Understanding a Real Estate Contract or Purchase Agreement

Let's break down the purchase contract so you can clearly explain it to clients. 

A purchase contract can be an intimidating part of the home-buying process. As an agent, you are making sure that everything is clearly communicated and explained. As a home buyer, you are making sure you know what you’re signing and what each deadline/contingency means for you. If you haven’t already, read our first blog: “How to Submit An Offer on a House.”

Now that you have the basics covered, we are going to dive into each section of the purchase contract. You can use this article as a teaching tool for your clients or as a cheat sheet for your reference.  

Topics we are going to cover:

• Price
• Timing
• Addendums
• Contingencies
• Earnest money
• Signatures

Price

The price is the first thing that the listing agent is going to look at when you submit a purchase contract. When clients are deciding what price, they are going to pay on a place they need to consider a few items; area, demand, comps, and whether the house suits their needs. Don’t just rely on your agent to give you a number for your purchase price. Ask for comps and compare the interior of the homes. Compare bathrooms, room sizes, and if the kitchen is updated. When you are deciding on the purchase price consider the closing costs paid by the seller, home warranty paid by the seller, and/or title search paid by the seller. If you have the seller paying any of these costs, then your purchase price is lower than offers where there are no other fees paid by the seller. Sometimes if the buyer has a great debt-to-income ratio but they are tight on the down payment, they can increase the purchase price by 4k and then have the seller pay 4k in closing costs. This allows the buyer to have more cash in the pocket once they move into the house for fixes, updates, or furniture. 

Timing

Time is a huge consideration because it controls the timeline for obtaining title, financing, and inspection. Having shorter more controlled intervals for these items can make your offer more appealing. Purchasing with cash vs. a mortgage can also speed up the closing date because you don’t have to jump through as many hoops as with a loan. The seller getting paid quicker and easier is a great thing for your offer. In a typical market, the window to perform an inspection is normally around 7 days. With the current state of the market in 2021, inspections are backed up at least 3 days. I try to give my buyer 9 days to get an inspection. If you passed your deadline in the contract, then you can no longer use the inspection contingency. There’s also a deadline for the loan approval. A typical contract has a closing date about a month and a half out from the day they went under contract and usually possession occurs on the same day. 

Addendums

Addendums are used to correct or change an executed contract. You can use an addendum to request fixes after a real estate inspection. You can also use it before you have an executed contract by adding an escalation clause. An escalation clause is when you are willing to pay the asking price for a home, but you will also pay up to “X” amount if there are other offers that go above the asking price. This allows your client to beat out other offers without going above their top dollar. 

Contingencies

Contingencies are a list of requirements or conditions that must be satisfied before closing. Essentially, the contract is contingent on these items and without them the buyer can back and terminate the contract with no penalty. There is an inspection contingency, a finance contingency, and an appraisal contingency. 

• The inspection contingency allows for the buyers to inspect the whole property. If big-ticket items come up as needed repairs, then you can write a post-inspection addendum that requires the seller to reduce the price or repair items that need to be fixed.
• A finance contingency allows the buyer to have a certain number of days to obtain loan approval. If they have done their due diligence to obtain a loan but can’t then they can opt-out of the contract with no penalties.
• The appraisal contingency allows the buyer to get a formal appraisal for the property. If the appraisal comes in lower than expected, the buyer can break the contract with no consequences.

Earnest money

Earnest money is also known as good faith money. It is a payment made by the buyer and usually held by the Buyer’s brokerage. It eventually becomes part of the down payment. Typically, the earnest money is about 1% of the purchase price. 

Signatures

Signatures need to be obtained by both the listing and buying agent by specific deadlines or the contract is null. The buyer’s agent submits a purchase contract with an expiration date. The listing agent has to submit a counteroffer, accept the current contract and terms, or decline within the time frame created by the buyer’s agent. You can obtain E-signatures or get handwritten signatures in person. As an agent, you should communicate the process with your client and find out which method is comfortable for them. If you are using e-signatures make sure you are using a platform that verifies the buyer/seller’s account before using it. I recommend using Dotloop or DocuSign.