Buying Your First Home : Part 4
The Agreement to Purchase a Home
For many homebuyers, purchasing a home (especially a first home) can be a complicated, confusing and sometimes frightening matter, so understanding your rights and obligations as a Buyer as well as those of the Seller in advance are important.
To begin, make sure that you're pre-approved for a loan before you sign a Purchase Agreement. In the following section, you'll learn more about the real estate purchase contract. A proper sales contract should contain the provisions listed below, but keep in mind that this is only a guide covering the major components. Other terms and conditions may be involved.
Also remember that the Purchase Agreement is a binding and legal document containing real estate terms which can be difficult or confusing for some Buyers to understand. Make sure you do understand everything that's in the contract before you sign. Any of its provisions may be vital to your interests. This is also a good reason to be sure that you are represented by a qualified Realtor acting as your Buyer's Agent. Of course, if you have any questions at all, feel free to call or email me. I'll get back to you with an answer fast.
The Contract to Purchase a Home
First, a contract consists of an Offer and an Acceptance. Once you've decided to buy, the Seller may require a cash deposit as evidence that you intend to go through with the sale. Do not put more deposit money into escrow than necessary. Make sure that your Purchase Agreement includes a provision allowing a refund of your deposit if you are unable to obtain financing (within a reasonable specified time), or if the seller or builder fails to perform on his or her part of the contract. Likewise, you're expected to agree that if you fail to go through with your part of the contract that your deposit will be forfeited. These are customary clauses in real estate sales agreements. To be safe, it's highly recommended that make your deposit and down-payment into an escrow account, rather than directly to the Seller.
You initiate the sales contract by signing an offer to purchase on a form called a "Residential Purchase Agreement," which is supplied by the Seller's agent. When completed with all the important terms and signed by you, it becomes your formal offer to purchase the property on the stated terms. A contract forms when the Seller accepts your offer by signing the Agreement before you withdraw it, if you're inclined to do so. In many cases, written Counter-Offers are exchanged between your agent and the Seller's agent before the actual contract is formed. Counter-Offers usually apply to adjustments to the purchase price, shared closing costs, any fixtures and appliances included in the deal and any repairs or upgrades to be made prior to the purchase as a condition of the sale.
When the closing date arrives, you're committed to the purchase of the property. Therefore, the time to ask questions or negotiate the price, costs and terms of the sale is not on closing day. By the time of the settlement date, any changes in costs and purchase terms may be very difficult or impossible to negotiate. You may have to pay additional costs if the contract or loan documents have to be changed, and the lock on your interest rate may expire as well.
Your sales contract should cover the following points:
- The sales price should be specified in the contract. For your protection, it's usually best if the contract states that the sales price is not subject to change.
- The sales contract should state the amount of cash deposit that will be required from you and the manner for financing the balance. Usually the contract will require that you arrange to obtain a loan for the balance due, which you should have done already. It should also provide that any cash deposit you make will be refunded to you if you cannot obtain a loan within a specific period of time.
- The sales contract should include a provision concerning closing costs and prepaid items with an understanding as to who is to pay what portion of each. Keep in mind that many loan programs have limits as to the amount of non-recurring closing costs that a Seller is allowed to pay--verify the maximum Seller contribution allowed before negotiating closing costs. This allows you to anticipate the cash needed for closing and to prevent disputes. Note that in a "Seller's Market", it can be difficult to negotiate to have the Seller pay some portion of the closing costs, so don't hinge your sale on the assumption that any Seller will want to help you with closing costs.
- The contract should provide for appropriate identification of any easily removable or built-in equipment, appliances, fixtures or devices which are to be included with the property.
- You should not sign any contract containing a "safety" or "escape" clause which enables the Seller or builder to back out of the contract at any time unless you also have the same right. However, it's recommended that your contract have a provision which will permit you to withdraw from the agreement without a penalty if the sales price is greater than the reasonable value of the property as determined by an appraisal, particularly if you sign the contract before the appraisal is actually done.
- The contract should contain a provision stating who will be responsible for the property from the date of the contract to the date the house is transferred to you. The seller or builder usually assumes this responsibility.
- The contract should require the Seller to transfer the property to you on or before a certain date. The contract should also specify your right to withdraw and get your deposit back if the property is not transferred on time.
- If you're attempting to buy a new home in a particular "phase" of a multi-phase housing development which has been sold out, some contracts for new construction may contain an "escalator" clause which permits the builder to increase the price of homes between phases when the prices for homes in the next phase have not yet been established. You may still make a deposit on the new home, but a contract containing this clause should also provide that you have the option of canceling the contract and receiving a full refund of your deposit if the increased price is not acceptable to you.
- In the case of new construction, the contract should state that the builder will complete the home in accordance with definite plans and specifications by a specific date or within a reasonable time thereafter. The plans and specifications describe the type of house that will be built, the dimensions, the type of materials which will be used and other construction details.
- Before you sign the contract on a new construction home, you should review the plans and specifications to which the contract refers, or have someone familiar with building construction do it for you. Unless you have a construction background, most people are not able to understand a set of plans and specifications to know whether the actual construction is being or has been done in accordance with those plans and specifications. It's common that either you or the builder will want or need to change one detail or another from the original plans and specs as construction progresses. Most major changes are arranged between the builder and you, and your loan may need to be adjusted if you make changes or additions resulting in increased costs that you are not paying for in cash.
- If you do not get a copy of the plans and specifications for a new construction home before you sign the contract, you should make sure that you'll have the right to look them over again at another time and place. Normally, the builder will cooperate in allowing you to examine the plans and specifications or else furnish you a copy.
Remember that these are just a few of the things that you as a prospective homeowner should be careful about when signing a Residential Purchase Agreement. Legal documents are fairly complicated, and in most cases your real estate representative can answer many questions you may have. If you find yourself at some point during the process where you do not fully understand the details of the transaction as they've been presented, or you have serious doubts as to the validity or legality of any provision contained in the agreement, you should seek legal advice from a reputable and experienced real estate attorney. You could save yourself a lot of future complications by obtaining such advice in advance.