Don’t entertain a real estate contract that doesn’t feature these elements
Preparing to sign your first real estate contract, but not sure what to look for? We’ve got you covered.
Real estate contracts are legally binding documents that tie two (or more) parties of a transaction together. While different contracts may include different things, depending on what they are trying to accomplish, each contract should hit these key items. Read on to learn what your real estate contract needs to include before renting or buying a home.
Before we examine the type of information real estate contracts require, let’s break down its definition. A real estate contract is a legal document that provides the details and terms of any type of real estate transaction. The purpose of these contracts is to protect all parties in the event that someone doesn’t uphold their responsibilities within the real estate transaction.
There are several types of real estate contracts, including the following:
Purchase contract: A purchase contract is a document that is drawn up between a home’s seller and the potential buyer, including specific details about the property sale.
Rental contract: This type of contract is drawn up between the homeowner and the person planning to rent the space. Rental contracts can be drawn up by a lawyer, real estate agent, or a well-versed landlord who has had some experience with lease terms.
Real estate assignment contract: This contract facilitates the sale of a home to a real estate investor or other third party. The agreement gives the investor the rights to the property, but doesn’t give them the title to the home.
Power of attorney: If a homeowner cannot physically sign a real estate contract, they can use a power of attorney contract to transfer signing permissions to another person.
Ensure your real estate contract contains the following elements before giving it your signature.
Real estate contracts should always clearly spell out all parties to the agreement. This requirement includes sellers and buyers in a purchase and landlords and tenants for renting. In addition to using full legal names, some contracts may also list a business entity. For example, if you’re renting an apartment from a management company, the contract will list the company instead of an individual.
Any real estate agreement should list the property’s full address, including any apartment or suite numbers. For rentals, this may mean naming the specific unit. Purchase agreements will often provide further details about the property, including the parcel numbers, lots, or any other identifying descriptions.
It may seem obvious, but the financial terms of the real estate transaction must be spelled out in the contract. This step ensures that sellers understand how much they will receive after signing and the buyers know exactly what the transaction will cost.
A purchase contract should break the numbers down line-by-line and include the agreed-upon purchase price, the deposit schedule, the financing terms from the lender, and any seller contributions. Additionally, if there are any real estate agents involved, the contract should include details about their fees (and the person responsible for paying them).
If you’re renting a property, your agreement should include your monthly payment obligations, including additional payments (like a monthly fee to cover your four-legged-friend) and utility obligations. You’ll likely also notice the terms of your deposit, when it’s due, and which part (if any) is refundable.
A real estate contract should identify which appliances, fixtures, and amenities are part of the transaction. For purchase agreements, this might mean details about whether the seller will be leaving the washer and dryer behind when they move out.
If you’re reviewing a rental agreement, you can expect to see details such as whether you’ll have access to a laundry unit within the facility or whether you’ll need to pay an additional fee to use the on-site gym.
Every contract should include the date that the contract was drawn up, the date it was signed, and any dates that both parties have determined. Rental contracts should list the date your lease begins, the date it ends, and how much notice you’ll need to give before terminating your lease, and any other relevant dates.
Since purchase contracts can contain some variables—a closing date may need to be shifted because of a log-jam in the lender’s underwriting department—you should expect your contract to list a number of important dates:
Closing date
Deadline for an appraisal and inspection
Deadline to submit your preliminary approval from the mortgage company
Time frame for additional contingencies
Possession date (the date you’ll take ownership of the property)
Some real estate contracts include addendums, contingencies, or disclaimers to address specific issues or agreements about the property.
Addendum: Some transactions have special circumstances that need to be addressed outside of the traditional outline of the contract, which is outlined in the addendum. These documents outline nuanced information about the property that didn’t fit into the contract, like details of the homeowner’s association’s role in the transaction. Not every contract will have addendums, but it’s worth keeping an eye out for one.
Contingencies: A contingency is a clause in a real estate agreement that specifies certain terms that must be met for the contract to become legally binding. For example, a home inspection contingency clause allows you to back out of the sale if the home inspection reveals unexpected and expensive issues.
Disclaimers: Some states have specific requirements regarding which disclaimers an owner or landlord needs to provide to potential buyers or tenants prior to signing the contract. One example is a statement about the presence of lead or asbestos on the property. These documents are often mandated by local or state ordinances and can also vary widely.
After you’ve read over your real estate contract and ensure that all of the i’s are dotted and the t’s are crossed, it’s time to put down your John Hancock and make the contract official. A real estate contract is not legally binding until it’s signed and dated by all parties, and in some cases, notarized by a third party.
