The Purchase Contract

With thousands—and maybe hundreds of thousands—of dollars on the line, it pays to know exactly what you’re agreeing to.

What is an offer to purchase?

Typically, most home sales 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 the buyer’s terms to the seller.

What might I include in my offer to purchase a home?

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 this document is signed by both parties, 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The offer should specify a date after which it is no longer valid.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.

What is "earnest money"?

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.

How is the offer negotiated?

Often the offer 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 any changes agreed to during negotiations must be initialed by both parties. 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.

How does an offer relate to the purchase contract?

It usually becomes the basis of the purchase contract, after the parties have come to an agreement on the terms of the offer.

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.

The bottom line is that buying and selling real estate almost always entails a contract. So, keep in mind that a typed or handwritten "letter or agreement" or "letter of understanding" signed by the parties will be binding if it meets the legal requirements of a contract. Don't sign something assuming it's not a contract and, therefore, not important. If something goes wrong, you don't want to discover too late that you've signed away important rights, failed to include important protections, or failed to receive what you expected.

Can oral promises constitute a contract?

Yes. Many kinds of contracts don't have to be in writing to be valid. For example, if a seller orally promised to update the electrical system, the buyer might be able to insist that the system be updated even if the matter doesn't arise in later negotiations.

When should we involve a lawyer?

Legal advice is most helpful—and least expensive—before you have committed yourself. If you are a buyer, you probably will want your attorney to enter the process when you are ready to make an offer and, certainly, before you sign an offer to purchase. If you are a seller, you probably will want to consult an attorney early in the process and before signing a listing agreement with a real estate agent.

What are the key provisions of the purchase contract?

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.

What is an inspection rider?

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. 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.

What is an attorney-approval rider?

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.

What is a mortgage-contingency rider?

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.

May the seller refuse a mortgage-contingency rider or an inspection-contingency rider?

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.

What happens to my earnest money deposit if we do not complete the sale?

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.

Can a buyer sue a seller for backing out of the contract?

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.

Are there any special considerations when you are buying a home from a builder?

A buyer purchasing a new home from a builder may or may not work through an agent. If you are not working with an agent, you may want to consult your lawyer to ensure that the purchase contract with the builder contains no surprises. In addition, you may want to consider having the finished structure inspected notwithstanding its newness. Remember, it's the quality of the construction, not its newness, that is important. An independent inspection can give you this assurance.

If you are contracting with a builder on a home that is not built or finished, you will want to make sure you will get what you think you are buying. For example, model homes typically include options, rather than standard features. Along with superior windows and siding, these could include better-quality kitchen cabinets, higher-grade carpeting, and more expensive lighting fixtures. Make sure that the builder provides you with a complete list of standard and optional features. If you are choosing options, make sure the purchase contract includes the specific cost of all options.

You will want to know other facts as well, such as the type and extent of any landscaping to be provided by the builder, known plans for the development of surrounding property, and the exact provisions of any warranty from the builder. If possible, you will want a warranty that is insured by an insurance company, rather than a warranty guaranteed only by the builder. Finally, the builder should provide you with evidence that his or her subcontractor's and material suppliers have waived any liens they might have against the property in the event the builder does not pay them for their work.

Specified dates for completion and occupancy should be included if the home is not yet built. You can provide for a penalty or for the right to cancel the contract if the builder exceeds these dates.