Monday, October 22, 2007

A Consumer Guide to Real Estate Contracts

Most consumers know that a real estate transaction is a very complicated process--from negotiating the price to lifting contingencies to arranging the financing before finally closing escrow. But what a lot of real estate consumers do not realize is that the transaction is also a legal process. The standard purchase offer used in the state of California is also a legally binding contract. So, it is important to understand some of the ins and outs of this innocent looking 8-page document.

The standard California Residential Purchase Agreement is a contract. And, a contract is a legally enforceable agreement between two or more parties that creates an obligation to do or not do particular things. In this case, the agreement is to purchase a house at an agreed upon price, usually with many conditions.

First, after agreeing upon a price, the contract usually states the amount of the initial deposit, down payment, and loan amount. There is often an initial deposit, followed by an increased deposit if certain conditions are met, such as the successful lifting of an inspection or loan contingency. In addition to the signatures, it is the deposit that makes the purchase offer contract valid.

It is important to keep the deposit in mind because the buyers can lose the deposit if they pull out of the contract. The deposit is a good faith display of consideration to the sellers that you intend to complete the purchase of the home at the end of the escrow period. So, if you pull out, you also can lose the deposit. This is covered in depth later in the contract in Section 16 regarding "liquidated damages." And pulling out of a contract is considered damaging to the sellers because they have lost time and other potential buyers and need to be compensated for this damage.

The next important section is regarding contingencies. The buyer has the right to a short period at the beginning of the escrow period to make sure their loan and appraisals are in order and to further inspect the house. This period is a safeguard to the buyer to make sure they are ready and able to make this major transaction and to ensure that home has no hidden defects. Perhaps there is a massive amount of dry rot or a faulty foundation that might cause the buyers to reconsider their interest in the home. By pulling out of the contract before lifting these contingencies, they can also safely get their deposit back (in most situations).

Most of the standard contract is considered "boilerplate" but make sure to read each section and make sure you understand it. There are sections that outline who pays which transfer taxes, who pays for home warranties, which major appliances and other items are included (or not included) in the sale.

One interesting legal fact pertaining to contracts that not a lot of people know is that a counter-offer renders the original contract null and void.

Now there is a lot more to the standard real estate contract here in California than I have covered here. I always advise that you contact a lawyer if you have a questions about the contract or a legal issue arises. If you would like to know more about the purchase offer contact, please let me know. I'm always happy to help. I can be reached at 510-547-5970 x57 or

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