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What is a Real Estate Contract?
A real estate contract is a legally binding document between two or more parties participating in a purchase and sale, exchange or transfer of real estate. It outlines the expectations of the homebuyer and seller. Real estate contracts need to be in writing to be enforceable. A real estate contract generally covers terms of finance, seller assist, home inspection, fixture and appliances, closing date, sale of existing home, etc.
Here is an article about real estate contracts.
How Real Estate Contracts Work
A real estate contract works in three main steps:
- An official offer form is created by the homebuyer’s agent and submitted to the seller. This initial offer will outline the description of parties involved, the property details, purchase price offer, earnest money deposit , closing costs and closing date .
- Upon receiving this initial offer, the seller now accepts, rejects or counters the offer. The counter could include proposed modifications or negotiated terms such as purchase price, closing costs, contingency , etc.
- Once both parties accept and sign the contract, it becomes a legally binding contract.
Here is an article on how to decide on the best offer.
Key Terms Found in Real Estate Contracts
In order to understand a real estate contract, you need to know what the key terms and components in the contract mean. Here are some common terms used in real estate contracts:
- Price : Given that any real estate transaction is a significant investment for the buyer, price is the first thing the parties consider. You can ask their real estate agents for a comparative market analysis (‘ comparables ’) to determine whether the current price is above or below the market value. Chances are that you will need to take out a mortgage for purchasing real estate (unless you are financially secure enough to make an all-cash offer). Before drawing up the offer, you need to research your interest rate for financing based on your credit score . Once the offer is made and if you have to back out, the seller keeps the earnest money. If you are using a loan to finance the deal, you will need to mention it on your contract.
- Riders : Riders or addendums allow changes to the real estate contract based on special circumstances. Some common riders include disclosing rules of homeowner’s associations or a Federal Housing Administration rider specifying that the buyer would secure a mortgage via FHA.
- Contingencies : Contingencies are the requirements that need to be met before closing. Some examples of contingencies include obtaining a loan to finance the purchase, buyer selling their current home, repairing any issues found during home inspection and house appraisal being equal to or higher than the sale price. Common terms in real estate contracts include:
- Seller assist : For instance, if you want the seller to pay for some of the closing costs, you can ask for seller assist in your contract. It works similarly to credit where the seller absorbs some of the closing costs.
- Title search : A title search is the process of going through public records to find the property's rightful legal owner in order to avoid any third-party claims on the property.
- Recording fees : A recording fee is charged by a government agency for recording the purchase or sale of any real estate.
- Earnest money : Earnest money is the payment made to the seller to show good faith at the time of signing the contract.
- Deed of trust : A deed of trust between a lender and a borrower allows parties to give the property to a neutral third party while the debt is paid off.
- Mortgage Note : A mortgage note contains all terms of mortgage, signed at the time of closing.
- Closing costs : Closing costs are additional fees needed to transfer the home to the buyer, beyond the purchase price. The contract should specify which party would be responsible for different closing costs such as escrow fees, title search fees, title insurance , notary fees, recording fees, transfer tax, etc.
- Considerations : Considerations mean anything of value exchanged in the transaction, generally referring to money.
- The signatures : No contract is legally binding before it is signed by both parties. Once the buyer has signed the contract but decides to pull out of the contract, the earnest money can be forfeited by the seller.
Here is an article of common contingencies in a real estate contract.
Types of Real Estate Contracts
There are four types of real estate contracts:
- Purchase agreement contract : A purchase agreement is between the seller and the buyer outlining terms and conditions of the purchase. This can be one of the following three kinds:
- State/association purchase agreement : State/association purchase agreement is used by a real estate agent to draft a purchase agreement contract using local realtor guidelines.
- General purchase agreement : General purchase agreement is a condensed version of the State/association purchase agreement for when a buyer buys directly from a seller instead of a real estate agent.
- Property-specific purchase agreement : Property-specific purchase agreement is used for non-traditional properties.
- Lease agreement : A lease agreement between a tenant/renter and an owner of property includes details of renting the property, responsibilities and payment dates.
- Real estate assignment contract: A real estate assignment contract is used to buy rights to a property by an investor with the intention of assigning the contract to a different buyer at a higher price.
- Contract for deed : A contract for deed agreement is used for buying property without going to a mortgage company. The buyer pays monthly payments and the deed is turned over when all payments have been made.
- Power of attorney : A power of attorney document assigns one person the power to act for another. In a real estate transaction, this would give one person the right to sell, purchase, refinance, manage, perform transactions, etc.
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Who Creates Real Estate Contracts?
Typically, the buyer’s real estate agent would prepare a real estate contract if they are licensed to practice law. Otherwise, the buyer can have them drawn by a real estate lawyer.
You can find templates online to draw up your own real estate contract. However, it is advised to consult a real estate professional to ensure a smooth deal. If you have questions about drafting a real estate purchase agreement, it is best to consult a real estate lawyer who will have knowledge about the laws and requirements for lease agreements in your state.
Here is an article on roles and responsibilities of real estate lawyers and agents.
Getting Help With a Real Estate Contract
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