For home buyers and sellers alike, real estate contracts can be difficult to navigate. They detail the terms of the sale, any provincially-required disclosures, and who is responsible for covering which costs. It’s important to fully understand your contract to be prepared and know what to expect during the process.
The Basics: What is a real estate contract?
A real estate contract is a legally binding agreement that provides all the details that encompass a real estate transaction. In real estate, contracts are used to facilitate the purchase or exchange of a property between two or more parties.
Details of your real estate contract will include:
- Sales Date
- Offer Deadline
- Earnest Money Deposit
- Details on who pays for inspections, survey, title insurance
- Details about adjusting utilities, property taxes, and other fees
- Contingencies and Disclosures
While the exact details of the contract will vary by transaction, those items listed above should all be included. These agreements must be written and signed by both parties to be legally binding.
Your Offer to Purchase is the Basis of Your Contract
The initial offer to purchase is the general form of a real estate contract. This contract is usually provided by the buyer’s agent who would presumably be using an industry-standard template that includes all the key pieces of the final contract. If you’re doing a private sale there is increased risk that the purchase offer may not include everything it should. Whether you have a real estate agent helping you with your home or not, it’s always smart to get a real estate lawyer to review the contract to ensure nothing is missed. If anything is unclear, they will be able to interpret the document for you. Read more about the role a real estate lawyer plays in the home buying/selling process.
Important Dates & Details
Your real estate contract must include your agreed upon purchase price, the offer acceptance deadline and the purchase completion date. If any one of these purchase details is not agreed on by all parties, the contract cannot be signed and your purchase/sale cannot proceed. When reviewing your contract, make sure you can uphold your end of the bargain. Should you be unable to meet your agreed upon dates and details, you will be in breach of contract.
Will there be any penalties to a breach of conditions? These also need to be included and agreed upon in your contract.
Earnest Money Deposit Account
If you are a buyer you will need to make an earnest money deposit which is an upfront payment that demonstrates your intent and interest in buying the property. In most cases, you’ll need to make this deposit within a day or two after your offer is accepted. These funds will then be held by the real estate brokerage in an escrow account while you work with the seller to finalize the deal. While earnest money isn’t required, a majority of sellers require it prior to accepting a contract.
Inspections & Adjustments
Most real estate contracts include a clause that allows the buyer to hire a home inspector before closing a deal. The home inspector will evaluate the property from top-to-bottom and identify any parts of the home that are out of code and are in need of repair. After the home inspection, the home inspector will provide the buyer with a detailed report with their findings. Home inspection clauses allow the buyer to back out of the purchase without losing their deposit if the home inspection results are not to their satisfaction.
When it comes to adjustments, these are made to reflect the amount buyers are typically paying for specific features of the home. For example, if your home inspector finds that there is a fault in the home you will need to decide if the seller will pay to fix it before closing or if the purchase price will be adjusted and the buyer will fix it later.
Contingencies & Disclosures
Contingencies are conditions in which the offer can be withdrawn without any penalties.
Some of the most common contingencies included in contracts are inspection, financing, appraisal, and home sale. Home buyers may want their potential home to be inspected before completing a purchase to assure that there are no issues with the home, or might want an appraiser to come in and assess the value of the house to make sure the pricing matches it. If there are any issues with these processes, the buyer is allowed to back out of the purchase without losing their deposit or receiving any penalties.
Formal disclosures are legally required and document known and potential flaws and issues with the home that the buyer needs to know about. These could include repairs that have been made in the past or need to be made, like broken appliances or water damage that will need to be addressed. If the home is built near an area that is prone to natural disasters, or if there are any neighborhood-related issues, the seller will need to disclose that.
Prior to signing
While the time frame always varies, once both the seller or buyer accept the offer, that contract will be converted into a legally binding agreement. But before sign, here are a few things you should keep in mind:
- Financing Terms: do you have the money needed to complete the transaction
- Closing Costs: does your contract specify whether the buyer or seller will be paying for closing costs such as escrow fees, title search fees, title insurance, notary fees, ect.
- Closing Date: how much time do you need to complete the transaction?
- Sale of Existing Home: if you are a homeowner who needs funds from the sale to buy a new property, you should make your purchase contingent upon the sale of your current home
If you’re in the process of selling or buying a home, book a consultation with our team today. The One80 Law legal team has the real estate law experience you need to simplify the process and make the most of your financial investments.