Buying a home involves learning the lingo of the real estate market. It’s especially important to get up to speed if you’re seriously shopping for homes and close to submitting an offer.
Purchase offers are legally binding contracts. Every state has its own real estate laws, and local real estate boards use different standard forms.
Ask your Accredited Buyer’s Representative to give you a copy of the standard contract so you can review it before searching for homes. That way, you can get familiar with the legal terminology and ask questions before you find a home you’d like to purchase.
Here are ten of the most common clauses:
Of all real estate contract terms, the purchase price may be the easiest to understand and the hardest to agree upon. If the seller is asking too much relative to recent comparable sales, your buyer’s rep may suggest attaching a report that helps defend your offer price.
Also, the seller may be willing to accept a lower price if you include other desirable terms in your offer, like a quick closing date or an all-cash purchase.
2. Closing Date
The closing date (also called settlement date) is the proposed date when ownership will be transferred to the buyer.
It’s an essential contract term that keeps both parties on track to meet their respective obligations. That said, unexpected delays may occur from completing inspection repairs or finalizing your financing, for example.
The purchase agreement includes provisions for situations when the buyer or the seller can’t meet the closing date, potentially including penalties. It’s also possible that the sale could be canceled.
Typically, buyers have ten days to conduct a professional home inspection once the sellers accept their offer. Your buyer’s agent can provide recommendations, but it’s your responsibility to hire the inspector.
Depending on the findings in the inspection report, you may need to negotiate repairs with the seller or agree to an adjustment in the purchase price.
Your purchase may be contingent upon securing funding with a mortgage company. This section of the real estate contract spells out the key terms of your mortgage commitment, such as the size of your down payment and the type of loan (for example, FHA or conventional).
Typically, sellers prefer buyers with larger down payments or who have already received pre-approval (which is stronger than being pre-qualified). These differences can be particularly significant in situations where you’re competing with other buyers.
5. Attorney Review
Real estate professionals are not licensed to practice law but are allowed to help home buyers (or sellers) enter into real estate contracts. This is why most real estate contracts include an attorney review clause, which gives both parties time (typically three to five days) to secure an attorney’s review and potentially cancel the contract under specific provisions.
Sellers are required to complete property disclosures that reveal various defects or improvements that may affect the home’s condition. Required disclosures vary by market, but common examples include revealing the presence of lead-based paint (a federal law), asbestos, or other environmental hazards.
Usually, disclosure documents are given to buyers once the seller has accepted your offer. In some cases, you may receive them before submitting a contract. Either way, buyers must sign off on all disclosures.
For sellers, it’s best to reveal everything about a home upfront because the transaction is less likely to fall apart. Also, if you discover after closing that the sellers lied on their disclosure forms, you may be able to take legal action against them.
7. Escrow of Earnest Money
As a buyer, you’ll need to show the sellers that you’re seriously interested in purchasing their home by depositing earnest money (also called a good faith deposit) into an escrow account.
Your buyer’s representative can advise you on local market conventions, but as a rule, the earnest money is 5% to 10% of the total home purchase and is applied to your down payment at closing.
Your purchase contract should stipulate where your escrow deposit will be held (typically a title company or the real estate broker) and how much you’ll be refunded if the transaction fails to close under various conditions.
8. Adjustments at Closing
This section of a purchase contract outlines any modifications to the property’s purchase price to accommodate the payment of property taxes, utilities, municipal assessments, association fees, etc.
For example, if the seller made a semi-annual property tax payment two months before closing, the buyer will need to “reimburse” the seller for the remaining four months.
9. Other Addendums
Additional terms and conditions beyond the general forms can be added to a real estate purchase contract as an addendum.
Typically, this is where you’d spell out requests to include personal property, ask for a home warranty, request information about the property’s Homeowners Association, or make other stipulations.
As a buyer, it’s essential to make sure that you clarify all the terms and conditions of your purchase. At the same time, you’ll need to balance these requests against your desire to successfully negotiate a purchase with a seller.