The contract is one of the most daunting documents when it comes to purchasing a property. Signing that piece of paper commits you to buy that piece of real estate. If you are new to the process, it can be unclear how it works and what you’re responsible for if something goes wrong.
To clear that up, let’s cover how a purchase contract works, and what it includes and how to protect yourself in a worst-case scenario.
The steps that go into a contract
The contract is a legally binding scenario that commits both parties to an agreed-upon deal when buying and selling a property. The contract lays out everything to do with the deal in writing.
Once the property is listed for sale, the seller starts taking offers. The buyer’s real estate agent prepares an official offer form and submits it. This provides a starting point and the seller can either accept the offer or counter. In its most basic form, the offer will include a description of both parties, the purchase price offered, the amount deposited as earnest money, closing costs, and a proposed closing date.
After review, the offer is either accepted or rejected by the seller. If there is a counteroffer, the listing agent will send it to the buyer for their review. At this stage, both parties are able to propose changes or modifications to the deal to suit their needs and goals. They can ask to adjust the price, closing costs, or add contingencies.
The offers go back and forth until both parties accept the offer as it’s proposed. After they reach an agreement, the contract becomes legally binding, and they are obligated to follow the rules outlined in the contract. At this point, no further changes can be made to the deal. If the buyer and seller can’t agree, then no agreement or deal is generated and they go their separate ways.
What does a contract include?
The total price of the property is always included, and is the point that is most often negotiated. A seller will usually have an idea of what they are looking for from selling the property, getting that number from their own opinion or a comparative market analysis that their agent does of comparable homes in the area.
This outlines how much time will elapse for getting the title, financing, and inspections. Both parties will agree on a time period that these processes have to be accomplished; otherwise, the deal won’t move forward.
These additions to the contract modify the deal. Both parties are allowed to add them, and they serve to protect each party from specific circumstances. Popular addendums include a Federal Housing Administration one that specifies that the buyer will be going through the FHA to secure a mortgage; these loans give extra protection to the lender in case the buyer defaults. Other relevant information is usually disclosed, like the rules and regulations of the homeowners association.
These are requirements that need to be met before closing. These are rules in place that protect the buyer and if one of these contingencies isn’t met, they are allowed to back out of the deal without penalty. Common conditions include:
- The buyer obtaining financing
- The buyer selling their current house first
- Having a clean home inspection, or if problems are found in the inspection, renegotiating the deal.
- Repairs that need to be made before the buyer takes over
- An official appraisal equal to or higher than the sale price
- Adding the proper contingencies ensures that the buyer won’t get tricked into purchasing a damaged property or be responsible for buying it if they are unable to secure financing.
This is part of the down payment and a sign of good faith on the part of the buyer. It is an agreed upon sum that is paid when the property goes under contract before closing.
These are the materials or assets that are being offered in exchange for the property. This most often means money but can sometimes include other valuables depending on the situation.
These are the additional fees not included in the purchase price that need to be paid to transfer the property. They include costs like title insurance, notary fees, and transfer tax. The general rule is that closing costs will be between 2-5% of the purchase price.
After all the other pieces of the contract are agreed upon, each party signing the contract makes it legally binding. If the buyer pulls out without a justifiable reason, they will forfeit any earnest money paid. In the case that there are issues that violate what is outlined in the contract, the parties may have the right to pursue litigation.