How to Read a Real Estate Purchase Contract
Disclosure: the information on this website is not a substitute for, and does not replace the advice or representation of a licensed attorney
The purchase contract is one of the quintessential pieces to selling your home, but for many, this 13-page anthology of sophisticated legal jargon can be intimidating. Fortunately, if you understand how a contract is written, it can actually be quite simple to comprehend.
Did you know The Columbus Board of Realtors has a standard contract with a couple dozen write-in boxes for the price, close date, etc? In fact, over 95% of the standard contract is unchangeable. This makes it really easy...if you know what you're looking for.
This guide will focus on the customizable contract terms to help you understand what matters and what doesn't. It's broken down by section, so you can easily follow along with a standard Columbus Board of Realtors contract. Without further adieu, let's dive into the not-so-exciting topic of how to read a real estate purchase contract!
Page 1, Section 1
This may go without saying, but the purchase price is how much you're selling the house for. At closing, you'll receive the purchase price less your outstanding mortgage amount, Realtor fees, and closing costs. Click here for more information on closing costs.
Additional Terms & Conditions
Page 1, Section 1.1
The additional terms and conditions section is where buyers ask for concessions outside of the standard contract. Below are some common examples of what you might find here:
Home sale contingency
Seller paid closing costs
Flexible closing date
Right to choose title company
Many contracts don't have additional terms; and often times, the terms requested, don't make a material difference. However it's very important to be aware of anything the buyers ask for in this section.
Helpful Hint: Additional terms and conditions may also be included as a separate contract addendum.
Attorney Approval Clause
Page 1, Section 2
This is informally referred to as the "cold feet clause", and simply states, "the buyer or seller may terminate this contract if this party's attorney disapproves of this contract". It essentially gives the buyers an out if they change their mind about buying your home within a certain number of days.
While this may sound scary, attorney review clauses are very common and should be expected. A typical purchase contract will include a 1-3 day attorney review period. Anything beyond 3 days should be questioned unless there are extenuating circumstances.
Pages 1-3, Section 3
The financing section is broken up into 3 main parts: type of financing, deadlines, and appraisals.
The type of financing refers to how the buyers are paying for your home. The most common types include cash, conventional loans, and government loans (FHA, VA, etc).
Financing deadlines outline when various steps of the loan process are due.
Proof of Funds Deadline: Cash buyers need to provide evidence of their ability to pay for your home by this date; typically within 2-3 days of contract acceptance.
Mortgage Pre-Approval Deadline: Buyers getting a mortgage need to provide a lender pre-approval letter by this date; also typically due within 2-3 days of contract acceptance.
Loan Application Deadline: Buyers must make a formal loan application by this date; typically within 7-10 days of contract acceptance.
Loan Commitment Deadline: Buyer's loan must be formally approved with no contingencies by this date; typically 30-40 days from contract acceptance. In order to prevent last-minute issues, this should be due at least 2 business days prior to closing.
Last but not least is the appraisal contingency. The buyer has a right to an appraisal to ensure the home is worth what they're paying for it. Most lenders also require an appraisal before issuing a mortgage. This usually isn't a problem, but occasionally the appraiser will value the home less than the agreed upon purchase price. If this happens, the buyer has the right to terminate the contract or attempt to renegotiate the price.
Taxes & Assessments
Page 4, Section 4
In 1988, presidential candidate George HW Bush famously said, "read my lips; no new taxes". Apparently this never came to fruition, hence the taxes and assessments clause.
This section is a boiler-plate disclaimer that essentially states property taxes might go up. Unless you're still living in a 1988 dream-world, this shouldn't come as a surprise.
It also states that the seller is required to pay property taxes through the date of closing. Since property taxes are paid in arrears (meaning 2017 taxes are paid in 2018) you'll likely owe some tax money at closing.
Fixtures & Equipment
Page 5, Section 5
This section includes a long list of "stuff" that should stay with the home when you move out. The list includes things like carpet, the mailbox, smoke detectors, etc. It's all pretty common sense, and probably goes without saying.
With that said, you should pay close attention to the write-in section where buyers can request additional items. Typical requests include kitchen appliances and window treatments, but it can also include more (furniture, backyard play-set, etc). All of this is negotiable, and can be removed through a counter-offer.
Inspections & Tests
Pages 5-7, Section 6
The infamous home inspection - everyone's (not so) favorite part of the home sale process. Unless otherwise specified, the buyers are entitled to an inspection, so here's a quick rundown of what you should expect.
Shortly after going into contract, the buyers will schedule the home inspection. It typically happens during the first week and lasts 3-5 hours, so plan accordingly. The inspector will do a thorough investigation of your home and create a lovely 20-30 page report outlining all of your home's deficiencies. Remember, the inspector is paid to find problems, so even the most perfect home in the world will have issues. After this, the buyers will submit a formal Request to Remedy asking you to fix some of these issues prior to closing.
As the seller, you can either accept the buyer's request or submit a counter, opening up the contract for another round of negotiations. The remedy process continues until both parties come to an agreement or until we hit the remedy deadline.
With all that said, there are two inspection deadlines to pay attention to on the contract:
Specified Inspection Period: The number of days after contract acceptance that the buyers have to complete a home inspection and submit a remedy request. Typically 10-12 days.
Agreement to Remedy Period: The number of days after the Specified Inspection Period that the buyer and seller have to come to agreement on the remedy request. Typically 3-5 days.
Helpful Hint: Sellers should budget up to 1% of the sale price for remedy repairs (hopefully less, but plan for the worst). While this may sound excessive (and often times it is), it's unfortunately how the market works in Central Ohio. Buyers typically have more leverage than sellers, but every situation is unique. The best way to handle this is to recognize exactly how much leverage you have and negotiate accordingly. For example, how quickly did your home go into contract? Do the buyers have to be out of their current home by a certain date or are they on a month-to-month lease? Knowing exactly where you stand might just allow you to call the buyer's "bluff". Talk to your real estate agent to determine the best negotiating strategy to limit your exposure to excessive remedy requests.
Page 7, Section 7
Over 90% of transactions in Central Ohio include a seller-paid home warranty, which typically costs $500-700. The warranty provider and cost will be listed in this section.
Helpful Hint: Since warranties are common place in Central Ohio, it's best to accept it if requested. Rather than negotiating it out of the contract, try to negotiate a higher sale price to off-set the cost.
Deed, Title Insurance, Utilities, HOA, Damage to Premises, etc.
Pages 7-9, Sections 8-11
Sections 8-11 includes a laundry list of boiler-plate legal jargon. Here's a quick summary...
Deed: Seller agrees to transfer the property deed free and clear; no liens, encumbrances, etc.
Title Insurance: Seller agrees to pay the buyer's title insurance (another standard practice in Central Ohio). Title insurance rates are set by the government and are approximately 0.5% of the sale price. Click here to calculate your exact rate.
Utilities & HOA: Seller pays for utilities and HOA fees through the date of the buyer's possession. So if you move out early, don't be a jerk and turn off your electric. You can be sued.
Damage to the Premises: Seller is responsible for any damage to the property prior to closing. And if something big happens, the seller is responsible for fixing it and letting the buyers know.
Earnest Money Deposit
Page 9-11, Section 12
Earnest money is a good faith deposit made by the buyers to demonstrate their intent to purchase your home. The deposit is either collected 3 days after going into contract or 3 days after the remedy agreement (this is more common).
We typically like to see an earnest money deposit around 1% of the purchase price, though it generally doesn't exceed $5,000.
Contrary to common belief, the seller does not always keep the earnest money if the contract is terminated. While this can happen in theory, it can take months, or even years, to hash it out in court.
Additional Provisions & Notice to Parties
Pages 11-12, Sections 13-14
This is more boiler-plate legal jargon including some of the following ideas...read on if you're bored and have nothing better to do.
The contract is legally binding
Oral agreements not included on the contract don't count
Electronic signatures are permissible
You can't not sell your home to someone because their Hungarian (or any race for that matter)
It's the buyer's responsibility to check for sex offenders in the neighborhood (such as Roy Moore or Kevin Spacey).
Closing & Possession
Page 13, Section 15
Closing is when you officially transfer ownership to the buyers. Possession is when the buyers get the keys and move in.
Helpful Hint: Closing and possession usually happen on the same day in Central Ohio. If you need a few extra days to move out after closing, be sure to request this in a counter-offer.
Duration of Offer
Page 13, Section 16
This is how long the offer is open until. The offer is considered null-in-void after the deadline, so this time is very important if you plan on accepting the offer.
Helpful Hint: Counter offers can be submitted after the deadline, but try not to leave buyer's hanging for too long. If you wait 3 days to submit a counter, they might go off and buy another house.