Wait, Don't Sign THAT Contract: Everything You Need to Know Before Signing a Real Estate Contract
You've found the home you love, now what? Before you sign that LEGALLY BINDING sales contract, there are some things you should consider....
What defines a real estate contract?
Every real estate contract meets four requirements to be valid:
1. A valid home purchase agreement must be in writing
2. The contract must contain an offer and an acceptance
3. The purpose of the agreement must be legal
4. There must be an exchange of things of value (usually, it’s money for property)
In addition, all parties signing must be legally competent. If you sell a house to a 12-year-old and he backs out, you probably won’t be able to enforce your contract. Likewise, if the person buying or selling is elderly and not legally competent (ie coercions, dementia etc.), then the contract isn't legal.
Verify your rate-
A good agent will have helped you take the necessary step of getting prequalified or preapproved by a lender prior to showing you homes. This ensures you are buying within your budget and helps the agent know how to negotiate and advocate for you and your financial needs within the contract negotiations. But, sometimes other factors can affect your rate. Covid, mortgage rate changes, or credit score changes are just some things that can influence your rate. Additionally, if its more than a set number of months from when you first received your rate, or if your rate wasn't locked in, then that number could have changed.
Buying a home is serious business. It involves a lot of money and a valued property. Hence, it’s important that legal safeguards are in place. A purchase and sale agreement/contract provides these protections for both the buyer and seller. Learn how this contract works. Know what to look for and what your duties as the buyer are. Be mindful of deadlines. Ask questions about anything you don’t get. Remember: it’s easy to sign your name. But it’s hard to break a contract.
Defining a purchase and sale agreement-
A purchase and sale agreement is a real estate contract. It’s a written agreement between buyer and seller to transact real estate. The buyer agrees to pay an agreed-upon amount for the property. The seller agrees to convey the deed to the property.
The deed is a legal instrument.
A real estate contract often includes:
• Price (and often details of the approved financing information)
• Sales/closing target date
• Deadline by which the offer expires (though it is always appropriate to submit an official offer withdrawal if you choose to allow expiration or are withdrawing for any reason represented on the contract)
• Earnest money deposit amount, possible additional earnest money to be submitted
• Details about who pays for inspections, survey, title insurance, home warranty, etc.
• Details about adjusting utilities, property taxes and other fees
• Contingencies, known as conditions that must be fulfilled for the contract to proceed. Contingencies give buyers a chance to back out of the purchase. For instance, an offer is subject to the buyer obtaining financing. Another (and most common), is getting a favorable report from a licensed home inspector.
• Make sure everything is in writing. Sometimes, buyers and sellers will agree to certain things verbally. For example, the seller may agree to leave some furniture behind for the buyer or the buyer may agree to accept a Real Property Report as-is rather than requiring an updated one. If you and the other party agree to anything, be sure to add it into the Contract in writing so that it becomes a term of the Contract and thus binding on the other party.
How the contract works-
In many states, the initial offer is in the form of a contract. If the seller accepts and signs, that converts the offer into a legally binding agreement. If rejected, the seller can counter the offer (although, a counter is not required and should not be expected). Both parties can counter the offer as many times as they want until they sign a mutual agreement or one party stops responding.
How long does it take to close on a house?
When buyer and seller each sign, the contract becomes legally binding for both. A contract is important, and will spell out clearly defined terms, including timing and contingencies. The time to close depends on the contract terms, how quickly a lender/appraisal/title can turn around documents and process the sale and if any liens appear on the property. Cash deals can sometimes close quicker. Just remember, everything is negotiable. That being said, it is not unheard of to have a closing take, on average, 21-45 days from accepted offer to closing day to funding and keys.
Who provides the contract?
The buyer’s agent usually creates the contract. In the state of Texas, we have forms provided by the State board and additional promulgate forms to use. It is up to the buyer's agent to use the appropriate contract to get signed by the buyer prior to submitting to the seller and seller's agent for approval. If there are special things you would like outlined in these standard contracts, or you are an LLC or other Corporate entity, it’s always smart to get a lawyer to review the contract. The lawyer has specialized training in contract formation and interpretation. (You'll also see lawyers involved in commercial real estate, or with builders).
Do you need a real estate agent to buy a home?
Not necessarily. While our state and national governing boards prevent a real estate agent or Realtor® from creating a contract from scratch (aka practicing law without a license), there isn't one prohibiting an individual from doing so. Keep in mind, though, that there might be an agent on the other end of that deal that might require the appropriate contract and forms. Luckily, a quick visit to texasrealestate.com can provide you with the forms to download yourself. I would recommend using a buyer's agent, though. They don't cost you a thing and you'll have someone to guide and advocate for you throughout the contract. Think you'll save money by not using an agent? Think again, the sales agent will still receive the commission as it has already been negotiated with the seller outside of the contract and their client is the seller- not you.
What to look for in a contract
It’s important to review a contract thoroughly. If anything is unclear, ask your agent and attorney. The key info to watch for has to do with buyer contingencies. These allow the buyer to make up their mind on the purchase based on two things. The first is their own investigation of the property (aka, inspection). The second is formal disclosures the seller gives the buyer through escrow. Once contingencies are removed, the buyer can no longer back out of the purchase without penalty, usually in the form of forfeiture of some serious money (and sometimes, they still can pursue legal action against you).