THE REAL ESTATE CONTRACT EXPLAINED
In our market, any offer for sale is made up of the basic body of the contract, any addenda or contingencies to the contract, plus any required disclosures. While not the most riveting of subjects, this article is one of the most important real estate articles that we’ve written. Here’s what you need to know to decode the real estate contract in the DC Metro area.
This article explains all of the most important terms of the real estate contract so you are prepared to negotiate to the best of your ability – as a buyer OR a seller.
BASIC TERMS IN THE BODY OF THE SALES CONTRACT
The most important part of every sales contract is the sales price. While all of the terms discussed below make up the full scope of the offer or real estate contract – money talks. Thus, price is the first thing buyers and sellers want to talk about.
Note: In our area, if the property has just gone on the market, it is unlikely that you will be in a competitive offer situation.
Sometimes you can negotiate for the seller to pay a portion of your closing costs. It is not usually possible in our current market environment, but it can happen from time to time if a house has been on the market for a little while. It is more common on properties under $700,000 and with FHA and VA loans. Whatever number you ask for in closing cost assistance is effectively deducted from the net proceeds to the seller. So an offer of $710,000 with $10K in closing costs assistance equals an offer to the seller of $700,000. If you do not need the assistance, we do not recommend asking for closing cost assistance in a competitive situation. Closing costs can vary significantly depending on your situation. If you have any questions about closing costs, you should talk with a lender.
Down Payment Amount/Loan Type
There are various types of loans to choose from, which you can explore here. Please discuss the type of loan and amount of down payment you qualify for with your lender.
Earnest Money Check
When you write an offer, you need to submit an earnest money deposit (EMD) that will be held in escrow by the real estate brokerage company or settlement company. The check will remain “in escrow” until settlement, when it is credited back to you towards your closing costs or downpayment. Read more here about earnest money deposits, why you need them, and how to protect them.
Typically, settlement dates are anywhere from 30-60 days from contract date to closing, depending on the needs of the buyer or seller. For a vacant property, the seller will typically want to settle as soon as possible, which is around 30 days from the real estate contract negotiation, sometimes sooner if the lender can close quickly or if it is a cash offer. Sometimes, the seller will request a rent back, which is when you close on the property and then the seller rents back from you. You can read more about rent backs (or post-settlement occupancy) here and we explain it more in detail later in this article.
Read more about what happens at settlement here.
In our market, the buyer has the right to select the title company. This is a non-negotiable portion of the contract. Your Realtor can suggest options.
Wood Destroying Insect Inspection
This inspection is required by most lenders in order to process a loan (exceptions can be new construction or mid to high-rise condo buildings. In Virginia, the purchaser selects if they will pay for the inspection or if the seller will pay. This cost (approximately $75) will appear on the closing disclosure at settlement charged to whichever party is indicated in the contract. If any repairs need to be made per the inspector, the seller is always responsible for that cost.
They can pay the treatment company directly or have the cost taken out of the proceeds at settlement. In D.C., the contract does not give an option for who pays for the inspection; it is always the purchaser. One caveat for both jurisdictions is if the purchaser is using a VA loan, the seller is obligated to pay for the termite inspection. If you have the choice, the advantage of paying for the inspection yourself is that you are in control and would know it was a reputable company doing the inspection.
Buyers have the option of asking the sellers to provide a home warranty. Home warranties are not typically part of the contract in our area. Usually, buyers make this request in older properties or where the purchaser is afraid an appliance or major system won’t last much longer. The cost is about $550 and the purchaser or seller is able to pay for this warranty. Again, this option can be negotiated, but in most cases is not.
For properties in a homeowners association or condo associations, this contingency is part of the contract. Once you receive the condo/HOA documents for the association, you have three days to review them. If within that three days, you find something in the rules or documents you don’t like (for example they have a regulation on renting out the unit or types of pets you can have that won’t work for your situation), you have the option to void the contract. However, that right automatically expires three calendar days after we receive the documents.
REAL ESTATE CONTRACT STANDARD CONTINGENCIES AND TERMS
In addition to the main body of the contract, buyers can include addenda (typically made up of contingencies) to the contract. In a competitive market like ours, often the seller is looking for an offer with no or few contingencies.
Just like any other term of the real estate contract, contingencies can be negotiated between the buyer and seller.
In a multiple offer situation, please no that the seller will not typicalyl negotiate with you, they will select the best offer. So it is important to put your best foot forward.
The major contingencies that are a part of most contracts are the home inspection contingency (and radon contingency for homes with basements), appraisal contingency and financing contingency. These contingencies are all very complex, so we have linked to more detailed explanations for these important terms (just click on each title below).
Home Inspection Contingency – Allows buyers to void the contract or negotiate for repairs if the home inspection reveals issues with the property. In a competitive situation you may want to utilize a pre-inspection, read more about that here.
Radon Contingency – Allows buyers to void the contract or negotiate for remediation if the radon levels in the home are higher than 4.0 pC/L. This contingency typically appears for homes with basements.
Appraisal Contingency – Allows buyers to void the contract or negotiate the sales price if the appraised value is lower than the negotiated sales price.
Financing Contingency – Allows buyers to void the contract if they are rejected for their loan.
ADDITIONAL CONTINGENCIES, CLAUSES, OR AMENDMENTS
The items below are a part of most contracts but are not as common as the contingencies discussed above. You should discuss with your real estate agent if these contingencies make sense for your situation and your real estate contract and the current real estate market.
Purchaser’s Home Sale Contingency
This contingency is used when a buyer has to sell their home in order to qualify for the purchase of the next home. With the home sale contingency, the buyers would have a certain number of days to put their home on the market (if it is not on already) and get a contract on their home with the home inspection contingency removed. They would also need to indicate how many days they will have to put their home on the market and at what price they will list it. Most sellers want to see the house listed for sale within a week or so. However, this contingency can be difficult to negotiate and is more likely to work with a home that has been on the market for a little while or for homes at higher price points. This contingency is almost never successful in multiple offers. If the buyer’s house does not sell, then the buyer and seller can agree to extend the timeline, or the contract will become void. These are more likely to be accepted if the house you are making an offer on has been on the market for a long time.
Contract Contingent on Successful Settlement of Purchaser’s Home
If the buyer’s house is already under contract, they could make their contract contingent on the successful settlement of their home. The successful settlement option is preferable (over the home sale contingency) for sellers, as there are no major contingencies remaining on their home’s contract. It is then likely that all will proceed smoothly to settlement, so most sellers will accept a settlement contingency. Just like in a home sale contingency, if the buyer’s house does not settle, the buyer and seller can negotiate an extension, or they can void the contract.
Home of Choice Contingency
On the other side of the spectrum, the seller can include a home of choice contingency. This contingency allows the seller to accept a buyer’s contract, but it is contingent on the seller finding another home to purchase. If they don’t find a new house within the designated time period, the sellers can void the contract.
Post or Pre-Settlement Occupancy
Depending on when the buyer or seller needs to move, a post or pre-settlement occupancy may be required. In the real estate world, a post-settlement occupancy is often referred to as a “rent back,” when the seller stays in the home after settlement. They then rent the home from the buyer for a certain time frame. The maximum time a lender will allow this is 60 days. A rent-back is much more common than a pre-settlement occupancy. In a pre-settlement occupancy, the buyer moves into the house prior to settlement. The pre-settlement occupancy is not as common as it can cause some issues if something breaks during that timeframe in the house. The waters get a bit muddy! You can read more about a post-settlement occupancy here.
In a competitive situation, you should consider an escalation clause, which automatically increases your offer over a competing offer with a price equal to or higher than yours. This is the most common way to handle a multiple offer situation. Here is a more in-depth look into how the escalation clause works.
The above points are a good primer on decoding the real estate contract – and what you need to consider before entering into the offer process.
However, there are exceptions to every rule! Many of the situations discussed above will vary if you are in a competitive situation – another reason having a great agent on your side is critical.
Keep in mind that real estate contracts are binding, legal documents and represent the largest financial investment you will likely make in your life. It is serious stuff! Be sure to carefully think through all of the options and discuss them with your agent and lender.
If you are a buyer – you should only write on one property at a time. If it doesn’t work out, be sure to withdraw that offer before moving on to the next. Otherwise, you risk both sellers accepting your offer.
Similarly, for sellers, if you have multiple offers on your home, only respond to one offer at a time. You would not want both buyers to accept! Then you would be obligated to sell to both.
Also, remember there is no set timeline for either party to respond in a contract negotiation unless a deadline is added to the contract. Deadlines can be tricky, so be sure to discuss this option in depth with your agent. If no deadline is in place, most people will respond in about 24 hours. However, keep in mind that everyone is different. Some parties respond within the hour, while others take several days if they are in a busy time at work or traveling. Don’t panic! Just stay in communication with your agent about the next steps.
The bottom line? Prepare as much as you can before the time that you are writing or reviewing a real estate contract. If you want to talk it through, our team is always here to help.
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