What Is a Real Estate Contract?

When buying or selling a piece of real estate, such as a home, land, or condo, it’s important to have an official contract in place. Known as the real estate purchase agreement, or a deed or mortgage, this document outlines all aspects of the transaction between the buyer and seller. It includes the purchase price, an adequate description of the property, and events that must occur before closing (known as contingencies). This contract also explains how the parties can cancel the sale if certain conditions are not met.

The contract should clarify which party is responsible for the various fees associated with closing, such as escrow charges, title search fee, notary fees, recording fees, transfer tax, and other similar expenses. In addition, the contract should include a risk of loss clause specifying who is liable for damage to the property between the time of signing the contract and the actual closing date. It is also common to include a “considerations” section that specifies anything of value exchanged during the transaction. This often simply refers to money, but could include credit or other items of value like furniture and appliances.

In residential real estate transactions, the buyer must deliver a deposit, or earnest money, to the seller upon signing the contract. This deposit is typically made out to the seller’s attorney, who holds it in a special account for safekeeping. The amount of the earnest money will be specified in the contract and is forfeited if the buyer backs out of the deal unless the seller can meet certain contingencies, such as an acceptable home inspection.

Once the earnest money is deposited, the buyers can arrange for a home inspection, which is usually conducted by a licensed and insured professional. During the inspection, any problems can be identified and addressed by the attorneys writing up the formal contract. In many cases, the contract will be contingent upon a satisfactory inspection within a reasonable period of time.

Buyers must also agree to finance the sale. In the contract, they will specify how they intend to pay for the property, whether by cash or with a new mortgage from the lender. If the mortgage is backed by the Federal Housing Administration, a specific rider or addendum may be necessary to disclose rules and requirements.

Other types of real estate contracts exist, including a car (vehicle) purchase agreement, commercial real estate purchase agreement, or land purchase agreement. These contracts typically have clauses that pertain to the type of real estate being sold, such as requirements for a condo association. Another type of real estate investment contract, called an assignment contract, is used for wholesaling. In this strategy, investors find distressed properties, secure them under contract, and then sell them to a second investor. This is a more risky investment strategy, and the contract will have special provisions for such deals.

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