Are you looking to own a property? Sell one? Or you’re financially ready to take that big leap into the real estate world? Then a purchase contract is considered vital to this cause.
A Purchase Contract is essential to the acquisition of any property as it protect both the buyer and seller and ensures that all expectations are meant. It covers every elements of sales, from the prices to terms of transaction.
Having said this, it’s also crucial that the Purchase Contract is prepared with utmost care and diligence. Negligence of this, poses great consequences as you’d later discover in this article.
Do not worry, as this post is going to give an ultimate guide on what you should look out for when preparing a Purchase Contract.
First, what is a Purchase Contract?
A purchase contract is a document that outlines the conditions of purchase for real property. It is a binding agreement, usually between two parties, for the transfer of a home or other property.
Purchase Contract can vary significantly from one state to another. In some regions, agreements are somewhat brief and to open the negotiation process. In other situations, the purchase agreement may be a full, legally binding contract. A purchase contract can either be drafted by a lawyer or by the buyers and sellers themselves.
Purchase Contract Elements
A real estate purchase contract should include the following items
Contact ID of the parties
A description of the property
Important details, rights, and obligations of the contract
Contingencies or conditions of the property
Which furniture and appliances are included in the sale and which are excluded
The amount of money deposit
Medium of payment (installment or not)
Lawyers or estate attorney representing
Signatures of each party
Terms of possession (when the keys to the property will be handed over)
The Real Estate Purchase Contract often times are lengthy and overwhelming, especially the first time you see the document. The Agreement may contain several unfamiliar terms and concepts and it is imperative that you wholly understand these concepts before you sign (You wouldn’t want to sign to something that won’t favor you right?).
In this guide, you’d get familiar with those terms and concepts and find out how they impact both the buyer and the seller. Read on
Identifying the property at stake
Foremost, A Purchase Contract must outline the property at stake. It should include the exact address and a clear description of the property. It should also highlights its past legal transactions.
Who are the parties involved?
Additionally, the contract should include the identity of the seller and the buyer or –buyers–.
In a situation where there are two or more buyers, the contract must indicate whether they intend to act as joint tenants or tenants in common.
As Joint tenants, they enjoy the right of survivorship; that is if one tenant passes away, the property instantly passes to the other without going through intense certification.
While as tenants in common, each tenant owns a share of the property. These shares are not always equal and could be transferred freely to someone besides the other tenant. In most cases, tenants who agree to live together classify their setup as joint tenancy.
Price and Terms
The price accepted by the seller as well as the means by which it will be paid must be indicated in the Agreement. This payment could be in full with cash, in installments, with a cash down payment and a new mortgage, or with some agreement involving an already existing mortgage. All This information may be detailed in the purchase contract or a financing addendum may be included.
The purchase agreement often includes earnest money requirements. Earnest money is used to confirm the contract; rates vary from one purchase to the next.
In some cases, sellers may choose to retain the earnest money if the sales doesn’t pull through. And in other situations, the earnest money is fully refundable to the buyer if certain conditions are not met.
Closing Date and Costs
The closing date marks the conveyance of the property’s ownership from the seller to the buyer. Both the property’s title and possession are transferred upon the listed closing date and time. This conveyance may eventually be recorded in a bill of sale.
The closing cost—and who covers them— of both the seller and the buyer should also be included. Often, the buyer covers the total of the closing costs. Closing costs are the expenses, over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction. The buyer and seller may also choose to split closing costs. Whichever is agreed upon should be writing down in the contract.
Taxes and Special Assessments
The seller is responsible for paying special duties during or prior to closing.
As of the date of closing, property taxes and other costs should be provided for. In most cases, rolled back taxes are addressed in an addendum.
Inclusive items and exclusive ones
The purchase contract should thoroughly detail all items to be included or excluded from the property’s sale. This items should also include fixtures attached to those structures. They including the following items:
Built in electrical wiring
Heating and cooling equipment
Taps and showers
Bathroom fixtures, etc.
There could be certain items on display when the property is shown, but not intended to be sold together with the property. These exempted items should also be listed in the purchase contract.
Knowing the Property Defect
As sellers, it is illegal to purposefully conceal known defects, especially if they put the buyers’ health at risk. Sellers hardly are required to vigorously search for defects, but must make known to the buyer of any issue or defect. Disclosure laws are incredibly strict in some states, with sellers required to specifically search for certain defects. To list a few of this disclosure law:
Lead paint disclosure- notifies buyers on the current condition of painted surfaces and where potentially harmful paint is located (usually older homes before 1978). It is included in a lead paint addendum.
Well disclosure- disclose the location of any existing wells on the property
Methamphetamine disclosure- disclose any knowledge of prior methamphetamine
Sewage disposal system
Indicating the Contract Contingencies
Contingencies are certain conditions which must be met before the property is sold. Below are a few of the most common contingencies:
A third-party home inspection is usually carried out in order to further satisfy the buyer. The seller must allow the buyer and the inspector of his or her choice access to the property. Though the buyer is responsible for paying for the inspection as it benefits the buyer. Most purchase contract include a deadline of ten days for the property inspection.
In addition to the inspection initiated by the buyer, an appraisal must be carried out by the owner. If the appraisal does not equal or exceed the listed value of the home, it may be required that the seller makes repairs prior to closing, at the seller’s expense. The buyer may also decide to make up the difference or negotiate a lower purchase price. If this condition is not satisfied, the buyer is permitted to cancel the agreement.
This contingency states that, if the buyer cannot obtain necessary funding, he or she can back out of the deal. Although buyers obtain a pre-approval letter before making an offer, this pre-approval letter never guarantees the buyer’s ability to obtain financing. This contingency aims to protect the buyer against financing difficulties and allow buyers to recover earnest money.
In a purchase contract, the seller must be able to make evident that he or she actually possess title to the home. A title contingency provides buyers with full confidence that they will obtain the property’s title upon closing. As a buyer, always ensure that this condition is met.
Expiration of offer and Delivery
This information should be outlined directly in the contract. Both buyer and seller should know exactly when the purchase contract will expire and work within time. After acceptance of the offer (at this point, the offer becomes a legally binding contract) and necessary conditions met, delivery may occur in person, by fax or email.
Terms of the agreement may later be summarized in a purchase and sale agreement (P&S), which is received after both parties have agreed to the offer.
Default contingencies (cancellation)
Both parties are given several opportunities to cancel purchase agreements—but cancellation must only occur within the terms of the agreement.
The buyer has right to back out of a contract if one or more of the contract’s contingencies or conditions cannot be satisfied. Nevertheless, if the buyer or seller fails to satisfy certain demands in the agreement, he or she may be considered in default of the contract. Default may occur in the following situations:
Buyer fails to pay earnest money in time
Buyer or seller fails to return signed disclosure forms on time
Buyer or seller cancels the sale after all conditions have been removed
Seller refuses to complete obligated work on the property
Seller prevents access for inspection
Seller does not evacuate out on time
Like the previous purchase agreement, the counter offer is a legally binding contract. After receiving the initial purchase agreement, the seller can decide to turn down the offer, accept and sign the contract, or present a counter offer.
A PURCHASE CONTRACT MUST BE:
Bilateral: it should favor both parties and indicate a series of rights and obligations.
Consensual: both parties must agree on all the details and content of the contract.
Susceptible to sale.
Once all conditions have been met and the purchase contract is complete, you will sign a removal of conditions form, this actually makes up part of the purchase contract and should be sent to your mortgage broker as well. Both parties should have a copy of the purchase contract and all the amendments that were made after the