Welcome to my blog “Getting ‘Real’ on Real Estate”! I’m a Virginia-licensed salesperson with Keller Williams Realty McLean/Great Falls. My goal in writing this blog is to offer a useful resource to buyers and sellers in the Arlington/McLean/Great Falls area. If you’d like more advice or need help finding or selling a home, get in touch! There’s more about me as well as my contact information on the About page.
This blog entry is about 6 key things you need to focus on in your contract to buy a home. So, you’ve found the house you want to buy and your realtor tells you he/she is going to put together the contract. All you have to do is sign it they say and they’ll present it to the seller. It’s just a matter of the realtor filling in a few blanks. Sounds simple enough, right? But, it’s not. The residential sales contract – though usually on a standard state board-approved form – is a complex legal document laced with obligations, conditions and important timing elements for both sides of the transaction. As a legal document, it is binding once signed. You might feel you don’t have the time to read all that fine print. You might feel you can trust your realtor to fill in the form with exactly the terms you’ve discussed. My advice – find the time to read it!
Read the contract with a fine tooth comb. If you do this at least once, you’ll never have to do it again. But, in so doing, you’ll have developed a basic understanding of the contractual obligations to which you’re agreeing and the terms and conditions that dictate how the parties on either side should (and must) behave. You’ll feel comfortable enough with the major sections of the contract that when it comes to you filled in for you by your realtor, you’ll then be able to focus on and know the deal-specific terms, like purchase price, financing and all the various contingencies and associated timeframes. For example, when it comes to the contract form, you should know the definition of business day. This matters if you’re trying to exercise a contingency and either ratify a condition or get out of the contract. If business day is defined as 9 a.m. to 9 p.m. and you respond on a given contingency at 9:15 p.m., you’ve missed your window and the contract will bind you one way or another.
Too often – and I know they will hate to hear me say this – realtors make mistakes when filling out form contracts. It happens all too frequently. And, when it does, it can have dire financial and legal consequences to you, the buyer. Spend the time to review the blanks that have been filled in by your realtor.
In particular, pay attention to these 6 key things in the contract:
1. Property Description – yes, this is the street address but it’s also the legal description of the property. That is, the description that is used by the local tax assessor to uniquely identify the property. You want to make sure you include the right information so that you’re buying the property you actually want. This means including the correct lot reference and map book/page in which the deed to the property is recorded in the applicable land records. Believe it or not, this is an area where mistakes can be and are made. Avoid the issue by reading carefully the information in this section.
2. Purchase Price – this sounds like a no-brainer but I’ve seen plenty of times where it is somehow incorrectly listed. Double-check it and make sure the correct amount is listed, with the decimal point in the right place!
3. Earnest Money Deposit – the general “rule of thumb” is somewhere between 1-3% of the purchase price. In reality, you should only commit what you feel comfortable with. Realtors will tell you that sellers won’t consider your offer as serious unless the earnest money deposit is on the higher end of that spectrum, or even more than that. My view – don’t concern yourself with the seller’s perception (unless you’re desperate to get the property or the market unquestionably favors the seller). Rather, only put down an amount that you could live losing with if something went wrong. Yes, that’s the worst case scenario and presumably won’t happen if you’ve done your contract diligence. But, you never know…
4. Financing – you’ll have told your realtor up front what kind of financing you expect to get (e.g., Conventional, VA, FHA) and that will need to be indicated in the contract. Remember, your buyer will want to hold you to this so try to be as sure as possible when you sign the contract that you’ll be seeking the type of financing you list. What’s more tricky is what interest rate you want to include. At the time you write the contract, there’s no guarantee you’ll get financing and at the interest rate you’d like/expect. To protect yourself, I suggest putting in as low an interest rate as possible. In this way, if you end up not getting approved for financing or cannot get the low rate you require, you can turn back to this provision and make the argument that you never intended to get a loan at an interest rate higher than the low rate included in the contract. Hence, you need to back out of the contract. Remember, your goal is to be as protective of your own interests as possible.
5. Settlement – your lender will tell you that he can get financing and button up the deal 30 days after contract ratification. Unless you’re really in a hurry or are uber-confident in your lender, I suggest a more conservative approach. Build in some cushion. If a lender says 30 days, put in 45 days. If they say 45 days, put in a date that is 60 days from contract ratification. With ever-changing and more stringent lending rules, it’s likely, if not guaranteed, that requirements will come up and you’ll need to satisfy them. That takes time. Don’t risk breaching the contract and losing your earnest money deposit because of a lender’s unrealistic promises.
6. Title Company – as the buyer, you get to pick which title company to use. Often, your lender will recommend its preferred title company. It’s up to you whether you want to go with that recommendation or find your own. Sometimes, it can be to your benefit to review several companies and have them compete with one another on fees (many of which are junk) like “processing” and “seller release” fees and “mailing costs.” This is an area where you can save yourself money. It’s worth the time to investigate the best deal.
That about covers the landscape of major areas of the sales contract you should focus on. Next time, I’ll explore some of the things to think about when reviewing the financing addendum and inspection addendum that both usually accompany the sales contract as part of your offer. The addenda are a whole other world of complexity. One that if brushed over, can lead to serious headaches for a buyer.
In the meantime, here are some good resources on contracts: