When a potential buyer puts an offer on a home, their agent creates a purchase agreement to present to the seller. This document contains vital information about the transaction, including the price the buyer is offering. Here, the seller finds financing terms, the date the buyer would like to take possession, any contingencies, and more.
Why is a Purchase Agreement Needed?
A purchase agreement, which many refer to as a real estate sales contract, allows the seller to review the buyer’s terms and make any changes. Once the seller signs the document, it becomes a legal contract.
Any errors could lead to a delay in the sale, the sale falling through, or the seller ending up with a less than favorable deal. For this reason, the seller must work with a professional who can guide them through the process and ensure the terms of the sale are favorable for the seller.
This document becomes a legal contract once the parties sign it. It typically spans seven to ten pages and contains a significant amount of information. Buyers and sellers usually find the following items in the contract:
- Details about the buyer and seller of the real estate, including names and contact information
- Property information, including the address and a physical description of the asset
- Processing fees and who will cover these expenses
- How the buyer will finance the property
- The closing date
- The date of possession by the new owner
- Any security deposit
- The down payment
- Property taxes that are the responsibility of the buyer
- Any contingencies requested by the buyer
- Repairs the owner must complete prior to the sale
- Items to remain in the home following the sale, such as major appliances or fixtures
- Terms for termination of the sale
- Seller disclosures
This document remains a work in progress until both parties sign it. Most real estate professionals keep a standard contract on hand. This document undergoes annual updates, so the agent for the buyer can quickly fill in the details of the specific sale.
Negotiating the Contract
The agent representing the buyer creates a real estate sales agreement when a person wishes to make an offer on a home. This serves as the official offer on the property, and the buyer’s agent forwards this document to the listing agent when it is complete.
The agent then shares this document with the seller, who may then accept the offer, decline it, or make a counteroffer. The seller typically has 24 hours to decide which route they would like to go.
Negotiations begin between the agent for the buyer and the listing agent, and these negotiations continue until all parties agree on the terms. When they do so, the buyer and seller sign the document.
The signed document serves as a legal contract, and the home is “under contract”. Closing on the property typically takes up to 45 days once the sales process reaches this stage.
Both parties use this time to take care of any required tasks. For example, the home typically undergoes an inspection. If certain items come to light during this inspection, the parties might need to renegotiate the sales contract or the buyer might choose to walk away from the deal. For example, when the buyer cannot secure financing for the purchase, the parties might declare the contract void.
The purchaser submits a security deposit when the home is under contract. This is also when they schedule the home evaluation by a licensed inspector and valuation, if the contract contains these contingencies. While the assessments are taking place, the buyer is actively working to secure the loan for the property.
While the home is under contract, the seller makes any repairs requested by the buyer and included in the contract. In addition, they remove their belongings from the home, so it is ready for the buyer to take possession.
At closing, the buyer and seller sign the required paperwork. The lender collects any funds from the buyer and disperses them accordingly. The local recording office assigns ownership of the asset to the purchaser, and the keys to the home exchange hands.
Purchase agreements fall into one of three categories. Each agreement option has its uses.
State/association purchase agreements are those typically used by real estate agents. Real estate professionals craft these documents in accordance with local guidelines.
General purchase agreements are shortened versions of the documents used by real estate agents and buyers who are handling this purchase on their own use this version.
Property-specific purchase agreements are for real estate deals that don’t involve a single-family home. For instance, sellers use this type of agreement for a mobile home or vacant land purchase. They share many similarities with the other purchase agreements.
However, they also include clauses that are specific to the property exchanging hands. Mobile home sales, for example, often have a “Residency Application” section. Before the buyer can purchase the home, this clause requires them to get residency approval when the home is on land owned by a third party.
Review this document carefully and work with a real estate professional. Once signed, the document is legally binding. The only exception is when one or both parties doesn’t meet the conditions and time limits included in the document.
The Buyer’s Obligations
When the buyer signs this contract, they are agreeing to the amount and the sale terms. Once both parties sign the document, the only terms they can negotiate are those involving the contingencies. If the buyer does not complete the sale and the contract doesn’t list the reason for backing out, they lose any deposit they paid.
The Seller’s Obligations
As with the buyer, when the seller signs the contract, they agree to the amount and the sale terms. In addition, they don’t dispute any conditions outlined in the contract. If a seller doesn’t meet a contingency, the buyer may exit the sale and receive their deposit back. The seller commits to completing the sale unless the buyer violates the terms of the contract.
Sellers find this document protects the buyer more than the seller. If the seller has any concerns about completing the sale, such as they may not find another home, they need to have a contingency in place to allow them to back out of the sale. Otherwise, they must dispute the legal document in court, which is costly and time-consuming.
One thing sellers must know before signing this contract is escape hatches. The buyer includes what appears to be a minor contingency when this clause is actually a way for them to walk away from the deal.
Many real estate contracts contain contingencies. Some are common, while others are not. Which contingencies can either party expect to see in this document?
The Inspection Contingency
Most purchase agreements contain the inspection contingency. This clause outlines the requirement for an independent evaluator to assess the property. If the buyer isn’t satisfied once this assessment is complete, they may exit the sale without penalty. The purchaser typically has seven to ten days to schedule the inspection.
Sellers may have the home inspected prior to listing it, but the buyer can request their own inspection. Upon completion of the inspection, the buyer may ask the owner to complete certain repairs. They may also accept compensation to have these repairs completed once the property exchanges hands.
In addition, the buyer might require additional inspections. For instance, they may request an asbestos or radon inspection as part of this contingency clause. If these inspections find problems, the purchaser might ask that the seller lower the price of the home or make repairs to the property before the sale is complete.
The Appraisal Contingency
Buyers want to ensure they are paying a fair price for the home, so the purchase agreement should include an appraisal contingency. This clause states the buyer may exit the sale without penalty if the home doesn’t appraise for the price outlined in the agreement.
This valuation occurs after the home inspection. If the appraised offer is less than the amount listed in the contract, the buyer may exit the sale or open negotiations.
The Financing Contingency
Buyers include a financing contingency to cover themselves if their home loan falls through. Delayed and terminated contracts are often the result of inadequate financing.
The Home Sale Contingency
Buyers often put a clause into a purchase agreement that states they must exit the agreement if their current home doesn’t sell. Sellers may make a counteroffer and suggest a bridge loan or other alternative in this situation.
Reviewing this Document
Both parties must carefully review the purchase agreement to ensure all figures are correct. This includes the purchase price, the earnest money, and the down payment.
A purchase agreement might contain an escalation clause. This states the buyer will increase their offer if another party outbids them. This clause may include a cap price, which is the maximum the buyer will pay. Carefully review these numbers before signing the contract.
Both parties should go over the processing fees and who covers these expenses. The costs include insurance premiums and fees, property taxes, and more. Most contracts have buyers covering certain costs and sellers covering others. However, the two parties may negotiate the costs.
The property doesn’t exchange hands until closing. Sometimes referred to as the possession date, the closing date may not actually be the same day as the day the new owner takes possession. In fact, 25 percent of closings experience delays, so both parties must prepare for this. In most cases, the buyer and seller schedule the closing date within 45 days after they sign the purchase agreement.
Financing issues remain the primary cause of closing delays. Prior to accepting an offer from a buyer, the seller needs to evaluate this individual’s financial strength.
Many buyers include a pre-approval letter when submitting an offer. This shows the seller that the buyer has the means to purchase the property. In addition, buyers may also come to the table with a bigger down payment to show they will complete the purchase.
What to Watch For
Sellers must watch for special requests from a buyer. This may be anything from asking that certain items remain in the home following the sale to a request that the home not be haunted when the new buyer takes possession.
Sellers need to review contracts carefully to ensure they find any special requests and can or will accommodate them. Often, there is a further conditions section in the contract. This is where the seller might find these special requests.
Work with a real estate professional when reviewing the contract. They help buyers and sellers find any clauses that could become problems as the process moves forward. Furthermore, these professionals ensure all conditions of the sale are met, so there are no delays at closing. While there is a fee for this professional’s help, the money spent is well worth it when the sale concludes with no issues.
Steltzner Law Firm assists clients with real estate closings in South Carolina. The state requires a closing attorney and we shine in this situation. Anyone in the Rock Hill, SC and surrounding areas in need of a closing attorney should call our office today to schedule an appointment. We are ready to help.