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What Is a Real Estate Contract? A Guide for New Investors

New to investing? Here's what you need to know about the real estate purchase contract.


[Updated: Feb 10, 2021] Dec 01, 2020 by Tara Mastroeni
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While there are many different types of real estate contracts, including the land contract and the assignment contract, if there's one type of contract new investors really need to know about, it's the purchase contract. We've created an in-depth guide to this agreement below. Read it over so you understand all the components included in a real estate purchase contract. Armed with this knowledge, you should feel more than ready to make an offer on an investment property.

What is a real estate contract?

A real estate contract is any legally binding agreement that guides a real estate transaction. In real estate, specific contracts are used between two or more parties to facilitate the purchase or exchange of a piece of property. While the exact nature of each contract can vary by state and according to the type of transaction, according to the statute of frauds (SOF) in U.S. common law, these agreements must be in writing and signed by both parties to be considered valid.

At its core, this statute is meant to reduce instances of fraud or situations where the court has to take the word of one person over another. So if a real estate contract is not written and signed, it won't be considered enforceable by a court of law. This statute is also why handshakes and verbal agreements are highly discouraged and why buyers and sellers are highly encouraged to work with a real estate agent or real estate attorney.

The components of a real estate purchase agreement

When people talk about a real estate contract, they usually mean a real estate purchase contract. This agreement is meant to facilitate the transfer of ownership of a property from one party to another. Again, while the specifics of purchase contracts can vary by state, in general, each agreement must contain similar information. A real estate purchase contract is made up of the following subsections.

Identity of the parties

The first thing the real estate sales contract must do is identify all parties involved, listing out the full legal name of the buyer and seller. Then, if the buyer and seller are being represented by real estate agents, each agent must be listed as well, along with the real estate broker of record and their contact information. Although it may happen in a different section of the contract, the information for the lender and title company or escrow agent should also be listed.

Property details

Once all parties have been listed, it's time to lay out important information about the property. These details can include a legal description of the property, as well as information regarding the condition of the property.

Details, rights, and obligations of the contract

When you sign a real estate purchase contract, you are agreeing to accept that you have certain rights and you'll fulfill certain responsibilities. Typically, these responsibilities include an acknowledgement you intend to move forward in good faith and you understand time is of the essence. You will also usually be informed you have the right to seek guidance from a real estate attorney.

Purchase price and financing details

Next, the contract will contain the buyer's proposed purchase price and any relevant details about how the buyer intends to handle financing the purchase of the property. The contract will also include details about the buyer's earnest money deposit.

In real estate, an earnest money deposit is a good-faith deposit the purchaser puts down toward buying the property to show the seller they're serious about buying it. Notably, that deposit is also used as monetary damages for the purchaser in the event the purchaser should decide to breach the contract and walk away from the real estate deal entirely.

Closing and possession dates

After that, the contract should contain information about the closing date and possession date. The closing date does not necessarily have to be the same as the possession date. For example, in some cases, the seller will rent the home back from the buyer for a set period of time, and the buyer will take possession of the home at a later date.

Items included in the sale

At some point, the contract will also include a subsection that talks about any personal property included in the sale. Usually, this will include items such as the kitchen appliances and the washer and dryer. However, it's technically possible for the buyer and seller to negotiate for any piece of personal property to be left behind.

Contingencies

In real estate, a contingency clause specifies a particular event that must occur for the transaction to keep moving forward. If the contingencies in the contract cannot be satisfied, the buyer has the option of walking away from the sale without sustaining any monetary damages. By that, we mean they don't have to give up their earnest money deposit if they decide to back away from the real estate deal because a contingency was left unsatisfied.

A real estate contract can include many contingencies. However, these are some of the most common:

  1. Financing contingency: The financing contingency states the buyer must be able to obtain a mortgage to buy the home. If the buyer isn't approved for a mortgage, they will be allowed to back away from the deal, as long as this contingency is elected in the agreement.
  2. Inspection contingency: An inspection contingency states the buyer intends to perform certain inspections on the property. If this contingency is elected, the buyer and the seller must be able to reach mutually agreeable terms on any recommended repairs or remediation to move forward with the transaction.
  3. Home sale contingency: If the buyer has to sell their current home to buy a new one, they will likely include a home sale contingency in the contract. The home sale contingency gives them a specified amount of time to find a buyer for their current home. If they can't find a buyer, this contingency allows them to dissolve the contract.

Closing costs

Additionally, the contract will include relevant information about closing costs. It will specify which closing costs are part of the transaction, as well as who is responsible for paying them. If the seller is helping the buyer cover some of their closing costs, that information will also be included in the agreement.

Any addendums

Lastly, once the offer has been accepted, the agreement will also include any needed addendums. An addendum is simply a form used to make any necessary changes to the original real estate contract. For example, if the seller makes a counteroffer at a higher purchase price and a buyer accepts, an addendum would be used to effectively change the purchase price for the transaction.

The Millionacres bottom line

Now that you know more about how a real estate contract works, you're better prepared to start the process of buying an investment property. However, before you do, remember that contract law can sometimes get tricky. With that in mind, if you have any questions when signing a purchase agreement, talk to your real estate agent or real estate attorney for clarification.

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