Lessons from the Pros

Real Estate

Contracts and the Stuff that Goes Along with Them

Real Estate contracts can be large and overwhelming, or (not very often) they can be one page and simple.

Typically, a real estate contract is written by a real estate professional (broker/agent) on a state approved form. As you can image, this contract is full of language that has more to do with legal protection of all parties (including the broker/agent) than it really does about the transaction.

The definition of a contract is: 1) noun. an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. The existence of a contract requires finding the following factual elements: a) an offer; b) an acceptance of that offer which results in a meeting of the minds; c) a promise to perform; d) a valuable consideration (which can be a promise or payment in some form); e) a time or event when performance must be made (meet commitments); f) terms and conditions for performance, including fulfilling promises; g) performance.  (Legal-dictionary.thefreedictionary.com)

If you are dealing with a broker/agent, you will have very little control over most of the language in the contract, however, there are things you will have control over and we’ll talk a little about those.

First of course is the “consideration” – What you are willing to pay for the property?

The second would be the “terms” – these are things like: all cash, new loan with 20 percent down, owner carried financing, closing in 30 days.  You get the idea.

Then there are things call “contingencies.” A contingency is a clause, a contractual requirement that must be fulfilled before the transaction can close.  There are some people who also call these “weasel clauses. ”  I don’t care for the term; however this is a way out of the contract without financial penalty.  In today’s buying environment having fewer contingencies is a way for you to make your offer stronger. This allows the buyer to know you are serious and aren’t looking for a way out.

Here are some of the common contingencies:

  • Contingent on sale of another property – among the most common contingencies is for consumers who are simultaneously selling a home and buying another.  The contingency allows the buyer to sell the current home before purchasing another.  This is not a very attractive contingency to the seller; too many things can go wrong.
  • Contingent on Financing – states you must secure financing for the purchase before you are obligated legally to complete the transaction.  Many sellers won’t even look at an offer that doesn’t have a letter of Pre-approval. Unless you are 100% sure of the financing, can afford to lose the deposit or are paying all cash, I would always suggest this contingency.
  • Property appraisal – states that the amount you are offering to pay is what the home will appraise for.  If the appraisal comes in lower than the purchase price the buyer has agreed to, it can increase the amount of cash (or down payment). Waiving this in today’s market can be an effective way for you to make your offer stronger.
  • Physical inspection – states there is an allotted period of time (commonly 17 days) in which to get a professional inspection of the property.

Less common contingencies:

  • Seller verification – states that the seller is indeed the true owner of the property.
  • Neighborhood contingency – states that the seller has an allotted period of time to research the neighborhood to determine its suitability.

Hope this has given you a few tips to make the difficult world of real estate contracts a little easier.

Great Fortune,

Diana Hill


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.