| MAKING AN OFFER: THE PURCHASE CONTRACT
Q. How do I begin negotiations to buy a home?
A. Negotiations are handled in various ways in different parts
of the country. Typically, most
transactions begin with negotiation over price, although other items such
as date of possession may also be negotiated. The real estate agent will
provide a form, usually called a contract to purchase or, simply, a real
estate contract. In any case, this is a formal, written offer that conveys
your terms to the seller. If you intend to have the home inspected, it
should include an inspection rider; if you intend to apply for a mortgage,
it should include a mortgage-contingency clause; if your attorney has
not reviewed the contract, it should include an attorney-approval rider.
In other words, it should cover the basics. Remember, once both parties
sign this document, it is legally binding.
The offer should specify a date after which it is no longer valid. This
may be as little as 24
hours from the time the seller or the seller's agent receives it. The
offer to purchase also is usually valid only if both the buyer and seller
sign it within a certain time period. As a general rule, an
earnest money deposit of perhaps $500 or $1,000 accompanies the offer
to purchase.
Often this is the start of negotiations. The offer to purchase may be
passed back and forth between the buyer and seller before being accepted
by both. Remember, however, that both parties must initial any changes
agreed to during negotiations. Once you have agreed on terms, you will
want to arrange for a home inspection and review the document with your
attorney if, as noted above, you included these riders in your offer.
In most cases, you will not want to apply for financing until the home
inspection is completed and satisfactory.
In some areas, the purchase contract will include all provisions of the
transaction; in other areas, another document will be drawn up by the
buyer or the seller that covers such items as conveyance of title, provision
for insurance, etc. In either case, you will want your attorney to make
sure that the final document covers all aspects of the sale.
Q. What is "earnest money"?
A. When the buyer signs the offer to purchase, the buyer usually
deposits a sum of money with the seller, the seller's real estate agent,
or the seller's attorney. Your offer should specify that the
earnest money deposit will be placed in an interest bearing account with
the interest credited to the buyer.
Earnest money is not the same thing as the buyer's down payment although,
if the sale goes
through, it will be applied to the down payment. Earnest money symbolizes
the buyer's
commitment to take the necessary steps to complete the purchase, for example
obtaining a loan.
Thus, if a prospective buyer does little or nothing to complete the sale,
he or she risks losing the
earnest money deposit.
Q. What is the purchase contract?
A The purchase contract may be called a sales contract, real
estate contract, purchase agreement, sales agreement, or purchase and
sale agreement. Whatever it is called, it is a legal document that, when
signed by both parties, is a legal contract that will govern the entire
transaction. Before signing such a contract, you will want to review it
carefully and have your attorney review it.
Remember, once signed, you are obligated to fulfill your part of the contract.
Q. What are the key provisions of the purchase contract?
A. A purchase contract, in most cases, is a standard form contract
with any necessary riders
attached. The contract can include many provisions but should include
the following items:
• the date of the contract;
• the purchase price of the home;
• amount of the down payment;
• all items to be included in the sale such as wall-to-wall carpeting,
window treatments,
appliances, or lighting fixtures;
• any items to be excluded from the sale such as an heirloom chandelier;
• the date when the deed will be transferred (or the closing date);
• a mortgage contingency clause if the buyer intends to apply for
a loan. This states that the
buyer intends to obtain a loan in a specified amount at a specified interest
rate within a
specified period of time. If the buyer is unable to obtain financing,
the buyer may be released
from his obligation. The seller usually allows the buyer 30 to 60 days
to obtain a loan
commitment.
• an inspection rider. This allows the buyer to have the home inspected,
usually within 10 days
of the date of the contract. If the inspection is unsatisfactory, the
buyer ordinarily is released
from the contract. However, the buyer may not be released if the contract
allows the seller to
make repairs and the repairs, when made, meet applicable standards of
workmanship.
• an attorney-approval rider for both the buyer and the seller if
either or both parties are signing
the contract before it is reviewed by their respective attorneys;
• a legal description of the property;
• provision that the seller will provide good title to the home
or what is sometimes called
marketable title. Generally, the seller fulfills this obligation by providing
an abstract of title,
certificate of title, or a title insurance policy. This indicates that
the seller has the authority to
sell the home. In some states, for example Connecticut, the seller is
required to deliver good
title, which the buyer is expected to verify, at his or her own expense,
by securing an abstract
of title, certificate of title, or a title insurance policy. If the buyer
encounters problems in
establishing title, he or she can reject the title at closing.
• any restriction or limitations that could affect title;
• provision for paying utility bills, property taxes, and similar
expenses through the closing date;
• provision for return of the buyer's earnest money deposit if the
sale is not completed as, for
example, when the buyer has been unable to obtain financing after reasonable
or good faith
efforts to do so;
• provision for taking possession. Along with a firm date for transferring
possession from the
seller to the buyer, the buyer should include a provision that requires
the seller to pay a specific
amount of rent per day if the seller does not leave the home by the agreed
date. If the buyer and seller already know that possession will be delayed,
the buyer may ask for a certain amount of money to be held in escrow at
the closing to cover the rent for the expected time period.
• provision for a walk-through inspection within a specified period
before the date of closing to
allow the buyer to make sure conditions are as they should be according
to the contract;
• terms of any escrow agreement;
• provision for who is responsible for maintaining insurance until
the closing. The Uniform
Vendor-Purchaser Risk of Loss Act applies in some states, which means
that the seller
assumes the risk of loss until either the transfer of title or possession.
In some states, the
common law requires the seller to assume this risk.
• signatures of the parties.
The Walk-Through
Many buyers like to inspect the property 24 hours or so before the closing
to be sure it is in the
same condition as it was when they signed the offer to purchase and to
make sure that all property to be included in the sale remains in place.
If something has been removed that was included in the sale under the
terms of the purchase contract (such as a chandelier or appliance), the
buyer should quickly notify his or her attorney or the seller's agent
to see if the item will be returned before closing. Or, if agreeable to
both parties, the buyer and seller may decide to reach a financial compromise
instead.
Q. What does an inspection rider provide?
A. The inspection rider is a very important safeguard for the
buyer. Two types are commonly used.
The first gives the buyer the right to have the property inspected by
a professional home inspector of the buyer's choice and at the buyer's
expense. If the inspector finds defects, the buyer has the right to cancel
the contract within a specified time. This type of rider raises some of
the same issues as an unrestricted attorney-approval rider, since inspectors
often find problems in homes.
Thus, it can give buyers a few extra days to decide whether they want
to follow through with the purchase.
The second type of inspection rider gives the seller time to either repair
any problems
uncovered by the inspection or agree to reduce the selling price contained
in the contract by the
cost of repairs. If a seller opts to do nothing, he or she must inform
the buyer. Unless the buyer and seller can come to terms based on the
buyer's inspection report, the buyer can cancel the contract and seek
return of any earnest money previously paid.
Some people prefer the first inspection rider described above. Although
it is open to
occasional abuse by fickle buyers, its simplicity generates fewer back-and-forth
discussions
between the buyer and seller. If there is a serious problem and the seller
really wants to sell, the
parties usually can make a new deal.
Still, the choice is yours. Just remember that a real estate purchase
contract is no different
in principle than any other contract its terms are negotiable. By using
properly drafted riders, you may quickly turn a form contract into one
that deals with your personal concerns.
Q. What is an attorney-approval rider?
A. One common rider makes the purchase contract subject to approval
by the buyer's and seller's respective attorneys within a short period
of time, usually five to ten days after acceptance of the offer. In such
cases, the standard contract form should include the phrase, "Subject
to the Approval of the Attorneys for the Parties Within Days," with
the number of days written in.
Without such a condition in the contract, both the seller and the buyer
are bound by the terms of the contract, which may be unclear or may differ
from the parties' intent.
Q. Does an attorney-approval rider give a buyer an "out"
from the contract?
A. Yes, like the inspection rider and the mortgage-contingency
rider, it does allow a buyer to get out of a purchase contract. In fact,
this is the reason some sellers will not accept such clauses.
An attorney-approval rider could avoid this pitfall by limiting the attorney's
approval to
legal matters as, for example, the state of the title. In addition, the
rider could specify that a lawyer must state such disapproval in writing,
with the seller having the option to correct the problem causing disapproval.
This type of rider ensures that the contract need not bind the parties
if their lawyers find an unsatisfactory provision in the small print.
Meanwhile, the buyer and seller can sign the contract knowing that the
other party may not easily back out of the contract because of a minor
defect or objection.
Q. What is a mortgage-contingency rider?
A. This common provision allows the buyer a certain period of
time to obtain a commitment for
financing at a specified interest rate for a certain amount of money.
It usually lasts for 30 to 60
days, depending on the average time needed to obtain a loan commitment.
The clause might read, for example, that the contract is contingent on
the buyer obtaining
approval for a 30-year mortgage for $100,000 at no more than eight percent
interest within 45
days. For additional protection, the buyer might specify the type of loan
he or she prefers, for
example fixed or variable.
A mortgage-contingency rider provides critical protection to the buyer.
For example, it
allows the buyer to void the purchase contract without penalty in those
cases in which the buyer is unable to obtain financing on the terms specified
in the contract after making a reasonable or good faith effort to do so
within the time provided. Because this type of clause favors the buyer,
some real estate agents suggest that the buyer obtain "pre-qualification"
from a lender, which gives the seller a degree of confidence that the
buyer will not use the clause to void the contract unless some extraordinary
circumstance arises.
The seller may refuse to agree to a mortgage-contingency rider. This can
and does happen
in a very hot seller's market, in which case, there is not much the buyer
can do. But the absence of a mortgage-contingency rider might mean that
the buyer will be forced to finance his or her home purchase at an unfavorable
interest rate. Because of this risk, buyers should be cautious about signing
a purchase contract that does not contain this clause.
Q. May the seller refuse a mortgage-contingency rider or an inspection-contingency
rider?
A. Yes. Sellers are not required to accept any of the buyer-protection
riders we've discussed.
However, as a general rule, most sellers will accept these and similar
riders unless they are selling in a very hot market.
Sellers should ensure that the proposed interest rate is reasonable, based
on current rates,
and also allow a limited but reasonable time for the mortgage commitment.
Similarly, most sellers accept an inspection rider but should make sure
that this rider expires relatively quickly say, ten days from signing.
Unlike a mortgage commitment, there's no reason that an inspection can't
be done within a week or so.
Beware of Contingencies
If an offer to purchase your home contains any contingency, you should
include a time period for compliance, after which the offer expires.
Otherwise, your home could be off the market for months, with no assurance
that the sale will go through.
If a buyer extends an offer that is contingent on Veterans Administration
financing, note
that your acceptance of the offer could obligate you to pay points
(percentages of the loan amount).
In this case, you would want to place a limit on the points to be
paid. |
Q. Should I allow the seller to remain in the home after closing?
A. Most buyers want possession upon closing, because they will
be paying the mortgage as of that date and will not want to pay for two
residences. Sometimes, however, a buyer may allow the seller to remain
for a specified period of time. For example, the seller may be moving
to another state one month after the closing or, perhaps, the seller is
waiting for a builder to finish a new home. If you find yourself in this
situation, do not rely on oral promises or a statement about the date
on which the seller promises to vacate the premises. Make sure your purchase
contract states
how long the seller may occupy the home after closing and specifies the
rent owed to you for that period.
The contract also should specify any penalties in the event the seller
does not move, does
not pay rent after closing, or does any damage prior to vacating the premises.
Sometimes your
attorney will prepare a separate lease, or use and occupancy agreement,
to cover these and similar contingencies.
Q. What happens to my earnest money deposit if we do not complete
the sale?
A. Generally, the purchase contract allows the buyer to get back
his or her earnest money and any interest earned on it, unless the buyer
has in some way violated the contract. If the seller refuses to return
the deposit, the buyer may have to sue the seller for return of the deposit.
Q. Can a buyer sue a seller for backing out of the contract?
A. Yes, if the seller violates the terms of the contract or refuses
to close the sale, the buyer can sue to force the seller to complete the
transaction. It also is possible for the buyer to sue for damages.
For example, a buyer who had incurred costs for obtaining a mortgage or
costs for renting
temporary housing caused because the seller broke the contract would have
a case for damages.
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