A real estate contract is an agreement between the Owner/Seller of a house and a Buyer. The parties have to agree on the following issues:
1. Price. The parties have to agree on the price of the home. Retaining a knowledgeable realtor is a good first step in determining the value of the home. The property appraiser’s web site also provides valuable information about the value of homes in the area.
2. Deposit. A deposit is required to make a binding contract. Usually the deposit is ten percent (10%) of the purchase price. If the Buyer defaults on the contract, the Seller can claim he deposit as liquidated damages.
3. Financing. A contract is usually contingent on the Buyer qualifying for a loan. It is important for the contract to clearly state that the Buyer will not be obligated to go forward with the closing if they do not qualify for a loan so that the Buyer can get their deposit back if they do not get a loan. The Buyer will want to get the best deal in their financing, so should use a mortgage broker or apply at different lenders to compare rates. For every $100,000.00 borrowed, it costs $66.00 per month for every 1% increase in interest rates for a thirty year mortgage.
4. Warranties/ “As Is” condition. The contract will state what warranties, if any, that a Seller gives to the Buyer about the condition of the home. Many contracts are “as is” contracts in which the Seller makes no guaranties as to the condition of the property. A Buyer should retain a professional house inspector to review the property to determine the condition of the roof, HVAC, etc. The contract should be made contingent upon an acceptable report. I also recommend that the Buyer talk to neighbors about the property to determine if they have any knowledge about the house condition (flooding, etc.) and any issues the neighborhood may have. Even if the contract is “as is,” the Seller is obligated to advise a buyer of any condition that is not readily observable that affects the value of the property.
5. Closing date. The contract will list the date by which the contract must close. The Seller generally wants to close quickly and not keep the property off the market for too long while the Buyer determines if they qualify for a loan and the property passes inspections. The Buyer wants to make sure they have enough time to go through the loan and inspection process.
6. Costs. There are costs for title insurance, documentary stamps for the amount paid for the property and documentary stamps and intangible tax for the amount of the loan. Usually the Seller pays for the documentary stamps for the amount paid and for the title insurance, while the Buyer pays the costs for the loan, As an example, for the purchase of a $200,000.00 home with a $150,000.00 mortgage, the Seller would pay $1400.00 for the documentary stamps (.70 for every $100.00 of the sales price) and about $1,075.00 for title insurance (title insurance insures title to the Buyer and is controlled by statute). The Buyer would pay $525.00 for documentary stamps on the $150,000.00 mortgage (.35 on the amount borrowed) and $300.00 for intangible taxes (.20 on the amount borrowed). The recording costs for the deed and mortgage are minimal.
For more information about real estate contracts, please contact Janice at Rice & Rose.
