Understand Real Estate Contracts.

by Mike Yeo on November 10, 2011

Understanding Real Estate Contracts

If you do not want to read any further about the dry and boring subject about real estate contracts, there is one most important thing you need to know about real estate contracts. You are entering a legal binding agreement, enforceable and will have recourse if you do not perform. I say because in many cases (buyers), they place offers and do not think too much about them until the Seller accepts.  It is definitely not a position you want to be in if you are not serious to make the offer in the first place. Sometimes, even a hungry real estate agent will write up that paperwork for you without explaining the seriousness of the action. Unfortunately, it happens.

Buyers and sellers of real estate enter an agreement to purchase/ sell a real property and their intentions are stated in real estate contracts. This real estate contract must be in writing to be enforceable. Most states do require a minimum age for the contract to be legal.

The parties ie. buyers and sellers to the transaction are called Principals. The property is typically identified with its legal description. Here in Texas, it is described by Lots and Block of a subdivision as the most common method. For example: Lot 18 Block CC of Panther Creek Estates. There are 3 other methods to identify legal descriptions which I will not describe here.

A real estate contract addresses these issues and more:

(1) Sales Price and how the Buyer intends to purchase the property ie. with cash, financing or loan assumption.

(2) Earnest Money which is also known as good-faith deposit is a sum of money paid towards the purchase upfront. It is made payable to the third-party settlement agent who will hold the money in escrow (not the seller) and will be applied towards the cost of the purchase. Here in Texas, the earnest money is NOT required to make a real estate contract legal but in reality, it is a sum of money to show the seriousness of the offer. Earnest money consideration should also be looked at as liquidated damages should buyer defaults to see if it is sufficient for seller.

(3) Closing Date is the day that buyers and sellers agree to make the legal title transfer. All of the sum of monies and exchange thereof are calculated based on the date.

(4) Possession is pre-determined by the buyers and sellers on when the sellers vacate the property. It is not uncommon for Possession to occur a few days after the closing/ funding of the property. This is to ensure that the Buyer’s loan closes and funds and the Sellers do not have the added expense to move back into the property should the loan falls through at the 11th hour. There are also Buyer’s Temporary Lease where the buyers occupy the property prior to closing. The possession is a negotiation and agreement between buyers and sellers.

(5) Failure to comply with the contracts will result in Default. Both buyers and sellers may default depending on their individual circumstances/ reasons. Because of the seriousness of this issue, either party may decide to take the other party to court for the fullest extent as provided by the state law. Hence, it is not just as simple as losing the earnest money.

There are other details to the contract which should be addressed by your local real estate agent serving your needs. A proficient real estate agent understands real estate contracts even though he/she will advise you to consult a real estate attorney if you do not understand what you are contracting to.

In order for the contract to be executed, an offer must be made, delivered and accepted by the other party. Typically, buyers make the initial offer and sellers can accept the offer or reject the offer with inclusion of a counter-offer. This process may go back and forth several times and no contract is made until all parties agree to every item, then sign the contract as per agreed.

Equitable Title – At the time when the contract is signed by ALL parties and have not closed on the transaction, the Buyers have equitable title to the property. The Sellers have legal title to the property until the house is closed and funded.

Deed and Deed of Trust – Deed is a conveyance/ transfer of ownership and can be transferred in various methods. While the owners of the property hold title (deed) to the property, a deed of trust is an instrument created when a loan is placed on the property and making the property the security to the debt in states such as Texas.

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