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You've found a home you love and it's actually in your price range. Your real estate agent pulls out an offer form -- eight pages of legalese -- and you start thinking that renting wasn't so bad after all.
Don't let the fine print in the purchase offer, or sales contract, keep you out of your dream home. But do make sure you understand exactly what you're agreeing to and use the contract to protect yourself.
Earnest Money Deposit Proves Buyers Are Serious
Be prepared to hand your real estate agent a check, generally between half a percent to 2 percent of the purchase price, as soon as you sign the offer. This is known as earnest money. If the seller accepts the offer, the check is deposited with an escrow company to later be applied to your down payment.
If a buyer pulls out of the deal without cause allowed in the contract, the seller may keep some or all of the deposit as "liquidated damages." Some states limit the amount of liquidated damages if a deal is broken. In California, for example, the maximum is 3 percent of the offer price. The penalty for pulling out of the deal should be spelled out in the contract.
Contingencies Give Buyers a Way Out
Nearly every real estate offer will include contingencies -- things that must happen for the sale to become final. There will be a time period specified in which each contingency must be met. If any one contingency is not met on time, the buyer may be able to get out of the contract.
Common contingencies relate to appraisal, mortgage approval (often at a specified interest rate), buyer's approval/acceptance of the results of a professional home inspection and completion of needed repairs. You can even make your offer contingent upon selling your old home to get the money to buy the new one.
Government Offers Contract Advice
The U.S. Department of Housing and Urban Development (HUD) publishes a booklet called Buying Your Home: Settlement Costs and Information that includes an outline of many of the legal issues and consumer rights to be aware of in a real estate transaction.
HUD says any purchase offer should cover the following points in specific, clear language:
- The sales price
- Details on transfer of title, and procedures to ensure that the title is free and clear
- Financing arrangements, including deposits, the down payment, and mortgage arrangements
- Pest inspection
- Home inspection
- Disclosure of lead paint or other environmental hazards
- How closing costs will be paid (who pays what)
- Title company or escrow agent to be used
Most offers include a specific date when the offer expires, deadlines for each contingency to be met, and an ultimate closing date.
Do You Need a Lawyer?
In some parts of the country, the escrow or title company handles the closing process and attorneys are not typically involved. Of course, you always have the option of enlisting the help of a lawyer or other expert. If you decide to use an attorney, you can make the sale contingent on an attorney's review of the agreement if your offer is accepted. That way you don't waste time and money having a lawyer review offers that end up being rejected.
The purchase agreement doesn't have to be intimidating. If you've come this far in the home buying process, you've got enough on the ball to write a contract that protects you while still looking attractive to the seller.