Every home sale starts with a real estate purchase agreement—a legally binding contract signed by home buyers and sellers that confirms that they agree upon a certain purchase price, closing date, and other terms.
While the forms and wording vary across the country, there are certain words common to all that you'll want to have down, cold. Why? Because they spell out crucial info such as how much money you're paying, when you pay it, under what conditions you can back out of the deal, and more. Here are seven terms you are likely to come across in a real estate purchase agreement, and why you need to check these provisions carefully before you sign on the dotted line.
What it is: Checking the home's purchase price on your contract is par for the course, but you also have to cough up some money immediately, in the form of an earnest money deposit, or EMD. That's the cash buyers commit to completing the sale to show sellers they're serious. The amount of the deposit is negotiable between both parties, but is usually about 1% to 2% of the purchase price. Once an offer is accepted, the money is typically held by the seller's broker or a title company, to be used as a credit toward the buyer’s down payment and closing costs.
Why it matters: In an aggressive seller's market, many homes receive multiple offers. One way to make your bid stand out is to offer a slightly higher EMD (think 4% to 5%) to catch the seller’s attention, says Washington, D.C., metro real estate agent Robyn Porter. That being said, "Many buyers want to make the smallest deposit possible, to limit their risk of loss," says Bruce Ailion of Re/Max Town and Country in Atlanta.
The caveat: If you back out of the transaction for any reason or contingency outlined in the purchase agreement, you get your earnest money back (more on contingencies next). However, if you decide not to buy the house for any what-if that is not included in the agreement, the seller can keep the earnest money.
What it is: "A contingency in a deal means there's something the buyer has to do for the process to go forward, like selling a property they already own," says Jimmy Branham, a real estate agent at the Keyes Company in South Florida. Contingencies can also include a home appraisal, home inspection and mortgage approval.
Why it matters: Contingencies protect you by giving you the ability to back out of the sale if something goes wrong, typically without losing your earnest money deposit, says Kathleen Marks, a real estate agent with United Real Estate in Asheville, NC. But all contingencies have deadlines that must be met in order for the transaction to chug along.
What it is: The settlement date, or “closing,” is the day when all involved parties meet to make the sale official. Buyers and sellers typically negotiate a settlement date that is mutually agreeable.
Why it matters: When choosing a settlement date, make sure you’re giving yourself ample time to fulfill the home inspection, appraisal, and any other contingencies. If you don’t meet your obligations to the purchase agreement by the settlement date, you could be considered “in default” and potentially lose your deposit, says Washington, D.C.-based real estate agent Katie Wethman.
What it is: The possession date is the day when buyers can move into their new home. Sometimes home buyers take possession of the home on the day of closing, and sometimes they agree to wait days or weeks after closing. Generally though, 30 to 45 days is the most common time frame.
Why it matters: The possession date is negotiable, and it can affect the strength of your offer. For instance, if the seller needs a few extra months to find a new place to live, offering a 60-day possession date could make your bid more attractive. Alternatively, some sellers allow the buyers to move in before settlement; this may occur if the house is already vacant.
What it is: Escrow is a secure holding area where important items (like the earnest money check and contracts) are kept safe until the deal is closed and the house officially changes hands. Although customs vary by state, the escrow holder is usually someone from the closing company, an attorney, or a title company agent.
Why it matters: The purchase agreement states whether the buyer or seller (or both) pays escrow—with the fee for this service typically totaling about 1% to 2% of the cost of the home. If you try to back out of the deal without a legitimate reason, you will forfeit your portion of the escrow money to the seller.
What it is: When buyers and sellers sign a purchase agreement, they must agree to an accepted form of communication during the transaction as defined by the terms under “delivery,” says Marks. In today’s day and age, email is generally an acceptable method of communication, but some people (say, older buyers or sellers) still prefer snail mail when receiving important documents, like the release of a home inspection contingency.
Why it matters: Your buyer’s agent must abide by the terms of the delivery when communicating with the listing agent or seller. If documents aren’t delivered properly, it could delay or even void the contract.
What it is: In a nutshell, a home warranty is a policy that covers the cost of repairing many of a home’s appliances if they break down. Basic coverage starts at about $300 and goes up to $600 for more comprehensive plans.
Why it matters: Many home sellers will offer to pay for the first year of a buyer's home warranty to entice buyers to bite, especially if the appliances in the house are old and/or it's a buyer’s market. However, this must be written into the purchase agreement.