Real estate can be a complicated industry. There are so many wrinkles you have to smooth out before you actually move into your home from getting an agent, to finding that perfect dream home. Not to mention the process of financing and making an offer to purchase. That's when a potential homebuyer makes a conditional proposal to buy a home.
But when you make a formal offer on a home you want to buy, you'll end up filling out a lot of paperwork specifying the terms of your offer. Aside from the obvious things like the address and purchase price of the property, here are some items you should be sure to include in your real estate purchase contract. In some spheres, these are also called contingencies that are written in to your real estate contract.
7 Must-Have Real Estate Contract Conditions
Most people aren't financially secure enough to make an all-cash offer on a home—and chances are, you're one of them. That means you'll have to take out a mortgage. But before you draw up your purchase offer, make sure you research the interest rate environment, and where you fit into that scenario. Your purchase offer should only be contingent upon obtaining financing at a specified interest rate. That last part is very important, and here's why.
If you know you can't afford the monthly payment on the house if the interest rate is higher than 6%, don't put 6.5% in your offer. If you do that and are only able to obtain financing at 6.5%, the seller gets to keep your earnest money deposit if and when you have to back out of the offer.
If you need to obtain a certain type of loan to complete the deal, such as an FHA or VA loan, you should also specify this in your contract. If you are paying all cash for the property, you should state this as well because it makes your offer more attractive to sellers. Why? If you don't have to get a mortgage, the deal is more likely to go through, and closing is more likely to happen on time.
- When you make a purchase offer on a home, make sure you have conditions in your contract.
- Some important clauses should include financing, home inspections, closing costs, and the closing date to name a few.
- Most contracts contain contingencies, but it's important to know all the issues that may affect your deal.
- If any contingency is not met during the specified period, you may be able to walk away from the deal with your deposit.
If you want the seller to pay part or all of your closing costs, you must ask for it in your offer. Closing costs are typically expenses above the property price that both buyers and sellers pay to execute a real estate deal. When you put in a concession for a seller assist, you're asking the seller to cover some of these additional expenses.
A seller assist is almost like a credit, where the seller agrees to absorb some of the added costs a buyer normally has to bear. Although it seems strange that a seller would pay a fee to sell their house, it is rather common. Sometimes, a buyer may also be willing to pay a little extra for the home if the seller agrees to pay more for the closing costs. It all boils down to how motivated each party is, and how well they negotiate.
The offer should state the closing costs you are requesting as a dollar amount, say $6,000 in closing, or as a percentage of the home's purchase price such as 3%. The amount of the seller assist depends on the full purchase price of the property.
Who Pays Specific Closing Costs
The agreement should specify whether the buyer or seller pays for each of the common fees associated with the home purchase, such as escrow fees, title search fees, title insurance, notary fees, recording fees, transfer tax, and so on. Your real estate agent can advise you as to who generally pays each of these fees in your area—the buyer or the seller.
Unless you buy a tear-down, you should include a home inspection contingency in your offer. This clause allows you to walk away from the deal if a home inspection reveals significant and/or expensive-to-repair flaws in the structure's condition. These are handled differently based on where you live—different states and cities have different laws that deal with home inspections.
Home inspections are an important part of the real estate transaction and shouldn't be overlooked.
A home inspector will walk through the property and examine it for structural problems or damages. If he or she cannot assess the damage, he or she may recommend an inspector who specializes in a certain field to come in to the home. This may include electrical, pest, and lead-based paint inspectors.
Remember, this is a very important part of the home buying process, so it shouldn't be overlooked or taken lightly. Say an inspector walks through your prospective home and discovers the property needs a new roof at a cost of $15,000. If you don't have the money to cover the replacement, the home inspection contingency gives you the option to walk away from the deal, as it is a costly expense. In some cases, a seller may be willing to pick up the cost of the repair, or credit it from the purchase price.
Most contingency contracts come with home inspection clauses, but if yours doesn't, check with your realtor.
Fixtures and Appliances
If you want the refrigerator, dishwasher, stove, oven, washing machine, or any other fixtures and appliances, do not rely on a verbal agreement with the seller and do not assume anything. The contract must specify any additions that are negotiated such as fixtures and appliances that are to be included in the purchase.
How much time do you need to complete the purchase transaction? Common time frames are 30, 45, and 60 days. Issues that can affect this time frame normally include the seller's need to find a new home, the remaining term on your lease if you currently rent, the amount of time needed for you to relocate if you move from a job, and so on.
Occasionally, the buyer or seller may want a closing as short as two weeks, but it's difficult to remove all the contingencies and obtain all the necessary paperwork and funding in such a short period of time. (Learn more in 10 Hurdles To Closing On A New Home.)
Sale of Existing Home
If you are an existing homeowner and need the funds from the sale of that home to buy the new property, you should make your purchase offer contingent upon the sale of your current home. You should also provide a reasonable time frame for you to sell your home, such as 30 or 60 days. The seller of the property you're interested in is not going to want to take his property off the market indefinitely while you search for a buyer.
There are many other things that go into a thorough real estate contract, but for the most part, you shouldn't have to worry about them. Real estate agents commonly use standardized, fill-in-the-blank forms that cover all the bases, including the ones described in this article.
A common form in California is the California Residential Purchase Agreement and Joint Escrow Instructions document produced by the state's realtor association. If you want to familiarize yourself with the details of the purchase agreement form you're likely to use before you write your offer, ask your real estate agent for a sample agreement, or search online for the standard form that is common in your state or locality. If you are looking for a good deal and have time to wait, a short-sale house may be for you. (Learn more about: Purchasing A Short-Sale Property.)
The Bottom Line
Even though these forms are common and standardized, and a good real estate agent would not let you leave anything important out of your contract, it is still a good idea to educate yourself about the key components of a real estate purchase agreement.
Although it's never easy to walk away from a home—especially if your heart is set on it—there may be instances where you'll have to do just that. Remember, if any of the contingencies put forth in your contract aren't met, you can cancel the deal and keep your deposit—all without spending anything other than time. The conditional contract, you'll find, is one of your most important assets you'll have in any real estate deal.