Submitting an offer to purchase a piece of real estate can be a very frightening experience if not handled correctly. When it’s done the right way, you are under contract, under budget and move into your home with only a few surprises. There are surprises in every real estate purchase, so don’t fret it when they come. Your contract will cover how they are to be handled. Writing a contract the wrong way can give you the lead role in an upcoming “Twilight Zone” episode called “Your Worst Financial Nightmare Come True!”
There are only a few issues that need to be addressed in an offer to purchase, but each is equally important. Collectively, they are called the “contingencies to the contract.” Their function is to ensure all the bases have been covered to protect you and meet the requirements of the lender and the title company. These contingencies also provide a way to get out of the contract if something about the house, loan and passing of ownership is not acceptable to you.
Writing a real estate contract can be done in a variety of different ways. You can:
- Use the contract supplied by your real estate agent (my recommendation).
- Go to a business form store and buy a generic contract.
- Create one yourself (good luck and make sure you have a good lawyer. You’ll need it.)
- Use a lawyer’s contract.
- Use the builder’s contract if you’re buying a new home.
The contract used in almost all real-estate transactions is the REALTOR® version. It is only available to REALTORS® and lawyers and is the best residential contract I have ever seen. It covers every type of arrangement between buyers and sellers, contains all the contingencies you need to protect yourself and is pre-printed, so all you do is fill in the blanks.
A real estate contract purchased from a business form store is usually very general and needs to have extensive contingencies written into it to protect the buyer. It favors the seller if the buyer is not careful. A contract provided by the seller should always be reviewed by the buyer’s attorney before acceptance if no real estate agent is involved. You don’t know what you are doing and the contract is binding, even for cases of ignorance and even stupidity.
CONTINGENCIES TO BE INCLUDED IN THE CONTRACT:
- List what is included/excluded with the sale. All items permanently attached to the structure and the land are included in the sale of the property. Any items in question should be specifically noted on the face of the contract—for example, “Swing set in backyard to stay” or “refrigerator in kitchen to stay.” Remember there is no such thing as a verbal agreement.
- Financing Contingency: Your offer should have specific parameters regarding the type of financing and the limits placed on the amount of down-payment, the interest rate ceiling of the loan, the number of years the loan cannot exceed, any fees the seller will be obligated to pay for the buyer (which can include all closing costs, pre-paid items and inspections but no down-payment money) and how long the purchaser has to pursue the financing. For Example: Purchaser agrees to turn over $500 as earnest money to be held by the title company of purchaser’s choice. Financing method to be a 30 year FHA fixed rate mortgage with the interest rate not to exceed 50%. The down-payment will not exceed 5% of the sale price and the seller agrees to pay up to 3% of the sale price in closing costs, pre-paids and inspections at closing. Written loan commitment. If written loan commitment from a lender of the purchasers choice is not received within 4 weeks, this contract is declared null and void unless both buyer and seller agree to extend said commitment. (Click on Loans)
- Inspections: All contracts should be subject to the buyer(s) being allowed 2 weeks to have any and all inspections done at their own expense to find any hidden or unknown defects in the property. If the condition is satisfactory to the purchaser, the process continues. If it is not satisfactory, then the buyer and seller either negotiate responsibility for agreed upon repairs or both parties mutually agree to release each other from the contract. Whole-house, termite, municipal and gas inspections are standard, with radon and sewer line inspections becoming more common all the time. (Click on Inspections)
- Closing and Possession: All contracts should note when the exchange of the property will take place, the location where it will take place and when the transfer of possession of the property will take place. Each party can pick its own title company to represent them and possession should take place after the loan is funded. (Click on Final-walk thru, Closing and Possession)
Although these contingencies may seem a bit overwhelming, there’s good news on the horizon. Most contracts (9 out of 10) are written by agents and lawyers who have almost all these contingencies included in the standard verbiage of the contract. They just fill in the blanks and add any extras they need. So, for most of you, all that is needed is verification that these contingencies already exist in the body of the contract. Contracts prepared by the seller or from a business form store require the most suspicion and care.
If you need help writing a contract, email me via [email protected]