Signing any legal contract is a risky business. You need to be aware of all the terms and conditions and the meaning of certain key phrases in order to fully understand the implications of signing a contract. In real estate, this is even more critical.
When it comes to real estate contracts, there are various clauses that are designed to protect the interests of both the buyer and the seller. However, most people are not aware of these clauses and end up not including them in the contracts. But not anymore. We present you a list of some of the clauses you need to understand before signing a real estate contract.
Contingency Clauses
According to a contingency clause, a particular condition must be met for a real estate contract to become binding. These are some of the most important clauses to understand and include in a contract since they can protect your interests whether you are a buyer or a seller. Some of the common contingency clauses include:
1. Appraisal contingency
This clause protects the buyer and makes the binding of the contract conditional to the favorable appraisal of the property. A certain minimum amount is usually specified. If the value of the property is below that amount, the contract can be terminated. However, the buyer may still proceed to make the purchase regardless of the results of the appraisal.
Appraisal contingency clauses can have two benefits. First, the termination of the contract leads to a refund in the buyer’s earnest deposit. Second, it gives the buyer leverage to renegotiate the price of the property after the notice of the appraisal value.
2. Inspection contingency
An inspection contingency is similar to the appraisal contingency. The difference is that it makes the binding of the contract conditional to the results of the home inspection, rather than appraisal. It protects the buyers as they can cancel the contract based on the findings of a professional home inspector.
An inspection contingency can include specific details about the condition of the house. These may include the exterior, plumbing, electrical systems and many more. If there’s a problem with any of these aspects, the buyer has an option to cancel or renegotiate the contract.
3. Financing contingency
The financing contingency clause allows the buyer to make the binding of the contract conditional to the securing of the mortgage. If the buyer applies for the mortgage, they do not risk losing their deposit due to failing to secure financing.
Usually, a specific number of days are specified, in the contract, for the buyer to secure financing. During that time, the buyers may terminate the contract if they are unable to secure financing. In addition to the ability to secure loans, the contract may also be made conditional to the terms of the loan.
For instance, it may be specified in the contract that if the buyer is unable to secure a loan with 6 percent interest rate, they may cancel the contract and get the earnest deposit refunded. This can also include the type of loan the buyer needs to secure the deal.
Building Permits
If the seller has made any additions or renovations to the property, the details of which were not included in the original public records, they must obtain permits. This clause protects the buyer from incurring the costs of obtaining permits. However, the seller may include a clause that if the costs of securing the permits exceed a specified amount, the buyer and seller should agree to share the costs.
However, if the seller fails to obtain the permits, or the buyer and seller fail to agree on sharing the costs of building permits, the contacts may be terminated and the deposits would be returned to the buyer.
Closing Costs
Simply described, the closing costs are the costs borne by the buyer or the seller during the closing of the real estate deal. Both parties may agree to share these costs. The agreement and the specifics of sharing the closing costs can be included in the real estate contract.
For instance, the contract must mention which party would pay what costs. Your real estate agent’s input is valuable in the matter. They can advise you on whether a particular cost is usually paid by the buyer or the seller.
Common Wall and Encroachments
Regarding encroachments, the buyer has two options:
• Correction: The buyer asks the seller to correct or remove the encroachment prior to closing the deal.
• Acceptance: The buyer does not require the seller to remove or correct the encroachment. Rather, they accept the encroachment in its present condition.
If the property shares a common wall with the adjacent property, a Common Wall Agreement must be attached with the contract. You must go through the agreement with your lawyer before signing the contract.
Occupancy
The real estate contract may also contain occupancy clauses. These clauses are related to the amount of time it takes both parties to close the deal and the buyer to move into the new house. One such clause concerns the ‘loss of rent’. For instance, the seller has given a 45-day notice to the current occupants to vacate the premises. If the buyer is unable to close the deal within that time frame and it is costing the seller daily rent, the buyer would pay the seller a fixed amount of rent each day to compensate their loss.
Other clauses include:
• Early occupancy: The buyer and seller can enter into an ‘early occupancy agreement’ if the buyer needs to move into the house before closing. In such a case, the buyer assumes all the risk of damage to the property and would be held responsible for maintenance in case of any damages or repairs.
• Late occupancy: The seller may indicate that they have a right to the possession of the property for a specific number of days. If they exercise that right, both parties can enter into a rental agreement.