give you pause – terms like “earnest money,” “due diligence,” and “disclosures.”
If you don’t know what they mean, signing that piece of paper can feel scarier than it should.
Put your anxiety at ease by going into signing a real estate contract with background knowledge.
Do Your Homework: Real Estate Contract Definitions
Signing a real estate contract is one of the most important steps in one of the biggest purchases you’ll ever make. As such, do your homework and come to the table prepared.
Effective Date
Some items in a real estate contract come attached to a timeline. In these cases, the effective date lets you know when the obligation begins. For instance, if an inspection is required within a certain number of days of signing, the effective date tells you when this goes into effect. You can then count forward from that date to determine your deadline.
Earnest Money
Earnest money is a small sum you put forward that shows the seller you are serious about buying the house. In general, this amount is put in escrow or held in trust.
Usually, you will be expected to put up about one to two percent of the total purchase price in earnest money. After the purchase happens, this money is put toward closing costs.
Contingencies
Before a real estate deal can close, either the buyer or seller may stipulate contingencies that must be met first. In your case, as the buyer, there is usually a contingency that allows you to secure financing to cover the mortgage before the sale is final.
Due Diligence
Contingencies also allow you to complete due diligence before a home sale is final. This means you get to do some checking to make sure everything about a property is in order and you’re aware of all negative aspects. If you uncover something negative that the buyer didn’t disclose originally, you can get your earnest money refunded and walk away.
Disclosures
Property disclosures are where the seller discloses everything they know about the house since they took over ownership. They must disclose both good and bad in order to avoid committing fraud. For instance, if the roof leaks during heavy rains, they have to fess up.
Make a Smart Purchase and Know Your Real Estate Contract Definitions
Buying a house is full of ups, downs, must-dos, and stress from trying to get it all right. However, with a bit of preparation, you’ll walk into a sale with a knowledgeable perspective that will keep you savvy. So, don’t go into home-buying blind and naïve. Take some time to learn the ropes and you’ll have a smoother sale.
