Real estate contract

A contract is defined as a legally binding bi-lateral agreement (usually in a document format) drawn between two or more parties commonly used for sale and conveyance purposes. It contains the rights and duties of each party to the agreement and details other applicable clauses such as ‘the consideration clause’ and ‘covenants’. All contracts are enforceable as long as it follows the prescribed format in the Laws of the country where the contract was signed. A contract binds the parties to it, which means that they can sue or be sued under its terms. Generally, Real Estate Contracts encapsulates all the terms relating to Real Estate dealings in a documented format, which was agreed between parties.  As with contract basics, in Real Estate deals the buyer makes an offer for acceptance by the seller. The contract is not binding on the parties except the terms have been agreed by both parties. Also, where the contract stipulates a specific period of time for acceptance and either party act otherwise, the contract will not be binding except there is a ‘meeting of the mind’ where some terms are dispensed with, for the seller or buyer’s benefit.

Legal Requirements in a Real Estate Contract

For a Real Estate Contract to be valid, there are basic requirements that must be present.

1. It must be in writing: An oral contract cannot be enforceable because there is no proof that the contract exists in the first place, so for the terms of the contract to bind both parties, it must be put in writing. Although there are few exceptions, it’s a general requirement which protects the parties to the contract.
2. Legally valid: The purpose of a Real Estate Contract must not be illegal so it cannot be due to an illegal reason. Where this is the case, the contract cannot be enforceable and is in fact invalid from the beginning.
3. Clearly list out Parties: Each party’s full name should be correctly spelt out and boldly written to prevent any mix up, in the event that there arises any question to be answered after the contract has been completed. This applies to both individuals and corporate organizations.
4. Mutual Assent: The terms of the contract must be mutually accepted and evidenced by the execution of the parties, that is, the parties must append their signatures and company seals (where applicable).
5. Property Identification: A Real Estate Contract must identify the property in detail. Statements such as the address and precise location should reflect when drafting the contract.
6. Consideration: The consideration represents the cost of the Real Estate; the subject matter of the contract. The exact price must be stated in numbers and words. In practice, the buyer will usually pay a deposit amount for the consideration, which is held in an escrow account by a third party (such as the seller’s legal representative) until the sale is closed.
7. Conditions: Each party will have certain condition(s) which must be met before the sale is closed. Such conditions are always contingent to fulfilling a Real Estate Contract, without which mutual consent may be absent, rendering the contract invalid.
8. Signatures and Seals: An individual party to a contract must sign the contract with an ink while a corporate entity must fix its seal to indicate the consent of both parties. The signing parties must have attained the recommended legal age (usually 16-18 years old) and must be of sound mind at the time the contract was executed.

Few Tips to consider when entering a Real Estate Contract

1. Specifically request closing costs: Whatever amount the buyer wants to propose as the closing cost for the sale must be stated in the contract in unambiguous terms, that is, an exact price or percentage of the purchase price/consideration.
2. Ensure to state which party pays each closing costs: Fees such as escrow fees, title search fees, taxes, insurance and notary fees should expressly be assigned to the party responsible for payment.
3. Home Inspection: It is a prudent decision to include home inspection as a pre-requisite to payment of the consideration cost. Usually, with home inspection comes a re-negotiation, especially on the price and few terms.
4. Furnitures and Appliances: The contract should contain clauses indicating the interest of the buyer in purchasing the property alongside any furniture therein. It cannot be assumed, hence the need to state it expressly in the contract.

Can a Buyer opt out of a Real Estate contract?

Normally, a buyer is committed to the terms of the contract upon payment of the deposit sum. However, where state of the property is unsatisfactory, especially when the parties cannot reach an agreement on specific areas such as ‘repairs’, the buyer may table this as a reason to opt out of the contract. Another reason may be the difficulty of getting a mortgage for the property.

What are the risks inherent in Real Estate Contracts?

There are many risks involved in Real Estate Contracts.  However, where the terms are expressly laid out and each party involves a legal practitioner or an experienced estate agent who will understand specific terms, with the ability to locate dicey conditions, the risks will be limited. Specifically, buyers are at a greater risk of losing the initial deposit amount where they back out due to superfluous reasons or when proper searches are ignored to discover any charge levied on the property.

Terms to note before signing a Real Estate Contract

Particularly, in cases where an experienced representative is absent, there are few common terms to note, especially where signing the contract becomes imminent.

Due diligence

This always indicates parties doing their homework on the property, such as carrying out searches at appropriate places, checking to see that it is not a subject matter of a dispute in Court nor does it belong to someone else.

Effective date

This refers to the date the contracts kicks into full force, but also includes deadlines for various actions contingent to the sale.

Contingencies/Conditions

These are requirement(s) for either party to perfect before the contract can be considered as closed.

Disclosures

In general terms, sellers are supposed to disclose all that they know about the property to the buyer. Where something negative is found after contract is closed, it is a ground for the buyer to sue the seller, based on the contract’s specified terms.

Related Links

1. http://dsps.wi.gov/LicensesPermitsRegistrations/Credentialing-Division-Home-Page
2. http://www.realtor.com
3. https://www.trulia.com/voices/Home_Selling
4. https://www.thebalance.com
5. http://www.investopedia.com/financial-edge/0810/7-must-have-real-estate-contract-conditions
6. https://www.biggerpockets.com
7. https://www.legalwiz.com/basics-of-the-real-estate-contract
8. http://www.rebgv.org/faq/what-contract-and-when-it-legally-binding

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