While there are many different types of real estate contracts, including the land contract and the assignment contract, if there's one type of contract new investors really need to know about, it's the purchase contract. We've created an in-depth guide to this agreement below. Read it over so you understand all the components included in a real estate purchase contract. Armed with this knowledge, you should feel more than ready to make an offer on an investment property.
What is a real estate contract?
A real estate contract is any legally binding agreement that guides a real estate transaction. In real estate, specific contracts are used between two or more parties to facilitate the purchase or exchange of a piece of property. While the exact nature of each contract can vary by state and according to the type of transaction, according to the statute of frauds (SOF) in U.S. common law, these agreements must be in writing and signed by both parties to be considered valid.
At its core, this statute is meant to reduce instances of fraud or situations where the court has to take the word of one person over another. So if a real estate contract is not written and signed, it won't be considered enforceable by a court of law. This statute is also why handshakes and verbal agreements are highly discouraged and why buyers and sellers are highly encouraged to work with a real estate agent or real estate attorney.
The components of a real estate purchase agreement
When people talk about a real estate contract, they usually mean a real estate purchase contract. This agreement is meant to facilitate the transfer of ownership of a property from one party to another. Again, while the specifics of purchase contracts can vary by state, in general, each agreement must contain similar information. A real estate purchase contract is made up of the following subsections.
Identity of the parties
The first thing the real estate sales contract must do is identify all parties involved, listing out the full legal name of the buyer and seller. Then, if the buyer and seller are being represented by real estate agents, each agent must be listed as well, along with the real estate broker of record and their contact information. Although it may happen in a different section of the contract, the information for the lender and title company or escrow agent should also be listed.
Once all parties have been listed, it's time to lay out important information about the property. These details can include a legal description of the property, as well as information regarding the condition of the property.
Details, rights, and obligations of the contract
When you sign a real estate purchase contract, you are agreeing to accept that you have certain rights and you'll fulfill certain responsibilities. Typically, these responsibilities include an acknowledgement you intend to move forward in good faith and you understand time is of the essence. You will also usually be informed you have the right to seek guidance from a real estate attorney.
Purchase price and financing details
Next, the contract will contain the buyer's proposed purchase price and any relevant details about how the buyer intends to handle financing the purchase of the property. The contract will also include details about the buyer's earnest money deposit.
In real estate, an earnest money deposit is a good-faith deposit the purchaser puts down toward buying the property to show the seller they're serious about buying it. Notably, that deposit is also used as monetary damages for the purchaser in the event the purchaser should decide to breach the contract and walk away from the real estate deal entirely.