Sign a Purchase Agreement
This is going to be a long post, so grab your coffee and start exploring the most important real estate transaction: sales contract. It is the most important document in the sale of real estate. It establishes the legal rights and obligations of the buyer and the seller. Depending on the area, the contract may be called an offer to purchase, contract of purchase and sale, purchase agreement, earnest money agreement, or deposit receipt.
A real estate sales contract contains the complete agreement between a buyer of a parcel of real estate and the seller. It is an offer to purchase real estate as soon as it has been prepared and signed by the buyer. When the document is prepared and signed by the buyer, it becomes the buyer’s offer to purchase the property. If the document is accepted and signed by the seller, it then becomes an agreement of sale. The real estate licensees who represent the parties are not parties to the contract. The agreement of sale creates the legally enforceable contractual relationship between the seller and the buyer. In effect, it dictates the contents of the deed.
In addition to the essential elements of a contract, several details frequently appear in contracts. These include:
- the sales price and terms;
- a legal description of the land;
- a statement of the kind and condition of the title and the form of deed to be delivered by the seller;
- the kind of title evidence required, who will provide it, and how many defects in the title will be eliminated; and
- a statement of all the terms and conditions of the agreement between the parties, and any contingencies.
Your agent will list your home for sale at the price and conditions set by you. When a prospective buyer is found, buyer’s agent will help that consumer prepare an offer to purchase. The offer must be signed by the buyer and presented to you by your agent.
It is customary, although not essential, for a purchaser to provide a deposit when making an offer to purchase real estate. This deposit, usually in the form of a check, is referred to as earnest money or hand money.
The earnest money deposit is evidence of the buyer’s intention to carry out the terms of the contract in good faith. The check is given to the broker, who holds it for the parties in a special account, as required by the licensing law and the real estate commission’s regulations.
The amount of the deposit is a matter to be agreed on by both parties. Under the terms of most listing agreements, it is wise to accept a reasonable amount as earnest money. As a rule, the deposit should be an amount sufficient to
- discourage the buyer from defaulting,
- compensate you for taking the property off the market, and
- cover any expenses you might incur if the buyer defaults.
Any change by the seller to the terms proposed by the buyer creates a counteroffer. The original offer ceases to exist because the seller has rejected it. The buyer may accept or reject the seller’s counteroffer. If the buyer desires, the process may continue by making another counteroffer.
Any change in the last offer may result in a counteroffer until either the parties reach agreement or one party walks away. An offer or counteroffer may be withdrawn (revoked) at any time before it has been accepted, even if the person making the offer or counteroffer agreed to keep the offer open for a set period. The property remains on the market during negotiations.
If another buyer materializes with a better offer, the seller does not owe the first buyer any special courtesy. The seller may revoke the counteroffer and accept the new offer. Your agent must present all offers and counteroffers in a timely manner.
An agreement of sale can be divided into a number of general parts. Although most contract forms contain these divisions, the placement may vary. Study the sample agreement of sale in to identify the terms of the agreement. Most sales agreements include the following information:
- The purchaser’s name and a statement of the purchaser’s obligation to purchase the property, including how the purchaser intends to take title
- An adequate description of the property, such as the street address (while a street address is adequate for a sales contract, it is not adequate for a legal description)
- The seller’s name and a statement of the type of deed a seller agrees to give, including any covenants, conditions, and restrictions
- The purchase price and how the purchaser intends to pay for the property, including earnest money deposits, additional cash from the purchaser, and the conditions of any mortgage financing
- The amount and form of the down payment toward the loan and earnest money deposit and whether the payments will be in the form of a check or promissory note
- A provision for the closing of the transaction and the transfer of possession of the property to the purchaser by a specific date
- A provision of title evidence
- The method by which real estate taxes, rents, fuel costs, and other expenses are to be prorated
- A provision for the completion of the contract should the property be damaged or destroyed between the time of signing and the closing date
- A liquidated damages clause, specific performance clause, or other statement of remedies available in the event of default.
- Contingency clauses (such as the buyer’s obtaining financing or selling a currently owned property, the seller’s acquisition of another desired property or clearing of the title; attorney approval and home inspection are other commonly included contingencies
The most common contingencies include the following:
- A mortgage contingency, which protects the buyer’s earnest money until a lender commits the mortgage loan funds. In Pennsylvania, a mortgage contingency must state the type and amount of the loan, the maximum interest rate and minimum term, the deadline by which the buyer shall obtain the loan, and the nature and extent of assistance that the broker will provide in helping the buyer obtain the loan.
- An inspection contingency; a sales contract may be contingent on the buyer’s obtaining certain inspections of the property. Inspections may include those for wood-boring insects, lead-based paint, structural and mechanical systems, sewage facilities, and radon or other toxic materials.
- A property sale contingency, whereby buyers may make the sales contract contingent on the sale of their current home. This protects the buyers from owning two homes at the same time and also helps ensure the availability of cash for the purchase.
- An insurance contingency, whereby buyers may make the agreement of sale contingent on obtaining affordable homeowner’s insurance.The seller may insist on an escape clause, which permits the seller to continue to market the property until all the buyer’s contingencies have been satisfied or removed. The buyer may retain the right to eliminate the contingencies if the seller receives a more favorable offer.
Now that you know the ins and outs of a real estate contract, you can proceed with the confidence that negotiation power will be strong and you’ll have all your bases covered for a seamless transaction.
