Buyers should read any document related to a commercial or residential real estate transaction very carefully -- with a real estate attorney's input in many cases -- and reading a home purchase contract is no exception.
This can be easier said than done, since sometimes real estate agents on both sides, as well as the mortgage broker, will push to get everything signed as fast as possible. Sporadic urgency -- often manufactured for no real reason -- is a hallmark of the homebuying process, and it can lead buyers to feel a bit frantic. But when it comes to reading the home purchase contract, take your time.
The contract typically contains pages of boilerplate interspersed with unique-to-the-purchase info, such as contingencies and closing cost responsibilities. This contract specifies what condition the house is in, details who will be responsible for taking on certain costs, and contains a breakdown of what contents of the house the buyer will get versus what the seller will take with them.
What is a home purchase contract?
This legally binding contract is a written record of a real estate transaction. It identifies the seller and buyer, outlines the details of a residential property, and states the home's purchase price and the conditions of its purchase. It also must contain both the offer and acceptance.
Why is a home purchase contract used?
A home purchase contract is mandatory in the United States because it protects both parties. It details in writing what property is being purchased and that if the buyer pays the amount stipulated, the seller will transfer the deed to the property. If either party tries to back out or change the terms midway through, this document holds up in a court of law.
Other names for a home purchase contract
The home purchase contract is also called a home purchase agreement, a real estate purchase agreement, and a real estate sales contract.
Who is involved in executing a home purchase contract?
The buyer and seller are the key parties that sign the home purchase contract, but a real estate attorney would typically write the original contract, while the buyer's agent would modify it for the specific transaction. Agents on both sides are typically involved in negotiating for their clients.
Reading a home purchase contract
As noted, some of the most important components of a home purchase are shorter and can get buried within reams of boilerplate. Or, they can be included as just one line of text. If you miss one line of text in a 10-page contract, you may unwittingly agree to accept a completely different purchase price than you intend to or take on more repair expenses and responsibilities than you want to. So be very scrupulous about reviewing the contract, and ask questions till you're clear on every point.
Key elements to review include:
Earnest money deposit information
The earnest money deposit (EMD) is a deposit that the would-be buyer makes into an escrow account to signal their serious intent to buy the house. It's often called a "good faith deposit" because it signifies that both parties mean to move forward with the transaction and fulfill the terms of the contract.
Generally ranging anywhere from 1% to 5% of the purchase price, it should be a substantial enough sum of money to make the seller feel comfortable and make the buyer feel like they've got real skin in the game and don't want to lose it. If the buyer's good faith holds throughout the process, they won't lose that money even if the sale falls through. They either get it back, or, if all goes well, it actually counts toward the down payment/closing costs. But if they stall out the deal through not fulfilling their responsibilities, they do stand to lose the EMD.
Breakdown of closing costs and which party pays for what
Description of property, including its condition and contents
You'll get into more detail on the home's condition during the inspection and appraisal stages, but for the contract's purposes, typically an overview of the condition is enough. Contents can be more complicated…
Contents of home and who gets ownership of what
Typically, a home is entirely empty or staged with rental furniture once it goes on the market. But in many cases, some or all of the contents are still there, and sometimes sellers will offer the more valuable contents to sweeten the deal. This can often turn into a fairly involved subject of negotiation. The purchase contract has a space where the buyer can detail what contents they want and the seller can counter.
Rights and obligations of key parties
Important matters with long-lasting consequences can find their way into this section of a home purchase contract, so don't assume it's all boilerplate. Especially if there's language having to do with curing a title or being responsible for any construction/repairs on an "as-is" home after closing, buyers need to study this section carefully to make sure they're not unwittingly taking responsibility for the seller's unfinished or unpermitted work.
This is a section that can easily torpedo an entire deal -- especially if the seller has cold feet or doesn't want to put a lot of effort into selling their house. Contingencies are the conditions and actions that must be fulfilled by the seller before the deal will close. They might include stipulations about repairing defects found during the home inspection or that the home needs to appraise at the value of the agreed-upon price.
Contingencies are the section for the buyer to make sure they're getting the best possible terms, including repairs to the property. But if the seller decides not to meet the conditions, the transaction will not close unless the buyer changes their terms. It's fairly common that the two parties won't be able to come to an agreement over conditions and the deal won't move forward.
Information on property taxes, insurance, and fees
This section isn't negotiable between buyer and seller; it's in the document for information and reference purposes.
Closing documents and target date
This section doesn't contain a draft of the closing documents but instead delineates what documents will be delivered at the time of closing. The most important of these is the deed, but there are typically other documents, which vary from state to state. If the property has renters living there, additional documentation pertinent to the tenant financials will be required at closing and listed in this section.
The closing date may seem like it should be flexible, since by the time it arrives, so much work has been done on both sides toward the purchase. The inclination may be to choose it optimistically, picking a date not too far out, because everyone wants to keep the ball rolling. But every other date and milestone in this process is organized around the closing date, and missing one of the big milestones -- e.g., the date that a loan is approved or an appraisal report is delivered -- can make it impossible to hit a date that is too close.
So choose this date with care, and give yourself a time cushion. There's no guarantee of an automatic extension in most cases, and some sellers will only extend one grudgingly -- or not at all.
How to read a home purchase contract? Slowly and with care
Going under contract in the home purchase process can be very exciting. Both parties are typically optimistic, and it seems like everything will fall into place once the contract is executed. However, that's far from the truth. Only once the contract is signed can the arduous due diligence steps and demanding loan underwriting process begin. The home purchase contract should start everyone off in sync, but sometimes it's the first place where red flags arise.
The phrase "Buyer beware" gets tossed around often in real estate, usually to do with stigmatized homes and inspection requirements, but it is highly applicable to home purchase contract vetting as well. If you start to notice red flags, proceed with caution and with expert help. This is a binding document that can protect you, but only if you also protect yourself.
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