What are the 10 Crucial Real Estate Contract Terms Home Buyers Should Know?

Real estate contracts can be a lot to handle at once especially when you are excited about your new home.  It can be packed with a slew of terms you may not be familiar with, at times you may want to take a step back and study up on the common terms.

Earnest Money- As known as “good faith money” is a sum put by the buyer and held in escrow or trust to show the buyer is serious about purchasing the home.  There is no defined amount but generally it runs about 1-2% of the purchase price.

Effective Date- The date the last party signed or initialed any terms and/or changes in the sale contract.

Due Diligence- The contract’s contingencies provide the buyer a period to do their homework.  If the buyer discovers negative information regarding the property during this time, they can cancel escrow and receive a full refund of their earnest deposit.

Contingencies- Requirements that must be met before a real estate deal can close. The frequently used are property appraisal, financing, home inspection, disclosures, homeowner’s association disclosures, and a title report.

Disclosures- All sellers are required to fill out a property disclosure for buyers that states everything they know about the home since they have owned it- good or bad. If a seller withholds information it is considered committing fraud.

Inspections- A buyer can request to do inspection within a time frame that’s mutually agreed upon with the seller.  Typically, an inspection takes place within 7 to 14 days of an accepted offer.  After the inspection, a buyer can accept the property in the current condition, release the contract and retain the earnest money, or ask the seller to repair issues discovered at the inspection.

Title Search- Confirms that the property is owned fair and square by the seller who can then transfer those rights to the buyer.  Occasionally, a home’s title can be compromised by long-lost heirs or liens by contractors who did work on the property but never received payment.

Kick-out Clause- If the buyer needs to sell a home in order to finance the purchase of a new home, the seller may decide to include a “kick-out clause” that allows the seller to continue to show the home and accept offers.  If the buyer can’t sell the home during a certain period of time then the seller can “kick out” that buyer and go with a new offer.

Appraisal- If the buyer is getting a mortgage, the lender will require the buyer to pay for an appraisal.  A third party comes in to estimate the value of the house, making sure a lender’s money isn’t going towards a lemon.

Closing- The final stretch of your real estate transaction that involves bringing together lawyers, realtors, buyers, and sellers at the closing table.  The buyer will provide the funds to purchase the home and will receive the keys to the home.