A real estate purchase contract—also known as a contract to purchase real estate or a residential purchase agreement—is a binding, bilateral agreement between two or more parties. They must each have legal capacity to make the purchase, exchange, or other conveyance of the real property in question.
The contract is based on a legal “consideration.” Consideration is whatever is being exchanged for the real estate and most commonly it is money. Consideration could also be other property or a promise to perform, such as a promise to pay.
The U.S. Statute of Frauds requires that real estate contracts must be in writing or they’re not enforceable. They must be signed by both the buyer and the seller. Handshakes are a thing of the past. Templates and forms are available but consider consulting an experienced real estate attorney or an agent if you’re handling a transaction on your own.
What a Purchase Contract Includes
In addition to the agreed-upon consideration, a real estate purchase contract should also include:
Identification of the parties
A description of the property
The essential details, rights, and obligations of the contract
Any contingencies or conditions that must be met before the sale can go through
The condition of property
What fixtures and appliances are included and what is not included
The amount of the deposit
Itemized closing costs and who is responsible for paying for each of them
The prospective date of closing
The signatures of each party
Terms of possession
The list of contingencies might include that the buyer be able to obtain financing and get a mortgage. It usually includes getting an appraisal and this is often required by the mortgage company. It can also include having a professional inspection.
Sometimes another sale must take place before you can close—”I must sell my home before I can afford to buy yours.”
Earnest Money Deposit
A deposit is usually made when the buyer signs the contract. The money is then held in escrow until closing by a third party such as the seller’s real estate attorney or a title company. The deposit is usually a fraction of the selling price and the amount should be specified in the contract. It’s a credit towards the final negotiated purchase price.
What If the Buyer Wants Out?
This is a serious consideration and can result in the loss of the deposit, or worse, being sued for specific performance or completion of the contract.
If you’re the buyer and you feel that you must get out of the contract, it’s best to do it during the time period when contingencies are being met. Contingencies are literally escape hatches and they can be legitimately be used but there’s no contingency for a simple case of cold feet.
The most common “out” occurs because of financing issues. If you try in good faith to get a mortgage and you’re turned down, the contract is canceled and no one is at fault. Many things can go wrong in underwriting. There’s no guarantee that a buyer will actually be given a loan just because she’s been pre-approved by a lender.
Another common “out” is the inspection contingency. If the inspection turns up defects—and they almost always all do—and if the buyer decides those deficiencies are too much to deal with, the parties can cancel the contract if they can’t reach an agreement regarding repairs. No one is at fault.
In some parts of the country, home inspections are completed in advance of executing a final purchase contract so an inspection might not be listed as a contingency.