Major parts of a purchase contract
A real estate purchase contract, also known as a residential purchase agreement or contract to purchase real estate, is a binding agreement involving two or more parties legally capable to purchase or exchange real property.
While money is most commonly used as consideration in exchange for real estate, it can also be another property in exchange, and sometimes promise to pay. As required by the United States Statute of Frauds, all real estate contracts should be in writing for them to be enforceable, and must contain the signature of both parties (buyer and seller).
A real estate contract contains the following major details:
- All important rights, obligations, and details of the contract
- The real estate property, identification of parties in the agreement, and the agreed-upon purchase price
- All conditions and contingencies that are to be met
- Amount of the deposit
- Property’s current condition
- A list of items included and not included with the purchase
- The prospective date of closing
- Closing costs (and who pays for what)
- The signature of each party involved
- Terms of possession
Information on contingencies
The list of contingencies in a purchase contract typically includes:
- Getting in appraisal (which is usually required by the mortgage company)
- Acquiring a mortgage or owner financing
- Having a professional conduct a proper inspection
- Need for another sale
Earnest money deposit
The buyer usually makes a deposit once he or she signs the contract. This deposit is held under escrow by a third party (typically a title company or real estate lawyer) until the closing. The deposit is usually specified in the contract itself and is a fraction of the total selling price. The earnest money deposit serves as credit used in the final purchase price negotiated.
What if the buyer wants to cancel?
Cancellation of the purchase contract is a serious consideration and may result in the buyer’s loss of deposit. In addition, he or she may be sued for specific performance or failure to compete the contract. In case you are thinking about getting out of the contract, the ideal time is while contingencies are being met by both parties.
Although contingencies are normally used as escape hatches, they aren’t for buyers who suddenly get cold feet.
The most common reason is financing contingencies. In case the buyer attempts yet is unsuccessful in getting a mortgage, the contract is canceled. There are also many potential issues in underwriting. Even if the buyer gets pre-approved by a lender, there may still be discrepancies during the mortgage underwriting process.
Another out commonly used by buyers is the inspection contingency. Should the inspection reveal any underlying defects in the property, the buyer may declare the defects too much for him or her to handle. In case the buyer and seller fail to reach an agreement on the repair of the defects, they can both decide to cancel the contract.
In some states, however, a home inspection is required before executing the final purchase contract. In this case, an inspection is not included as a contingency of the contract.