You’ve visited the open houses, you’ve looked at all the properties, you’ve gotten your financing set up and you’re ready to make an offer. Congratulations! Here’s what you need to know about the next step of this legal process: preparing and signing the purchase agreement for the house.
What Is A Purchase Agreement?
When you put in an offer on a house, your real estate agent or attorney will put together a purchase agreement, also known as a purchase and sale agreement,for your house, which is a binding contract between the buyer and the seller. The purchase agreement will cover the basics of the transaction, such as what’s included and excluded, the terms of the sale, conditions under which you can back out and the relevant deadlines.
Let’s look at each of these components more closely.
What Is Included In A Purchase Agreement?
Here are the main elements that your purchase agreement should have:
- A description of the property
- The agreed-upon selling price
- The deadline by which the offer must be accepted
- Terms of possession, including the closing date and details on a potential rent-back from the seller
- Closing costs and who will pay them, including real estate commission
- A list of everything that is included and excluded (such as appliances, fixtures, etc.)
- Details on the earnest money – the amount, the specifics on third-party holding specifications and confirmation of what happens if the buyer backs out
- Title information, including the title insurance company and any title conditions
- Contingencies (more on these below)
- Riders (more on these below)
What The Seller Should Look For In A Purchase Agreement
In addition to checking all the details, there are a couple of areas where a seller should pay special attention.
While this goes without saying, it’s important to realize that the terms of purchasing a house can be just as important as the price, says David Reischer, real estate attorney and CEO of LegalAdvice.com. “The seller should expect (that the buyer may) offer a bigger down payment, waive inspection contingencies or change the closing date to accommodate them.”
Home sale and settlement contingencies are what buyers use when they have to sell their current home in order to buy another home, says Russell Volk, REALTOR® with RE/MAX Elite in Huntingdon Valley, Pennsylvania. “A ‘home sale’ contingency is when buyers still don’t have a buyer for their house, and a ‘home settlement’ contingency is when buyers already found their own buyer and are just working towards settlement, which is a less risky scenario for the sellers,” he explains. These contingencies could throw off the entire agreement, though, if something falls through on the buyer’s end.
The home inspection procedures, including the timeline, whether the house is being sold as-is or if repairs will be made, should also be included.
What The Buyer Should Look For In A Purchase Agreement
The buyer needs to ensure they are protected in case something goes awry with the inspection or their own financing. The main way they can do that is through adding contingencies.
Common Contingencies In A Purchase Agreement
While contingencies are for their peace of mind, thebuyer should still have as few contingencies as possible in order to ensure a higher likelihood of securing the house, especially in a situation where there may be multiple offers, says Reischer.
However, you also shouldn’t forgo anything you need to protect yourself. Here are the most common contingencies that allow a buyer to back out of a purchase agreement:
- A mortgage contingency clause: This allows a buyer to back out of a contract if they are unable to receive a mortgage from a lender. This can apply even if they have a preapproval, as circumstances can change and a preapproval is not a guarantee of eventual financing.
- A home inspection contingency clause: This is where the deal is most liable to go awry, says Reischer. “If the buyer discovers something during the property inspection that he or she cannot live with, the buyer will nearly always have the option to terminate the sale and get their earnest money returned,” he says. “After that milestone, it is much more challenging to back out of a deal unless another contingency is specifically drafted into the agreement.”
- Specialty inspection contingency clauses: Volk adds that you should add in additional inspections as well for things that are not visible to the naked eye, such as the septic system or mold testing. “These ‘specialty’ inspections go beyond a general home inspection and might reveal a costly problem; if you don’t have a contingency in place, you might be in for a big surprise,” he says.
- A low appraisal contingency clause: Even if the house passes all inspections with flying colors, a lender still must do an appraisal to ensure that the market value is at least as much as the selling price of the home in order to meet the loan to value financing that the lender is offering. Otherwise, the buyer will need to make up the difference in cash or negotiate a lower selling price.
- Title contingency: This protects the buyer from any title issues at closing.
Adding A Rider To The Purchase Agreement
A rider is a document that outlines additional terms of the purchase contract and is quite common in most real estate transactions, Volk says. “When a list of buyers’ requested inclusions is extensive – such as light fixtures, outdoor furniture and gardening or landscaping equipment – a rider is used to list each item that buyers want included with the sale.”
And, adds Reischer, most attorneys will include language identifying that if there is a conflict between duplicate information – or a diversion in language between the rider and the original purchase contract – the rider will override the language in the purchase contract. Therefore, it’s crucial to give the verbiage in the rider the same attention as the actual contract itself.
Signing The Purchase Agreement
Finally, it’s time to sign on the dotted line. It’s ideal for both parties to be present, but sometimes that isn’t practical. In that case, the most important thing to know is who signs the purchase agreement first– and that’s the buyer, who puts down the deposit money to be held in the escrow account. Then, if all the details are in order, the seller signs, making it an officially executed contract.
When determining what a purchase agreement is, remember that relying on the assistance and knowledge of both a real estate agent and lender can be invaluable in making sure that the document is legal, processes are properly followed and the transaction proceeds smoothly.
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