October 1st, 2017 11:10 AM by Jackie A. Graves
After a seller accepts a buyer's offer to purchase a
property, it's time to make it official, in the form of a real estate contract.
This document is one of the most important steps in the home-buying
process, as it clears the way for both parties to begin the transfer of
property. It means that the sellers can begin planning to move out, while the
buyers can work with their agent, lender, and attorney get their
ducks in a row for closing.
But at what point are both
parties actually locked into the contract?
"In general, an offer
becomes a contract when both parties have signed," says Phil
Lunnon, a Realtor® with Lunnon Realty in Lakewood, CO. Once
this happens, the contract is binding for both the seller and buyer.
Of course, just how binding the
contract is depends on the details of the contract itself. Some contracts
may have contingencies—or
outs—built in. Typically a buyer's attorney will try to build as many
contingencies as possible into a contract to keep the client from being
tied down if something unexpected comes up. A seller's attorney, on the other
hand, will typically advocate for as few contingencies as possible, because the
client doesn't want the buyer walking away from the deal.
of the most common reasons a real estate deal falls through is because of
financing—or a buyer's inability to get financing from their lender. For
example, an appraisal contingency protects buyers and gives them the
opportunity to walk away from the sale if the home fails to appraise for the
agreed-upon purchase price. If the home appraises for lower than the purchase
price, it usually means the lender won't be able to provide the buyers with as
much financing as they had hoped.
Other contingencies in contracts include the property
passing a home inspector's review, the buyer's own home selling before closing,
or the home making it through a title search, ensuring that the buyer has the
right to sell. Sellers get some protection out of a contingency—like time
limits on how long a buyer has to obtain financing—but most contingencies are
written to protect a buyer and allow them an out if something goes wrong before
contingencies aren't met and the buyers want to walk away from the deal, they
can typically get back their funds held in escrow, like earnest money. "Should any of the
contingencies not be met in a timely manner, the buyer should be able to
dissolve the contract and walk away with no repercussions," says Aaron
Hendon, a Realtor® with Christine & Company in Seattle, WA.
"That is the whole point of the
course, if the contingencies were met, "the
buyer is then obligated to perform in accordance with the original parameters
of the contract," Hendon says. That means forfeiting any monies in escrow
and potentially even the full value of the contract.
long as the provision is written into the contract and both parties agree upon
it, the sellers may cancel a contract. Why? They usually want out of a
contract because a higher offer came in from another buyer. In that case, the
buyers have to decide whether or not to let the sellers out of the deal.
But if the buyers don't want to let the sellers off the hook, the sellers will
be bound by the provisions outlined in the contract, says Jeffersonville, NY,
attorney William Chellis.
the sellers are refusing to stick with the deal and want out for good, the
buyers then have the authority to take them to court to push for the deal to go
through, or file for compensation for costs like the home
way to settle the dispute out of court? If the higher offer is high enough, a
seller can offer to buy the buyer out of the contract, essentially offering
more money than just the return of the buyer's funds in escrow, says
Chellis. That extra cash might satisfy a buyer, and allow the contract to be
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