The Layers of a Real Estate Contract: A Buyer and Seller Guide

Buying or selling a home can feel like wandering into a maze. Right at the center of it all? The real estate contract. It’s full of specifics that change from one place to another in the U.S. How do you know if all the i’s are dotted and t’s crossed? We’re here to break it down for you, spotlight the important bits, and clear up any confusion or myths you might have heard about real estate purchase contracts.

Key Sections of a Real Estate Purchase Agreement

A real estate sale contract is a comprehensive document that tries to cover all aspects of transacting real estate. It is there to protect the home buyer and the property owner. As much, the contract length can be extensive, especially if there are many contingencies or addendums to the sale. States can also have different regulations regarding the selling process and what must be included. That’s why using a local real estate agent is a great idea. They know the local regulations around buying or selling residential properties.

Nonetheless, common elements in the sale contract are: 

Property Description

This section goes beyond stating the address. It includes legal property descriptions, usually identification related to property tax records like a parcel ID or Tax Map ID. This ensures no ambiguity about what’s being bought or sold when the deed is recorded.

Sale Price

The most straightforward part of the contract states the property’s agreed-upon purchase price.

Closing Date

The closing date is the deadline for finalizing the transaction. On that date, all the documents to legally transfer possession are signed, payments are made, escrow closes, and the keys change hands. This date is a must for planning the sale and meeting contractual obligations.

Contingencies

Contingencies are conditions that must be met for the sale to proceed. Common contingencies include the ability to sell a current home, financing, and home inspection. Understanding these can make or break a deal. Some, like the home inspection and appraisal period–called due diligence period in some markets–are windows of time where the buyer may renegotiate or withdraw the purchase agreement without penalty under certain conditions. Contingencies often have a timeline.

Earnest Money Deposit

The prospective buyer deposits money into an escrow account as a sign of good faith. Different real estate markets call it “earnest money” or “good faith deposit.” Either way, this money is applied toward the purchase price at closing. However, it can be forfeited if the buyer breaches the real estate purchase agreement without a reason specified in the contract.

Fixtures and Appliances

This section delineates what stays with the house and what goes with the seller. It aims to ensure everything is clear on items assumed to be included in the sale. A big one is the washer and dryer. In some states, it’s customary to include these with the house, but others expect the washer and dryer to move with the seller.

Inspection Period

The inspection period, also known as the due diligence period, allows the buyer to have the property evaluated by third parties. The inspection contingency is for the buyer’s peace of mind to know what they’re purchasing. Usually, the buyer hires a certified home inspector. They may also request specialty inspections like pests, radon testing, or chimneys. Depending on the contingencies, issues discovered can lead to renegotiation, a repair request, or contract termination. Usually, the contract terms will state how many days a buyer has to schedule these inspections, their review period, and how long they have to renegotiate with the sellers.

Possession

Possession details when the buyer officially takes over the property. It can be at closing or another agreed-upon time after closing.

Disclosures

Sellers must inform the buyers of known issues affecting the property’s value, safety, or desirability. These can include lead paint, asbestos, or previous damage. How the real estate contracts express the disclosure varies, as does what must be included. As an example, in some states, you must disclose if the home was formerly a meth lab or if someone died on the property.

Home Warranty

It’s common for real estate contracts to have a section for the buyer to request a home warranty. This is a one-year policy on the operating components of the home, like the refrigerator or the water tank. The intent is to reassure the buyer that they won’t have to pay exorbitant fees to replace essential home features for at least a year.

Financing

This real estate purchase contract section provides more specifics on how the buyer will purchase the property. If all-cash, it will say that. For financing, it will list the buyer’s pre-approved lender and a deadline to secure their final home loan approval.

Appraisal Value

Most real estate contracts hinge on the property’s official home appraisal coming back in line with the purchase price. If the appraisal is under the purchase price, that could impact the home sale.

Damage During Pending

Sometimes, things happen beyond our control. A hail storm can damage the roof, or there can be a fire in the kitchen. We’ve even heard of a car driving through the living room while the home was under contract. Should the house be damaged during this time, this section explains what will happen and who will be responsible for the repair.

Compensation

Real estate agents are compensated for assisting with the home sale. This section describes how they are paid at the time of closing.

Termination

The clause specifies under what conditions a buyer or seller can terminate the purchase agreement.

Common Questions and Misconceptions

Do real estate purchase agreement contracts differ by state?

Yes, they vary because every state has different housing concerns, laws, and regulations. California deals with earthquakes, while Florida has to contend with hurricanes and high winds. Naturally, their contractual laws and regulations differ in addressing these concerns.

But it’s not only climate-related ways states treat real estate transactions differently. For instance, the down payment and escrow details can differ in New York compared to other states. While Alabama and Georgia require an attorney’s involvement, Arizona does not. Other examples of state-specific requirements are water source disclosures in Colorado and specific timing for disclosures in Hawaii.

So, if you’re moving to a new state, it’s smart to have a real estate professional or attorney educate you about the contract. They can tell you what must be included in the sale agreement because of the law and what typical requests are in local contracts. Learn what disclosure forms are required or about different contract forms.

What do these common terms mean?

Contingencies: These are conditions or actions to meet for a real estate purchase agreement to become legally binding.

Escrow: This is an account held by a third party on behalf of the two principal parties in a transaction. It ensures the transaction proceeds smoothly and all conditions are met before money and property change hands. Generally, the potential buyer selects the escrow agent. It may be title companies, real estate attorneys, or a licensed escrow agent.

Due Diligence: A catch-all term for the window of time when buyers can have a house inspection.

Addendums: An additional form added to the real estate sales contract to modify or support specific terms. For example, some states require an addendum to contracts if there is a home sale contingency. Or, you can have an addendum due to a repair request after a home inspection reveals an issue.

What are common time frames on residential property sales?

The actual time to sell once a buyer and seller have reached an agreement varies based on multiple factors. A typical average is 30 to 45 days.

• Inspection Requirement: A typical time frame for an inspection clause is 8 to 12 business days.
• Financing Contingency: Financial institutions take 2-4 weeks to clear the home loan to close. For some loan programs, financing may take longer. It can depend on when they can schedule the home appraiser and receive their report. The buyer may also need to provide additional financial details as requested by underwriting.
• Closing date: That depends on what works best between the buyer and seller. 

Navigating Real Estate Contracts

Keep in mind that a real estate sales contract isn’t just paperwork; it’s the roadmap for your property deal. Staying informed can help you negotiate better terms and protect your interests. On the buying side, it’s there to safeguard your investment, while for the sellers, it’s about making it hassle-free. Since the rules change from state to state, team up with folks who know their stuff—like our vetted local real estate agents or real estate lawyers. Always ask questions so you fully understand the terms and conditions of the purchase agreement. Your real estate agent and escrow agent will help see the property sale through to closing.