After submitting an offer on a home you plan to purchase, a few things might happen – once an offer is accepted (typically, after negotiations but not always), real estate sales agreements come into effect between buyers and sellers.
This is a legally binding agreement between the buyer and seller that helps ensure the sale will be completed according to the contract’s outlined conditions.
Real estate purchase contracts come into play to protect both parties and move the sale forward, helping prevent either party from wasting the other’s time and money. Throughout the following, we’ll discuss various components for real estate agreements of purchase and sale as well as cover all the different terms and contingencies.
What Are Real Estate Sales Agreements?
An officially accepted offer between a buyer and seller puts a home under contract, which is essentially the final stretch before real estate closing when the property is transferred to the buyer.
A real estate agent usually begins the process by leveraging a pre-approval letter furnished by the buyer’s mortgage loan provider. During the under-contract period (usually the month leading up to the closing stage of your home purchase), several different processes need to be completed, such as the home inspection and possibly repairs. Some of these procedures can be required depending on the type of home loan.
Repairs and other changes that can arise as a result of home inspection fall under the contingency category of real estate purchase contracts. In the case of an impasse, contingencies allow buyers to renegotiate or back out of the sale without penalty. Title contingencies work similarly: buyers can back out or negotiate different terms with the seller if a property lien is discovered.
What Should be Included in Real Estate Sales Agreements? A Look at Components & Contingencies
Once an offer is accepted, the buyer usually pays earnest money (a deposit between 1% and 3% of the home purchase price). Should the buyer breach the contract (e.g., decide not to buy) for anything outside of contingency, the deposit is forfeited.
As such, it’s important to know what is included in real estate sales agreements and the gravity each element carries.
Common Elements In Agreements of Purchase and Sale
The following are standard elements of all real estate purchase contracts that come into play in almost every property sale, save for alternative scenarios (e.g., auctions, cash sales, etc.):
- Parties Involved. This section of the real estate sales agreement clearly identifies all buyers and sellers participating in the transaction, complete with their full names and contact information.
- Property Identification. A precise description of the property that includes the address, legal description, and any other relevant details that pinpoint the exact real estate in question are all detailed here.
- Purchase Price. This portion lays out the agreed-upon selling price for the property. It should encompass the base price, any included deposits (e.g., a buyer’s earnest money), and additional costs associated with the transaction.
- Financing Details. This section explains the fine details of how the purchase will be financed. Whether you utilize a mortgage loan or assume the seller’s existing mortgage, this section in real estate sales agreements provides clarity and a workflow for how funds will be transferred.
- Title and Insurance. Title insurance is outlined here which provides a crucial safeguard against potential property defects. It specifies whether the buyer or seller will be responsible for acquiring this protection.
- Transfer of Ownership. This is the designated date for the official title transfer (i.e., real estate closing) and the moment you, as the buyer, receive the keys to your new property.
- Taxes. This section clarifies how property taxes will be handled. It may specify any existing property taxes levied on the property.
Additional Key Elements of Real Estate Sales Agreements
While the above components form the core of a real estate closing contracts, there are other significant elements to consider:
- Representations and Warranties. The seller provides statements regarding the condition, structure, and composition of the property.
- Appliances and Fixtures. Which household appliances and permanent fixtures will be included or excluded in the sale are detailed here.
- Earnest Money Deposit. This section details the terms related to the earnest money deposit, a good-faith gesture from the buyer.
- Option to Terminate. This area outlines a window of opportunity to back out of the purchase and sale agreement before closing. It also details penalties, such as the forfeiture of earnest money, in the event a buyer terminates the sale.
- Lead-Based Paint Disclosure. For properties built before 1978, this legally mandated disclosure informs the buyer about the hazards of lead-based paint and their right to request an inspection.
- Signatures. To solidify the agreement, all parties must sign the real estate purchase contract.
Contingencies of Real Estate Sales Agreements
Contingencies represent specific conditions that must be met before the real estate closing is finalized, providing a cushion for both the buyer and seller should a problem emerge with some portion of the sale.
Common contingencies you might encounter are:
- Title Contingency. A title contingency involves a thorough review of the property’s title history. This process checks boxes to ensure the seller has the legal right to sell the property, free from any outstanding liens or claims. If the title search reveals issues, the seller may need to resolve them before the sale can proceed, or the buyer can back out and reclaim the earnest deposit.
- Inspection Contingency. This contingency empowers the buyer to have a qualified inspector thoroughly examine the property. Should the inspection reveal significant defects, the buyer has the right to terminate the real estate purchase contract or renegotiate terms based on the findings.
- Appraisal Contingency. This safeguards both parties by ensuring the property’s appraised value meets or exceeds the agreed-upon purchase price. If the appraisal falls short, the buyer may have the option to renegotiate the price or walk away with their earnest money deposit.
- Financing Contingency. Also known as a mortgage contingency, this protects the buyer in the event they are unable to secure financing for the property. Should their loan application be denied, the buyer can typically back out of the agreement and sometimes recover their earnest money deposit.
- Home Sale Contingency. This contingency offers a degree of security to buyers who haven’t yet sold their existing residence. It stipulates that their purchase of the new property is contingent upon the successful sale of their current home. This can be particularly helpful in a competitive market where selling a home can take time.
Remember that specific details between real estate sales agreements can vary – like any legal document, you should thoroughly examine it and request any clarification you might need before signing. Ideally, most of the clauses will never come into effect and you’ll be in your new home before you know it!
