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Real Estate Purchase Agreement Contracts and Inspection Contingencies – What Are They?

By JDFerris | Contracts

Jan 05

What is a Real Estate Purchase Agreement or Contract?

A purchase agreement also referred to as a purchase and sale contract, is a type of legally binding document that outlines the various conditions and terms that are related to the sale of a good or product. They are typically associated with the sale and purchase of goods, rather than services (contracts for services are often called “service agreements”).

A purchase agreement can cover transactions for the sale of just about any type of product, but typically those goods and products in excess of several hundred U.S. dollars. Historically, when one thinks of a purchase agreement, it is not odd to automatically be reminded of real estate. This is because a large number of contracts, purchase agreements, and other forms and documents remain under the purview of the real estate markets.

The purchase and sale agreement is a critical contract to any real estate transaction

A proper purchase agreement should include all of the information that is pertinent or relevant to the deal. It must be clearly-written to prevent any misunderstandings relating to the various terms, concessions, and contingencies.

Real Estate Transactions: Title Company, Earnest Money Deposit, and the Sales Contract

What is Earnest Money?

Earnest money, also called an earnest money deposit or good faith deposit, is an amount of monetary funds, personal or otherwise, that a buyer pays to the seller at the time of entering into a purchase agreement or sales contract. The primary purpose of the earnest money deposit is to ensure that the home buyer is serious about following through on the purchase agreement terms.

Generally used in real estate transactions, earnest money may be used to offer the homebuyer more time while looking for funding. It also provides the seller with an incentive to continue the sale of their residential or commercial property if the buyer runs into trouble.

The earnest money is not paid directly to the owner of the home for sale. The creation of an escrow account is necessary to make sure the appropriate disbursement of funds, after the real estate transaction’s conclusion, is handled by a professional third-party to the real estate transaction.

Once the owner of the property accepts an offer for purchase, the buyer is required to sign a contract to make the transaction legal and binding. This contract is generally referred to as the “purchase agreement” or the “purchase and sales agreement.” This contract starts the earnest money procedure, which enters both the home seller and home buyer into a legally binding contract for the purchase of the home at the agreed-upon terms, less any home inspection contingencies, or addendums to contract.

Title companies can perform title searches for you
Title companies can perform title searches for you or the real estate brokerage you are using and is the third party typically responsible for holding and transferring the earnest money deposit as well.

As soon as the contract is signed, the purchaser or their real estate agent is then required to make the earnest money deposit to be held in escrow by a third party title company. When all the provisions of the sales contract are complete, the title company pays out the earnest money deposit to the seller as part of the purchase price. If the purchaser is unable to find funding for the purchase of the property, she/he can get their earnest money back, provided that he/she included the correct inspection contingency in the purchase and sale contract.

How Much Should My Earnest Money Deposit Be?

Honestly, the amount of earnest money deposit can be as much or as little as you want it to be. Many times you will run into the ever-dreaded “subject to our terms” clause, but legally, there is no set amount of money, or a percentage of the cost to buy a home that your earnest money deposit need be. As long as the parties involved come to an agreement on the amount as well as concessions to the transaction, your earnest money deposit can be any amount you want it to be.

The earnest money will generally have to come out of your own pocket as there are not really any mortgage lenders willing to increase their risk of loss by funding the earnest money deposit as well.

What Does Contingent Mean In Real Estate?

Being contingent means the seller of the home has actually accepted a deal– one that comes with contingencies, or a problem that needs to be met for sale to be taken into consideration full or last.

For instance, the house might have to pass the appraisal, as well as the buyer requires to secure funding or a number of other possible items. In either case, the listing is still practically active up until the purchaser satisfies the contingency.

Once the offer is accepted, all that’s left is the final paperwork and closing, the status of the real estate transaction will change from contingent to pending.

There are various kinds of both contingent and also pending conditions, each one suggesting a various level of chance for other enthusiastic purchasers.

  • Contingent – Continue to Show: The seller has actually accepted a deal that depends upon one or numerous contingencies. While the purchaser is functioning to clear up those contingencies, various other buyers can proceed to view the residential or commercial property and also submit deals.
  • Contingent – No Show/Without Kick-out: The seller has actually accepted a deal with contingencies. However, the seller will certainly no longer be showing the house or accepting offers.
  • Contingent – Release/Kick-out: There’s a target date whereby the purchaser has to meet their contingencies. The seller is still showing the home as well as approving additional bids.

What is an Inspection Contingency and Why are they Important?

In real estate, a “contingency” refers to a condition of the Purchase and Sale Agreement that requires to take place for the real estate transaction to keep moving on. As the buyer, there are numerous contingencies that you can pick to include in your purchase and sale agreement or contract for sale.
In a real estate transaction, home inspections are for your benefit, as the buyer. They permit you to get a full image of the condition of the home that you plan to purchase.

The home inspection contingency along with many others help you as a home buyer hold on to your money if and when you need to back out of a deal.
The home inspection contingency along with many others help you as a home buyer hold on to your money if and when you need to back out of a deal.

The majority of buyers know about the house inspection contingency, which covers a basic assessment of the exterior and interior of the home, as well as its systems, but did you understand house inspections can likewise be useful to sellers too?

When it comes to contracts and protecting yourself as a home buyer, it is important to understand what the different inspection contingencies and real estate contingencies are, and how they can help you. Following is an example of three of the most important contingencies you should include in your purchase and sale agreement:

The Three Most Common Home Buying Inspection Contingencies Explained

  1. Financing Contingency – If you are planning on using financing, conventional or otherwise, in which there is the possibility of being declined, you are going to want to include a financial contingency in your contract. The financial contingency can say that if you, as the home buyer, are unable to secure financing by the given date, you can back out of the real estate transaction with minimal to no losses.
  2. Appraisal Contingency – When you purchase a home, you expect to receive what you were led to believe you purchased, right? Right! What the appraisal contingency clause can do for you is protect you as the buyer if and when an appraisal of the property comes back significantly under the initially stated value and price of the home.
  3. Home Inspection Contingency – Buying a home sight unseen is just plain stupid if you don’t REALLY know what you are doing. When you purchase a home without a home inspection, it is akin to buying a home sight unseen, in that you never know what kinds of problems might be hiding behind the walls of the home. It is crucial to have a certified home inspector inspect the house you are buying, and if that inspection report comes back unsatisfactory to you for whatever reason, the Inspection Contingency Clause allows you a way out of the deal without breaking the contract. Without this clause, you might end up being forced to purchase a junker of a home when it looked like you were getting a sweet deal… And no one likes it when that happens. The length of time or number of days you have to complete your inspection contingency can be negotiated between you and the seller as long as it is before the date of delivery of the funds.

*Note: This is not legal advice, but meant to educate. Always make sure to speak with your real estate attorney on matters related to an actual contract you have or are trying to form.

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