Buying a home can feel like the most exhilarating shopping trip ever, with hours of online research culminating in a home visit and a successful offer.
Once you see the real estate purchase contract, however, you will realize how serious the homebuying process is from a financial and legal perspective. When you sign, you’re committing yourself to a price, deadlines and contingencies that could save you—or cost—hundreds or thousands of dollars if the deal goes bad.
Here is a look at how you can influence—and why you need to closely review—the real estate purchase agreement before you sign.
What Is a Purchase Contract?
A purchase contract is an agreement between the buyer and seller on the price, location and closing date of a home purchase. There are often many contingencies in the contract, which can protect both parties from harm if complications arise before the closing date.
Once the buyer and seller agree on a purchase price, their real estate agents will work on a real estate purchase agreement that should be based on a template that follows the regulations of your state. The agents will negotiate the terms and fill in the details of the contract, which also should allow for a few days of review by each side’s real estate lawyers, if needed.
You should be consulted on the most important aspects of the deal, such as how long you might need to complete the closing process and contingencies such as the sale of your current home.
Purchase Contract Example
A real estate purchase agreement usually will include:
- Details about the buyer, seller and property
- The agreed-upon sale price and how it will be financed
- The amount of earnest money paid by the buyer
- Property disclosures, such as whether the home contains any hazardous materials
- Items—such as large appliances—that are part of the purchase, and will remain in the house when the buyer takes possession
- Deadline for the closing date and timing for possession of the home by the buyer
- Contingencies, such as whether major issues found during a home inspection can nullify the contract
You can find a contract template for your state on lawdepot.com or through state governmental agencies.
How a Purchase Contract Works
In addition to setting the legal framework for the real estate transaction, the purchase contract provides guidance on potential roadblocks to the deal. The contract should spell out, for example, what happens if the borrower’s financing falls through and when closing will occur.
Here are some ways to address potential complications:
Contingencies
Many prospective homebuyers have to sell the home they currently own before they can buy a new one, which means they otherwise wouldn’t be able to afford the purchase. That’s why including a contingency to ensure a previous home is sold before the deal is finalized is common in real estate purchase contracts.
Other reasons to void a contract:
- Low home appraisal. If that’s the case, the buyer’s lender will likely rescind the mortgage loan offer out of concern that it is giving the buyer more money than the home is worth. A lower appraisal could be a way to re-open purchase price negotiations.
- Problematic home inspection. It’s ideal for the buyers if the contract isn’t specific about what level of problem would allow them to pull out of the deal. It could be an opportunity for renegotiation on price—or who will pay for repairs.
- The buyer’s mortgage falls through. This could happen if a buyer loses a job or has another major financial problem before the closing date. During the recent economic downturn, lenders have been much more strict about making sure loan applicants are earning the salary they indicated on the loan application and will check days before and even on the day of closing.
Earnest Money
You’ll want to spell out the amount of earnest money—which is, essentially, a deposit on your home purchase—and where it will be held during the closing process. Buyers could put up between 1% and 5% of the purchase price, which would likely go toward the down payment or closing costs. The money could also be given to the seller if the buyer doesn’t follow the stipulations in the purchase agreement and the deal falls through.
Timing
This is of major concern to both sellers and buyers, because sellers don’t want the closing process to drag on too long, while buyers want to make sure they have adequate time to complete their due diligence. A buyer would need enough time to schedule and review the home inspection and get the appraiser’s report. Buyers who miss their deadlines are at risk of losing the contract and their earnest money.
The timing of the buyer’s possession of the home needs to be spelled out, as well. While most homebuyers can move in right after the closing, some sellers might ask for more time in the home because they need to find another place to live or their new home is not move-in ready yet.
Closing Costs
Both buyers and sellers have to pay closing expenses, and the purchase agreement could spell out who pays which closing costs. For example, buyers’ closing costs total about 2% to 5% of a home purchase price, while sellers often pick up the real estate commissions and taxes.
Questions to Ask Before Signing a Purchase Contract
Buyers and sellers should be active participants in the development of the purchase contract to make sure their interests are covered.
For example, a seller who needs to unload a home as soon as possible will want to wrap up the closing process at the earliest possible date, while a buyer who is concerned about the condition of the home will want plenty of time for the home inspection and appraisal.
Some questions to ask a real estate professional and/or real estate lawyer before the purchase agreement is finalized:
- How much time will I have to get the home inspection scheduled, and is it enough?
- What happens if I can’t sell my current home in time to buy this one?
- Under what conditions will I lose my earnest money deposit?
- Is the amount of earnest money requested within local market averages, or is this much higher? If it’s higher, can we negotiate?
- If I lose my job or have my pay cut and the mortgage application is pulled, will I get penalized if the deal falls through as well? Can I get extra time to find a new lender?
- What closing costs do (buyers or sellers) usually pay, and does this contract reflect that? If not, why not?
- How low does the appraisal estimate have to be to allow us to back out of the contract and/or renegotiate the price?
Can I Get Out of a Home Purchase Contract?
The language in the contract and state regulations will guide both parties on whether a home purchase contract can be nullified and what the penalties might be. For example, buyers are likely to lose their earnest money if they simply say they don’t want to go through with the purchase. The seller could also sue for breach of contract.
The contract should spell out the terms of the purchase and allow each party a chance to nullify it under certain circumstances. For that reason, the language in the contract should be as clear as possible to avoid a protracted battle between real estate professionals and lawyers when one party wants to dissolve the deal.
For example, sellers could face a lawsuit if they back out of the contract because a higher purchase offer came though, unless there is a clause that allows for that. As long as the purchase contract is crafted with the appropriate language, the sellers, for example, could nullify the purchase if they can’t find another home or the buyers could withdraw if they are unable to sell their current property.
A well-written purchase contract should ensure—whether you’re a buyer or seller—that what’s most important to you will be covered whether the sale goes through or not.
