Overview of a Real Estate Contract

A real estate contract is a written agreement for the purchase, sale or exchange of real property between a buyer and a seller.

A real estate contract must contain the following in order for it to be legally enforceable:

 • Buyer/seller identification--The legal name of each party must be on the contract. If the transaction involves an intermediary such as a real estate agent, her name and broker information must also be included on the contract for her to receive commission on the sale of the property.
 • Property address--The property address must be included on the contract. Along with the address, the contract will usually have space to include a parcel number.
 • Purchase price--The sales price of the property needs to be included on the contract.
 • Signatures--All parties need to sign the contract.

The rest of the contract outlines terms and conditions that are subject to negotiation. Here are the major sections that make up a real estate contract.

Financing Section
The financing section details how the property will be paid for. If a mortgage is going to be obtained, the interest rate and terms of the loan are usually included in this section. A buyer will typically include a loan pre-approval from his lender to demonstrate his creditworthiness.

Although not a requirement of a real estate contract, most will have the option to include an earnest money deposit in the form of a check. The deposit shows the seller that the buyer is committed to closing on the sale of the property. The deposit is held in an escrow account and released at the close of escrow.

A contingency is a condition that must be met for the exchange of the property. If a contingency is not met, the contract can be cancelled or terms of the contract can be re-negotiated. Most real estate contracts contain at least one contingency; however, they are not legally required. These are the most common contingencies found in a real estate contract:

 • Loan Contingency--If a buyer is applying for financing through a lender, he will want to include a contingency that the contract can be canceled if his loan is not funded. Buyers can also cancel if the interest rate is not what they anticipated.
 • Inspection Contingency--A buyer also wants to ensure that the house is in good condition and will not release a contingency until a property inspection is completed. Any as-yet-unknown defect that may affect the value of the property or a failure to make repairs on known defects is grounds for a cancellation.
 • Appraisal Contingency--A lender will require a borrower to obtain an appraisal on the property being purchased. The lender wants to ensure that the value of the property is worth the loan amount. An appraiser is hired to determine the value of the property based on similar homes that have recently sold in the area. The appraisal will give the property a value. If the property doesn’t appraise for the amount of money the seller is requesting, the lender will not fund the loan.

Once a condition is satisfied, the seller will request that the contingency be removed. If the buyer does not remove the contingency within a specified time frame, the seller has the right to rescind or cancel the contract.

Closing Costs
There are several closing costs that are paid by the seller or the buyer or that are split evenly between the two parties. Some of these closing costs include inspection, title insurance, appraisal fee, homeowner’s insurance and property tax. The contract will list which party is responsible for each closing cost.  

Date of Possession
At the close of escrow, the title to the property is transferred from the seller to the buyer. This happens after the money has been exchanged for the property and the transfer of ownership has been recorded with the county. The contract will specify the date that the sale is anticipated to close.

Restrictive Covenant

A restrictive covenant is an agreement in which the buyer of real estate agrees to complete a certain action. This could also mean that the person has to abstain from doing certain things. In most cases, a restrictive covenant is part of a real estate transaction in which someone is buying into a subdivision, condominium or some other type of group living arrangement. The homeowner may have to abide by rules such as maintaining his or her property or choosing the proper type of exterior for outbuildings. The restrictive covenant must be adhered to in order to avoid fines or further legal action.

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