The law of contracts (sometimes “agreements”) literally fills libraries and people devote their lives to learning and teaching its content. The issues can oftentimes be complex, confusing and daunting. I cannot possibly begin to cover all nuances in a real estate contract. However, I will provide a buyer and seller with five major points to consider in a contract to protect yourself.
- What is a real estate contract? A real estate contract is nothing more than an agreement about how the real estate will be sold by the Seller and purchased by the Buyer. It should contain all of the agreements between the parties. A typical consumer actually enters into a simple, unwritten contract each and every time a purchase is made no matter how small. However, we usually do not bring paperwork into donut purchases. Real estate on the other hand has significantly more value and can be far more complex. A written agreement allows for all of the details to be clear between the Seller and Buyer and in writing so as to prevent confusion and misunderstanding.
- Purchase price. Simply put: How much is the Buyer going to pay the Seller for the real estate to be purchased. Sounds simple enough but where will the money be delivered? Are the funds to be certified? (meaning the equivalent of cash?) Will there be an earnest money deposit? An earnest money deposit is a deposit towards the purchase of the real estate. It is most often made to the title insurance or closing company and paid towards the purchase at closing. However, if the Buyer fails to close for any reason that is not specifically allowed by the contract, the earnest money is forfeited to the Seller. Basically, it helps insure that the Buyer will carry through with the contract while at the same time giving the Seller some assurance that the Buyer is serious about the transaction.
- Closing date. When will the transaction take place? This is the day the Seller will deliver a deed and typically possession of the real estate and the day the Buyer will deliver money for the purchase. This date is often times about 30-45 days following the initial signing of the contract. The 30-45 day period allows the Buyer an opportunity to secure his financing. It also allows the title company an opportunity to prepare a title commitment and arrange a closing.
- Delivery of Deed and Possession. Just as it is stated; when will the deed be given to the Buyer and when will possession be granted? Typically, the giving of the deed and possession happen on the date of closing. Most Buyers prefer to have access to their home or real estate upon paying a significant amount of money. That being said, unusual circumstances do arise and the parties to a contract oftentimes work out arrangements that protect both sides to an agreement.
- Proof of ownership. Most real estate contracts will contain how the Seller will prove to the Buyer that the Seller actually owns the real estate to be sold. This is important because ownership of real estate is proven by several sources and methods. Liens, easements, encumbrances, and ownership issues can impact the real estate to be purchased. Most individuals are not equipped to determine whether these issues exist on real estate to be purchased. Therefore, most contracts state that the Seller will deliver proof of ownership and the condition of the “title” prior to closing. Most often this is through a “title insurance commitment.” A commitment will show who owns the real estate and what liens, easements, encumbrances, etc. exist. This document is usually prepared by a title insurance company on behalf of the Seller. Additionally, the title insurance company will usually handle the closing of the transaction too. This means that the title insurance company will collect a deed from the Seller and the money from the Buyer and pass them to each other.
As stated above, the process of entering into and fulfilling a contract can be complex and time consuming. I highly recommend that potential Buyers and Sellers employ a real estate professional such as a Realtor or attorney to assist in the process.