Understanding The Anatomy Of A Real Estate Contract
By Paul Esajian on July 16, 2018
Before you sign your name on an offer you had better know what is on the contract. You may be so blinded in your desire to buy that you fail to read, or fully understand, the language of the contract. In the event things go wrong you could lose more than just the property. Under the right scenario, you could lose your deposit or face other issues with the purchase. Depending on the seller and the specific contract used it is easy to overlook a clause or a contingency. Just one missed date can prompt a clause in the contract that removes your offer, with penalty. It is not a stretch to say that the contract is the single most important document in the process and impacts almost everything that is done. Here are five tips to help protect you from anything unexpected on the contract.
- Use an attorney. There are a few items in business that are worth whatever you have to pay for them. Protecting yourself and your business is one of them. With every deal you get involved in it is essential that you utilize the services of an attorney. It is not hyperbole to say that just one error or oversight can instantly change your business for the worse. Having an attorney give the contract a read can prevent many issues before they start. Even if your real estate agent signs off on the contract you should still use an attorney. They know what to look for and any language that could be a red flag. Whatever you do, you can’t go cheap and try to handle this process yourself. Most attorneys will not charge to review a contract if you have an established relationship. If they do charge, it will be a minimal charge, at best. Never think you know more than the professionals involved in the transaction. Always use an attorney whenever possible.
- Get everything in writing. You are not being overly cautious to ask for everything in writing. Any time you communicate with a real estate agent, seller or prospective partner you need to get things in writing. They may not like it, but it is the only way to know you are protected. This doesn’t mean you have to record every conversation you have. When you make big changes with numbers or the language of the contract you need to get that in writing. There is too much at stake to simply take someone’s word for it. Things can change down the road that have an impact on the transaction. By taking someone at face value you have no recourse. Verbal agreements may not be binding and can only give you a false sense of security. Real professionals understand that things should be in writing. If someone balks at doing so it may be a sign of a potential problem.
- Know your clauses. Even if you use an attorney you should still know what is on your contract. Most contracts have the same basic terms and language on every transaction. However, the way they are worded, or the dates used vary from deal to deal. If you are using financing to purchase, there will be a financing contingency. This is the date in which financing must be finalized to satisfy this condition. Even though most sellers will grant an extension if things are moving in the right direction, never assume this is the case. You also need to deal with contingencies for the inspection and the appraisal. The inspection typically starts the process and is usually done within 48 hours of the executed contract. Assuming there are no inspection issues the next hurdle is the appraisal. This is pretty straightforward in that the value must match, or exceed, the sales price. There could also be credits or concessions for furniture or other items involved.
- Hit dates. Regardless of what you doing in real estate, time is of the essence. It is essential to constantly keep the process moving forward. As we mentioned, if there is a signed contract the seller doesn’t have to grant an extension if dates aren’t hit. It is up to you to follow up with your mortgage broker or real estate agent to make sure you are on target. If you hit your dates you should never have a problem with the contract. It is when you start asking for extensions when things could get dicey.
- Communicate. The best attorney isn’t the one with the most experience or real estate savvy. They are the ones that communicate with you every step of the way. Your attorney may be great, but if they don’t return calls or emails it doesn’t make a difference. You need to know there is someone at their office you can reach out to if an unexpected issue pops up or you simply want a question answered. The easier it is to communicate with your attorney the more at ease you will feel. There is something to be said for peace of mind. An attorney that is there with you throughout the process is worth the money you pay them.
The contract is too important to gloss over it and hope for the best. You need to know exactly what is on it and what you are signing.