The Real Estate Purchase Contract
A Deep Dive
The Process of Buying Real Estate
You've been out previewing houses with your broker for months and you've finally found the home, property, and neighborhood that feel exactly right for you. The seller has published the asking price and now it's time for you to make a bid or convey to the seller that you are seriously interested.
The bid may be lower, the same, or even higher than the asking price, based on market conditions.
It's the beginning of negotiations, a process that could go on for several rounds. Finally, you and the seller agree on a price. Now it's time to "go to contract". What some agents also call "under contract."
The Real Estate Purchase Contract
Also known as a contract to purchase real estate or a residential purchase agreement, a real estate purchase contract is a binding, bilateral agreement between two or more parties with legal capacity for the purchase, exchange or other conveyance of real property. The contract is based on a legal "consideration." Consideration is what is exchanged for the real estate and, most commonly, it is money. Consideration could also be other property in exchange, or a promise to perform (i.e., a promise to pay).
The United States Statute of Frauds requires real estate contracts to be in writing to be enforceable, and it must be signed by both parties (buyer and seller).
Hand shakes are a thing of the past. There are templates and forms available, but you should always consider consulting an experienced real estate attorney or a real estate agent.
The real estate purchase contract, among other details, will contain:
- Identification of the parties, the real estate property, and the agreed upon purchase price
- The essential details, rights, and obligations of the contract
- The contingencies or conditions that must be met
- The condition of property, what is included, and what is not included
- The amount of the deposit
- The closing costs and who pays what
- The prospective date of closing
- The signature of each party
- Terms of possession
The list of contingencies may include:
- Getting a mortgage (or owner financing)
- Getting an appraisal (which may be required by the mortgage company)
- Having a professional inspection
- The need for another sale (e.g., I must sell my home before I can afford to buy yours)
Earnest Money Deposit
A deposit is usually made when the buyer signs the contract, which is held in escrow by a third party, e.g., the seller's real estate lawyer or title company until the closing. It is usually a fraction of the selling price and is specified in the contract. The earnest money deposit is a credit towards the final negotiated purchase price.
What if the Buyer Wants Out
This is a serious consideration and may result in the loss of your deposit, or worse, being sued for specific performance, or completion of the contract. If you feel you have to get out, the best time is while the contingencies are being met.
Contingencies are escape hatches and can legitimately be used, but not really for the purposes of if the buyer gets cold feet. There is no contingency for cold feet.
The most common "out" is because of financing contingencies. If the buyer tries, in good faith, to get a mortgage and is turned down, the contract is canceled and no one is at fault. Many things can go wrong in underwriting. Just because a buyer is pre-approved by a lender does not mean the buyer will emerge successfully from underwriting.
Another common out is the inspection contingency. If the inspection turns up defects, and they all do, and the buyer deems the deficiencies to be too much to deal with, or the buyer and seller cannot reach agreement on repair of the defects, the parties can cancel the contract, and no one is at fault.
In some parts of the country, home inspections are completed in advance of executing a final purchase contract, so an inspection might not be a contingency of the purchase contract.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.