Buying a home will likely be the biggest investment you ever make. So it makes sense to take the time to understand the fine print in the long and confusing real estate contract. A good agent will help guide you through the process, but save yourself time, money and anxiety by knowing these key terms and phrases.
The real estate contract offer
It should go without saying but all offers should be in writing. Oral agreements offer ZERO legal protection. Put the offer in a written contract and make sure it’s signed by both parties. Chances are the offer will be met with a counteroffer. It might take one round of counters or it may take several to finally agree to a price and the other terms of the contract.
Earnest money deposit
An earnest money check is a promise from the buyer to follow through with the terms of the contract. This tells the seller you’re a serious buyer and have the money to purchase the home. Usually, the amount of the earnest money deposit will be 1 percent to 2 percent of the purchase price but this can be negotiable. Laws vary from state to state regarding who holds the earnest money, but is oftentimes held in an escrow account by the listing firm or an attorney’s office. Never make the earnest money check out to an agent. The check is a major part of your contract. If all goes well during the purchase, the earnest money deposit will be put toward the down payment and closing costs. If things don’t go well, the earnest money check may be returned, which brings us to our next point.
Due diligence period
This is absolutely the most important period in the contract. The due diligence period provides the buyer with an option to terminate the sales contract, and in some states, an option fee is paid directly to the seller. A set amount of time is negotiated between the buyer and the seller, usually between two and four weeks. A bad inspection, an unfavorable appraisal, or a bad feeling in your stomach — it doesn’t matter what the reason is, the buyer is free to walk away during this time. The earnest deposit will be refunded to the buyer. However, the seller keeps the due diligence fee.
During the due diligence period, it’s important to get the home inspected and appraised. Even a new construction home should have an inspection. The inspection will reveal any repairs the house needs. Use the due diligence period to negotiate who pays for what in the inspection report. Asking the seller to fix everything on the list is a sure way to kill a deal. Be reasonable and figure out what needs to be addressed before you move in.
If a buyer backs out after the due diligence period expires, the seller is typically entitled to the earnest money. Again, rules differ from state to state so make sure you know where you stand beforehand. The most important thing during due diligence is to be proactive. Quality inspectors and appraisers are difficult to book at the last minute. It’s the buyer’s responsibility to get these scheduled quickly.
Schedule a final walk-through of the house a few days before closing to make sure the owners have left the house as you remember it. Note any repairs that haven’t been done as promised. Make sure any items they promised to leave behind are still there. Have the movers damaged any walls or floors? Do the appliances still work?
Barring last-minute problems with financing, the closing day should run smoothly. Bring proper identification, along with a bank check for the down payment. Be prepared to sign multiple copies of the closing documents and don’t be afraid to ask questions. Once the deed has been recorded, you’ll receive that coveted set of keys to your new home.