If you are making an offer without the services of a real estate agent and dealing directly with a seller, you might be able to use a standard purchase form obtained from an office supply store. If you do this, be sure to have your attorney review the document and suggest any contingencies you should include.
If you are making an offer through a real estate agent, however, you must use their standard form. In most states, you cannot use your own contract when making an offer through a real estate agent.
The following is a checklist of items to look for when you are buying. Some of these clauses may be found in some form or another in the standard real estate contract that is used in your area.
- The Right to assign: As the buyer, you want to have the right to assign your contract. In the absence of a statement claiming otherwise, a contract is usually assignable. By placing your name with the words “and/or assigns,” you automatically give yourself that right. However, if the preprinted portion of the contract contains a provision forbidding assignment without the seller’s permission, you must cross out that provision.
- Inclusions and exclusions: Most real estate contracts have a clause that specifies what personal property is included in or excluded from the sale. Sellers and buyers often forget to specify certain items, which leads to arguments at closing. A few appliances could be worth $500 or more to you (or cost $500 out of your pocket if you have to replace them). As the buyer, you would prefer the clause, “Anything not specifically excluded will be included, whether or not affixed to the property or structures.” As the seller, you would want to include a clause such as “All personal property, including appliances, furnishings, and decorations are excluded unless specifically included in the purchase agreement.”
- Third party disclosure: Should you disclose that you intend to assign the contract to a third party? Legally, a purchase agreement is assignable in the absence of any provision that prohibits assignment, as long as the assignment does not unreasonably hinder the seller’s rights and obligations under the agreement. On discovering that you made a profit, the seller may be offended or get greedy. As a practical matter, it may help to diffuse such an argument in advance with an explicit statement in the contract: “Buyer may assign this agreement to a third party for a profit.”
Of course, such a clause may also alert a seller into thinking, “Maybe I should ask for more.” Whether such a clause is necessary is a tough call, and it depends on the particulars of the deal.
- How Much Earnest money: As the buyer, your preference is for earnest money to be held in escrow by an escrow agent or a title company of the buyer’s choice. Never let the seller hold the escrow. When selling, do just the opposite; keep the earnest money in your account of a title company of your choosing.
- Total Cash required at closing: What happens if you are assuming or taking title subject to an existing loan and it turns out the actual balance of the loan is less than the seller thought? This may mean you have to come up with extra cash at the closing. To prevent such a disaster, insert the clause: “If the actual loan balance is less than as stated herein, the purchase price shall be reduced to reflect the difference; if the actual loan balance is more than as stated herein, thus the buyer’s required cash payment shall be reduced accordingly.”
- New loan contingency: If you intend to obtain a bank loan to purchase the property, you should include a loan contingency in the contract. The loan contingency clause has been interpreted broadly by courts as putting the obligation on the buyer to make reasonable attempts to obtain a loan. The issue really becomes how many points and how high of an interest rate you want to pay. The buyer should include a clause that reads similarly to the following:
“Buyer is not required to accept a loan with an interest rate of higher than ________ percent over ______ years and payments exceeding $________/month, and buyer is not required to accept any loan that requires more than $_________ in points, closing, and/or other fees.”
Remember, the goal of a contract is to protect yourself and your interests without being unethical. If in doubt, get professional help!