The following are some critical elements of a purchase agreement for real estate. This is not meant to be an exhaustive list, but it does cover the more essential items. Some of these points may or may not apply to your state or particular situation. If you have any questions about specific issues in your transaction, be sure to consult with an attorney before signing any contract for the sale of real property.
Real Estate Purchase Agreement
An agreement outlining the terms and conditions of the purchase and sale of residential property is known as a Real Estate Purchase Agreement or REPA.
This document may be submitted as an offer by prospective buyers (or agents). The seller may then negotiate terms before accepting the offer. For a less comprehensive offer to purchase real estate, Law Depot’s Offer to Purchase Real Estate might be a better choice.
1. Property description
Give a complete description of the property being purchased, including the legal definition and street address if applicable. Also include all attachments such as parking spaces, storage sheds, etc., whether they are included in the purchase price or not. Sometimes an extension will have its separate entrance from the outside to be treated as a particular unit. This must be clarified in the purchase agreement.
Sometimes, earnest money deposit requirements show that a buyer is committed to the transaction and not just shopping around for a better deal. The more difficult it will be to find another buyer if you decide not to go through with the sale, the larger this deposit should be; however, keep in mind that most sellers expect you to come up with at least some cash as part of your down payment (discussed below).
If you do not have money on hand and cannot borrow it from a lender or investor, try asking friends and family members before trying a bank or other lending institution; otherwise, they may feel like they were giving money away “for nothing.” If you do not make an earnest money deposit, the seller may ask for a larger down payment (discussed below).
3. Performance period
If it is clear early on that the purchase will not go through, it’s better to end things quickly. A performance period is often included in a contract that gives the buyer time to secure financing and conduct property inspections without undue pressure. This part of the agreement usually sets out how much time you have to satisfy these conditions; if there are enough contingencies built into your deal, however, this period can be as short as a few days.
Your real estate agent should be able to guide you through this process. The longer you have to complete these tasks before losing the deposit, the more likely you succeed.
4. Earnest money deposit
This amount is usually one percent of the purchase price (or, as the contract states, “1% of the purchase price”) and can be used as part of your down payment or held by a third party until closing if both parties agree. The third-party may charge interest on this period; however, most banks will not do this for less than six months since we’re talking about money.
One exception: some lenders will pay you interest for short-term deposits like this (like a bank CD). It would help if you tried asking before assuming that no such option exists. Another thing to note about earnest money: it’s sometimes refundable. Either way, you should try to negotiate this point thoroughly before signing the agreement.
5. Down payment
Most purchase agreements require a down payment of at least twenty percent (20%) of the purchase price, but sometimes more is needed. If you do not make a substantial down payment, you may have to purchase private mortgage insurance (PMI), which can be expensive and difficult to cancel later on if your loan-to-value ratio goes below 80%.
Don’t forget that the lender will want proof that you have enough money for closing costs and your other expenses before releasing funds for use in your transaction. Closing costs are usually about 3% – 5% of the sale price but could also include any repairs or upgrades required by the seller before closing.
Most states allow sellers to keep certain items, like appliances or window coverings, without your approval. If you are not happy with this arrangement, you may be able to negotiate with the seller for support on these “exempt” items; however, you can also ask that they be listed as non-refundable (and therefore non-negotiable).
If these “exempt” items are important to you and might entice you to purchase the property, try asking the agent if there’s any room for negotiation. Remember: It’s easier to ask now than later! Other more minor expenses could also fall under this category, so read your agreement carefully. Be especially aware of any changes to the purchase agreement concerning these smaller items.
7. Closing costs
These are prepaid expenses, including closing fees, inspections, surveys, taxes, and other related costs. Lenders require that these be paid in advance before they will release funds for use in your transaction. You can usually negotiate to have some or all of these costs reimbursed at closing if you have successfully secured a loan with your lender of choice. Otherwise, you might be stuck paying them out-of-pocket.
Ask about this possibility carefully before signing the contract to purchase since doing so is legally binding once signed by both parties. If you need more money allocated for closing costs to complete an offer, things could get messy fast! Consider asking for a short-term loan from the seller so you can complete your talks with them.
8. Transfer of property title
The buyer pays for transferring the title to their name, but sometimes it may be best or even required that this is done by a third party (for example, if the buyer does not yet qualify for a mortgage on their own). If this is required, there will most likely be an additional cost associated with it. The final transfer of property title usually occurs at closing; however, a transfer can occur just before signing in some states. This is known as “delivery versus payment,” You should discuss any applicable state laws regarding this arrangement with your attorney beforehand.
Your purchase agreement should specify at least one method of financing for which you are pre-approved. As with the down payment, lenders may also require proof that your closing costs (if any) will be covered as well before releasing funds for use in your transaction. This can become a sticky situation if different approvals are required, so try to address this issue ahead of time by talking to the seller or their agent about it via email or phone conversation. Again, better safe than sorry.
Most contracts include language requiring inspections. A home inspection is usually just one of these inspections; others may consist of an environmental assessment or surveys needed by lenders to ensure the property meets specific criteria they set forth is required before releasing funds. You may negotiate that the seller will cover some or all of the costs associated with inspections, but remember. These items are usually non-refundable if you decide not to buy the property once they’re completed.
This is the language used in your purchase agreement to outline what can and cannot happen during negotiations while it’s still in effect. It’s important because certain contingencies allow for cancellation of a contract by one party without penalty should something go wrong during negotiations that would make it impossible for them to complete their end of the bargain (for example, financing falling through at the last minute).
Others place limits on certain activities, such as requiring inspections within a specific timeframe. And still, others make a provision for a particular frame of time in which a decision on the purchase must be made. A good agent will usually help both parties determine what contingencies make sense and work best for their situation, as well as discuss them with you before finalizing negotiations on an offer.
12. Contingency clauses
Generally, there are three types of provisions that can be used as contingencies: financing, inspection/contingent upon satisfactory completion of repairs/or inspections, and home warranty protection. Most purchase agreements include some contingency clause, so if something unforeseen happens to cause either party to back out during negotiations, it doesn’t become a significant issue requiring legal action against one another.
However, different states have different laws regarding what is allowed in terms of contingencies. For example, most purchase agreements in California do not include a contingency clause for financing because it is assumed that the buyer will find funds necessary to complete their end of the contract.
13. Transaction terms
These are crucial definitions regarding how specific items will be handled during negotiations and how they should be accounted for on your side of things, especially if you happen to be using an agent who works with the seller rather than one working for you. For example, some owners may offer “seller’s credits,” which function like an allowance toward certain items on your closing statement (which works out like them reducing your closing costs).
Also, there may be used specifying how to commission fees are split between you and the seller or how earnest money is handled. If these items are not addressed in your purchase agreement, it could lead to problems down the road that you may or may not be able to solve without involving lawyers (obviously an option of last resort).
- How should a purchase agreement be drafted?
The purchase agreement typically contains the purchase price, the closing date, an amount of earnest money the buyer must submit, and the list of items included and excluded from the sale.
- Are purchase agreements important?
Between a buyer and seller, a purchase agreement is legally binding. The arrangements are usually related to the purchase and sale of goods rather than services. They can cover almost any type of transaction. Purchase agreements safeguard purchasers and sellers against contract breaches.
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