The Importance Of A Real Estate Contract
1. What is a real estate contract & what should it state?
A real estate contract is a legally enforceable agreement to buy & sell a particular piece of real estate. The following is a list of some of the most important common terms: 1) The purchase price, 2) the downpayment amount, 3) a mortgage contingency, 4) the anticipated date & location of the closing, 5) a description of the property, 6) a list of all the personal property, appliances & fixtures included in the sale, 7) clauses concerning ownership & permitted uses of the property, 8) the seller’s responsibilities & 9) the penalties should either party not complete their responsibilities. Usually the seller’s attorney prepares the contract. The buyer’s attorney has the right to negotiate any of the details of the contract to protect their party’s interests.
2. How much of a down payment is required?
The down payment or earnest money is a tangible indication of the buyer’s intent & is designed to be a source of compensation to the seller or penalty to the buyer should the buyer not carry out his promises, according to the contract. The seller will want a reasonably substantial deposit to make sure that the buyer won’t walk away from his deposit. The buyer, on the other hand, will want to make as small a down payment as possible, considering that this money is at risk (the buyer may lose this money if he doesn’t close). Generally 10% of the purchase price is a good rule of thumb is due at the contract signing, or half the down payment. The seller’s attorney holds this money in his escrow account until the closing.
3. What happens if I can’t get a mortgage?
Most real estate contracts include a mortgage contingency, which means that the buyer has a certain period of time to obtain his mortgage. If he can’t get a mortgage, the seller’s attorney will return the earnest money to the buyer & the contract will become void. The terms of the mortgage (interest rate, length of time, etc.) should be included in the mortgage contingency. Sometimes an all cash offer, with no mortgage contingency, will be preferable for the seller, especially in a strong seller’s market. In this case, if the buyer needed a mortgage but didn’t have a mortgage contingency & couldn’t get a mortgage in time for the closing, he would lose his earnest money deposit.
4. What can I expect about the condition of the house at the time of closing?
The condition of the house at the time of closing should be the same as at the time of contract signing. All mechanical & structural systems & appliances should be in the same condition at the closing as they were at the time of contract signing. Just prior to closing, the house should be in broom clean condition. Buyers should always schedule a walk-through the morning of the closing to further inspect the property for damages or defects. If anything is out of order, let your attorney know before the closing.
5. If I purchase a furnished house, how can I account for the items at closing?
If personal property is included in the sale, an inventory list should be prepared & attached as an exhibit to the contract in order to prevent misunderstandings at the closing.
6. If there is a swimming pool on the premises & closing occurs during the winter, how can I make certain it has no defects?
The best way to make sure that the swimming pool will pass the inspection will be to hold some money in escrow, by the seller’s attorney, on behalf of both parties, pursuant to the pool passing the inspection when the weather is warmer. Additionally a letter from the seller’s pool service company that the pool & equipment were in good working order & free from leaks when they were winterized will be helpful.
7. Is a termite report necessary?
A termite inspection & report is necessary to determine if there is any signs or damage caused by wood-destroying insects. All inspections should occur prior to signing the contract & their results negotiated prior to signing the contract. However if there are no visual clues of termite damage then usually the buyer will forgo the termite inspection.
8. When is a water quality report necessary?
Buyers would be prudent to perform a water potability & flow rate test for any property with a private well. This test should be done before signing the contract.
9. Why do I need the seller to supply Certificates of Occupancy?
The most important reasons for a buyer to make sure all CofOs are obtained is to make certain that there are no illegal decks, additions, pools, or other structures on the property. If there are, the seller should take the steps necessary to legalize these items. This is usually more important when the buyer is getting a mortgage to purchase the property. Cash buyers can usually forgo the CofO issues (if they want to) & still obtain title insurance for a property that missing some CofOs.
10. When do I need flood insurance?
It is advisable & mandatory by most lenders to obtain flood insurance if the property is located within a flood-prone area. Coverage is available under a federal program. The local municipality office will have maps showing the flood prone areas in their community.
11. What is a tax map number?
Each parcel of property is assigned a number on the county tax map. The purpose of this number is to aid in tax collection. Tax maps do not give the legal description of a property. Only a survey or deed description should be used for legal descriptions.
12. What can I do with my accessory buildings? Can I have a home office? Can I use my den as an art studio? Can I put a kitchen in my pool house? Can I use my garage as a guest cottage?
Most municipal zoning ordinances allow for some form of home office, even in a residential neighborhood. Some zoning ordinances permit an art studio in the home or in an accessory structure that has plumbing. Most local ordinances prohibit cooking or sleeping facilities in pool houses. However some accessory structures pre-date the code requirements & are considered exempt or “grandfathered”. Sometimes a sink or wet bar is allowed, but no cooking range. Most zoning ordinances prohibit the creation of guesthouses or guest cottages in an accessory structure, like a detached garage. However most will allow a 2nd story added to an attached garage that would accomodate a guest room & a bathroom. Some detached garages may be grandfathered as guest cottages. Always check with the building department in your town before making any structural changes or additions to your accessory buildings.
13. What is a fixture?
A fixture is an item that once was personal property but is now attached to the land or building & has therefore become part of the real estate. Fixtures include: built-in shelves, cabinetry, plumbing & electrical equipment, etc. Light fixtures, blinds, shades, curtains, wall-to-wall carpeting are usually included in the sale but not always. Always better to specifically inquire.
14. How can I determine the tradesmen who are familiar with the house?
Ask the seller for a list of names & telephone numbers of contractors who have done work on the house, as well as architectural plans, if available. The building department of the local municipality may also have a set of architectural plans on file.
15. What if there is a buried fuel tank on the premises?
Sellers must disclose if there is a buried fuel oil tank on the property. Buyers should inspect the tank at their cost prior to signing the contract, if they choose to. Any leakage or damage to the tank should be repaired at the seller’s expense prior to the closing.
16. What if a vacant lot is not buildable?
The contract should provide if a vacant lot is buildable or not. Purchasers should do their own due diligence prior to signing the contract. Some contracts are “subject to” the buyer getting approvals to build on the lot. If the lot is not buildable, then the buyer gets their earnest money back & the contract becomes void.