Looking to start investing in Real Estate? Read this guide that is full of information to help the beginning novice learn how to begin mastering the real estate market. From renting, to selling, to buying my goal is to help educate as much as possible.
This installment is important to the real estate investor as well as the individual who is looking to purchase property for their own residence. Once again as in the lease option contract installment, this is only a guideline and should never replace the advice of a licensed attorney who is retained to represent your interests. Especially when dealing as expensive as a house and the financial implications that result in the purchase of something so expensive.
A contract is something that all parties sign, and agree to abide by, if a party of the contract breaks the terms they default and is enforceable in court should it ever resort to something so drastic. You want all terms of the sale included in the contract, remember if the agreement is not in the contract in writing, then it is not enforceable, and will not likely be upheld should a disagreement occur. You should NEVER purchase a piece of property without a contract, even if you are paying cash for the property.
Section 1. The first and most critical thing that must be included in the contract is the buyer and sellers information. This should include legal names, address of both the buyer and seller. If the property is owned by a company, then the company name should be listed, if owned by individuals then the names of the individuals should be listed.
Section 2. Moving along the next section should be a description of the property. This should include the county and state where the property is located. As well as a legal description of the location, and the physical location (postal address) for the property.
Section 3. Purchase price is going to include several sections. The first section is the amount of the earnest deposit; this is the money that is given to the seller along with the contract to the seller to show that you are in fact serious about purchasing the property. Sometimes a promissory note can be used in lieu of cash or check for the earnest deposit. The next part is Sum Due after Acceptance of Contract, this is not always required, and most investors will negotiate to purchase a property without paying anything additional here. Next is Proceeds of New Note and Mortgage from Any Lender Other Than Seller, this means any mortgages that will be secured, for the property. Next is Existing Mortgage on the Property, this is the amount that is expected to still be due after the purchase of the property, if you are not assuming the previous mortgage this should be zero, if you are assuming the loan, this would be the payoff of the mortgage. Following we add in Balance Due Seller by Promissory Note, this is any promissory notes that the seller has agreed to hold to assist in the purchase of their property, this includes any 2nd mortgages that they agree to hold. Finally we now add in Additional Sum at Closing, this is not always used, some sellers require money at closing, while others do not each deal is different and will determine if this is necessary or not. Finally, the last part of this section is Total Purchase Price, in which we add up all of the other parts of this section. Total Purchase Price will be the complete total of money that will be paid for the property. This includes all notes, mortgages, and money paid upfront for the property.
Section 4. Apportionment of Purchase Price and Deed, this section typically is broken down into four sections, land, buildings, improvements, and personal property. The reason to break it down is that different tax laws and deductibles are available for the different aspects, as well as depreciation is handled differently. This may not be as important for an individual doing a purchase for their own personal use; however, for an investor this can save thousands of dollars in taxes.
Section 5. Buyer’s Expenses should be listed in this section. Obviously you want this to list as few things as possible, since you are having to purchase the property you are already spending a large amount of money overall. The more you can get the seller to pay the better off you are.
Section 6. Seller’s Expenses should list anything and everything that the seller will be covering in connection with the sale. Some of the different items that must be paid for by someone include, Transfer Taxes, Title Commitment for Title Insurance, Survey, Attorney Fees, Appraisal Fee, Real Estate Commission, Title Abstract, Title Opinion Letter, FHA/VA Mortgage Discount, Photographs, Satisfaction of Mortgage and Recording Fee, Lead Paint Inspection, Home Inspection, Repairs or Replacements of the Structure, Any Other Inspections Required By Law. While not all sellers will cover everything, the majority of the items listed are typically covered by the seller. Attorneys’ fees are typically covered by the party who the attorney represented.
Section 7. Attorney Modification means that both parties have the right to have an attorney review the contract before the parties are bound by it. However, such items as purchasing price, closing date, and possession date are not open to attorney review.
Section 8. Prorated Items, this will include any trust account, as well as tax payments that are due. The total of for a tax bill for a year for example will be divided by 12, if the seller sells the property in March, then the seller is responsible for 3 months worth of the tax bill. The buyer is responsible for the other 9 months of the tax bill. Any amounts that are held in an escrow account for items such as taxes and insurance are transferred to the buyer.
Section 9. Title and Title Insurance are covered here. Most attorneys agree that a period of 30 days to provide a Title Commitment or proof of Title Insurance is acceptable. If you know what title company you want to use, you would also record that information here. If this is undetermined at the time the contract is written, you can put “To Be Determined.”
Section 10. Next section is devoted to the survey and information obtained during the survey. Most attorneys also agree that 30 days for a survey is plenty of time. Surveys are important so that the buyers are well aware of exactly where their property lines are, as well as making any encroachment issues known upfront.
Section 11. Examination of Title and Time of Closing follow after the section for the survey. This will determine the exact date and time in which the closing will occur. During the closing, the title will be provided so that it can be examined as well. The location of the closing is also included so that all details are recorded. Typically, this occurs at the office of the buyer’s attorney, if the buyer is not using an attorney then the title company is the next best option for the closing location.
Section 12. Something that is very important is the Default by Buyer section. This section limits the responsibility of the buyer to only forfeiting the money paid as the Earnest Deposit when this contract was originally presented. Regardless of whether the earnest deposit was cash, check, or even a promissory note. This limits the liability of the buyer in case something occurs in the future before the purchase is completed that makes the sale unable to be completed.
Section 13. Moving along we have the Performance/Default/Release of Earnest Deposit section of the contract. This section simply states who specifically will retain the earnest deposit until the sale is completed, as well as what if any type of account it will be held in. It also states when the earnest money will be disbursed, and what will happen to the money if the buyer defaults, as well as if the seller defaults. This is a very important section since it involves money that is given before the property is in the possession of the buyer.
Section 14. Attorney Fees and Costs is another section that is important, not so much for an immediate need, but more of a protection measure. This states that in the event the parties must go to court for some reason due to the contract, or the sale of the property the party who wins the suit will be entitled to recover from the losing party the attorney fees as well as court costs and any other costs of enforcing the contract.
Section 15. Until the buyer gains possession of the property, you need a section in the contract that states that the seller is responsible for the property. This section is called the Risk of Loss or Damage. This will enable you to have a course of action in the event that there is damage done to the property from vandals, natural disaster, or other methods.
Section 16. We now come to another important section, Condition of the Property. This will cover the condition that the property is in, and the condition that the property is expected to be in when the buyer takes possession. Typically, this also warrants that there are no defects in the property, if this is included as well and defects are found the buyer can sue the seller.
Section 17. Well and Septic Test, this is to certify that the property has water and sewer connects and that the system is in good working order, regardless of whether it is septic and well or through a local water company that handles both issues.
Section 18. Flood Zone, this section states that the property is not in a flood zone. If the seller is unsure, they need to find this out for sure, before selling. A buyer who is not told property is in a flood zone before the purchase can sue the seller for any damages that occur due to flood, as well as breach of contract.
Section 19. Occupancy, this is typically only important if the property is currently rented out, or someone else lives on the property that will be remaining. If there are tenants, their legal names must be included for all occupants. If there is, no tenants and no one living on the property that will remain after closing you can either omit this section, or just put “Not Applicable.”
Section 20. Mortgage or Third-Party Financing, this section simply means that you are released from the obligation to purchase the property if you are unable to secure a mortgage and financing on terms that are reasonable and that the buyer can afford. If you cancel the contract due to this reason you will be due back any deposit money paid thus far.
Section 21. Seller Financing, this section covers all details of the sellers note, as well as number of days to cure any default, the interest rate, amount of the seller financing and any other details pertaining to the sellers financing. Also, need to include the options to assign the seller financing so if you so choose to sell the property later on, someone else can assume the mortgages.
Section 22. Termite Inspection is a major issue. Often termite damage is not readily visible to the average person. The seller is responsible for a termite inspection, and if damage is found responsible for repairs up to 3% of the selling price. If the seller opts not to repair the damage, the buyer is entitled to a 3% discount off the selling price according to the terms of the contract. If the repairs will exceed 3%, the buyer has the option to either cancel the contract, or just simply deduct the 3% from the purchase price.
Section 23. The Zoning section states according to the zoning laws of the county and state where the property is located what the zoning requirements are. Multi-family units are not allowed on properties that are zoned for single-family residences, so this is very important to make sure the zoning is correct for the structure on the property.
Section 24. Legal Use, this section refers to the fact that there are building code violations or any other violations on the property.
Section 25. Local Ordinances, depending upon the area where the property is located there may be certificates showing compliance with the ordinances. If this is the case for the area where the property is located, the sellers are responsible for these costs.
Section 26. Next section is Time for Acceptance, this states that amount of time that the contract and offer to purchase the house are good for until the seller must make a decision to either accept or deny the offer and contract.
Section 27. RESPA Compliance, you need an attorney or title company to make sure your transaction following all Real Estate Settlement Procedures Act of 1974 guidelines. This section will cover those guidelines.
Section 28. Additional Terms and Conditions are all included here. If it was not mentioned in a different part of the contract, it probably belongs here.
Section 29. Notices, this section details exactly how the buyer and seller will communicate with each other. Typically, most contracts state that notices must be done in writing, with certified mail, return receipt so there is no question of it the notice was received.
Section 20. Finally, you need a section for the signatures. This includes the signatures of all sellers as well as all buyers. Make no mistake this section while listed last, is not an option, but a requirement. Without signatures the entire document is void and not enforceable I any courts and leaves everyone unprotected.
Whew, we are finally done covering the main parts of a sales contract. Seems like a lot of work. By now, I am sure you are searching for the attorney to work with if you have not already gotten an attorney lined up to use. While an attorney is not a requirement, they do help make sure your protected and will look after your best interests as well as your money. Next installment will cover the closing of property. The final step in the purchase of property.
This installment is important to the real estate investor as well as the individual who is looking to purchase property for their own residence. Once again as in the lease option contract installment, this is only a guideline and should never replace the advice of a licensed attorney who is retained to represent your interests. Especially when dealing as expensive as a house and the financial implications that result in the purchase of something so expensive.
A contract is something that all parties sign, and agree to abide by, if a party of the contract breaks the terms they default and is enforceable in court should it ever resort to something so drastic. You want all terms of the sale included in the contract, remember if the agreement is not in the contract in writing, then it is not enforceable, and will not likely be upheld should a disagreement occur. You should NEVER purchase a piece of property without a contract, even if you are paying cash for the property.
Section 1. The first and most critical thing that must be included in the contract is the buyer and sellers information. This should include legal names, address of both the buyer and seller. If the property is owned by a company, then the company name should be listed, if owned by individuals then the names of the individuals should be listed.
Section 2. Moving along the next section should be a description of the property. This should include the county and state where the property is located. As well as a legal description of the location, and the physical location (postal address) for the property.
Section 3. Purchase price is going to include several sections. The first section is the amount of the earnest deposit; this is the money that is given to the seller along with the contract to the seller to show that you are in fact serious about purchasing the property. Sometimes a promissory note can be used in lieu of cash or check for the earnest deposit. The next part is Sum Due after Acceptance of Contract, this is not always required, and most investors will negotiate to purchase a property without paying anything additional here. Next is Proceeds of New Note and Mortgage from Any Lender Other Than Seller, this means any mortgages that will be secured, for the property. Next is Existing Mortgage on the Property, this is the amount that is expected to still be due after the purchase of the property, if you are not assuming the previous mortgage this should be zero, if you are assuming the loan, this would be the payoff of the mortgage. Following we add in Balance Due Seller by Promissory Note, this is any promissory notes that the seller has agreed to hold to assist in the purchase of their property, this includes any 2nd mortgages that they agree to hold. Finally we now add in Additional Sum at Closing, this is not always used, some sellers require money at closing, while others do not each deal is different and will determine if this is necessary or not. Finally, the last part of this section is Total Purchase Price, in which we add up all of the other parts of this section. Total Purchase Price will be the complete total of money that will be paid for the property. This includes all notes, mortgages, and money paid upfront for the property.
Section 4. Apportionment of Purchase Price and Deed, this section typically is broken down into four sections, land, buildings, improvements, and personal property. The reason to break it down is that different tax laws and deductibles are available for the different aspects, as well as depreciation is handled differently. This may not be as important for an individual doing a purchase for their own personal use; however, for an investor this can save thousands of dollars in taxes.
Section 5. Buyer’s Expenses should be listed in this section. Obviously you want this to list as few things as possible, since you are having to purchase the property you are already spending a large amount of money overall. The more you can get the seller to pay the better off you are.
Section 6. Seller’s Expenses should list anything and everything that the seller will be covering in connection with the sale. Some of the different items that must be paid for by someone include, Transfer Taxes, Title Commitment for Title Insurance, Survey, Attorney Fees, Appraisal Fee, Real Estate Commission, Title Abstract, Title Opinion Letter, FHA/VA Mortgage Discount, Photographs, Satisfaction of Mortgage and Recording Fee, Lead Paint Inspection, Home Inspection, Repairs or Replacements of the Structure, Any Other Inspections Required By Law. While not all sellers will cover everything, the majority of the items listed are typically covered by the seller. Attorneys’ fees are typically covered by the party who the attorney represented.
Section 7. Attorney Modification means that both parties have the right to have an attorney review the contract before the parties are bound by it. However, such items as purchasing price, closing date, and possession date are not open to attorney review.
Section 8. Prorated Items, this will include any trust account, as well as tax payments that are due. The total of for a tax bill for a year for example will be divided by 12, if the seller sells the property in March, then the seller is responsible for 3 months worth of the tax bill. The buyer is responsible for the other 9 months of the tax bill. Any amounts that are held in an escrow account for items such as taxes and insurance are transferred to the buyer.
Section 9. Title and Title Insurance are covered here. Most attorneys agree that a period of 30 days to provide a Title Commitment or proof of Title Insurance is acceptable. If you know what title company you want to use, you would also record that information here. If this is undetermined at the time the contract is written, you can put “To Be Determined.”
Section 10. Next section is devoted to the survey and information obtained during the survey. Most attorneys also agree that 30 days for a survey is plenty of time. Surveys are important so that the buyers are well aware of exactly where their property lines are, as well as making any encroachment issues known upfront.
Section 11. Examination of Title and Time of Closing follow after the section for the survey. This will determine the exact date and time in which the closing will occur. During the closing, the title will be provided so that it can be examined as well. The location of the closing is also included so that all details are recorded. Typically, this occurs at the office of the buyer’s attorney, if the buyer is not using an attorney then the title company is the next best option for the closing location.
Section 12. Something that is very important is the Default by Buyer section. This section limits the responsibility of the buyer to only forfeiting the money paid as the Earnest Deposit when this contract was originally presented. Regardless of whether the earnest deposit was cash, check, or even a promissory note. This limits the liability of the buyer in case something occurs in the future before the purchase is completed that makes the sale unable to be completed.
Section 13. Moving along we have the Performance/Default/Release of Earnest Deposit section of the contract. This section simply states who specifically will retain the earnest deposit until the sale is completed, as well as what if any type of account it will be held in. It also states when the earnest money will be disbursed, and what will happen to the money if the buyer defaults, as well as if the seller defaults. This is a very important section since it involves money that is given before the property is in the possession of the buyer.
Section 14. Attorney Fees and Costs is another section that is important, not so much for an immediate need, but more of a protection measure. This states that in the event the parties must go to court for some reason due to the contract, or the sale of the property the party who wins the suit will be entitled to recover from the losing party the attorney fees as well as court costs and any other costs of enforcing the contract.
Section 15. Until the buyer gains possession of the property, you need a section in the contract that states that the seller is responsible for the property. This section is called the Risk of Loss or Damage. This will enable you to have a course of action in the event that there is damage done to the property from vandals, natural disaster, or other methods.
Section 16. We now come to another important section, Condition of the Property. This will cover the condition that the property is in, and the condition that the property is expected to be in when the buyer takes possession. Typically, this also warrants that there are no defects in the property, if this is included as well and defects are found the buyer can sue the seller.
Section 17. Well and Septic Test, this is to certify that the property has water and sewer connects and that the system is in good working order, regardless of whether it is septic and well or through a local water company that handles both issues.
Section 18. Flood Zone, this section states that the property is not in a flood zone. If the seller is unsure, they need to find this out for sure, before selling. A buyer who is not told property is in a flood zone before the purchase can sue the seller for any damages that occur due to flood, as well as breach of contract.
Section 19. Occupancy, this is typically only important if the property is currently rented out, or someone else lives on the property that will be remaining. If there are tenants, their legal names must be included for all occupants. If there is, no tenants and no one living on the property that will remain after closing you can either omit this section, or just put “Not Applicable.”
Section 20. Mortgage or Third-Party Financing, this section simply means that you are released from the obligation to purchase the property if you are unable to secure a mortgage and financing on terms that are reasonable and that the buyer can afford. If you cancel the contract due to this reason you will be due back any deposit money paid thus far.
Section 21. Seller Financing, this section covers all details of the sellers note, as well as number of days to cure any default, the interest rate, amount of the seller financing and any other details pertaining to the sellers financing. Also, need to include the options to assign the seller financing so if you so choose to sell the property later on, someone else can assume the mortgages.
Section 22. Termite Inspection is a major issue. Often termite damage is not readily visible to the average person. The seller is responsible for a termite inspection, and if damage is found responsible for repairs up to 3% of the selling price. If the seller opts not to repair the damage, the buyer is entitled to a 3% discount off the selling price according to the terms of the contract. If the repairs will exceed 3%, the buyer has the option to either cancel the contract, or just simply deduct the 3% from the purchase price.
Section 23. The Zoning section states according to the zoning laws of the county and state where the property is located what the zoning requirements are. Multi-family units are not allowed on properties that are zoned for single-family residences, so this is very important to make sure the zoning is correct for the structure on the property.
Section 24. Legal Use, this section refers to the fact that there are building code violations or any other violations on the property.
Section 25. Local Ordinances, depending upon the area where the property is located there may be certificates showing compliance with the ordinances. If this is the case for the area where the property is located, the sellers are responsible for these costs.
Section 26. Next section is Time for Acceptance, this states that amount of time that the contract and offer to purchase the house are good for until the seller must make a decision to either accept or deny the offer and contract.
Section 27. RESPA Compliance, you need an attorney or title company to make sure your transaction following all Real Estate Settlement Procedures Act of 1974 guidelines. This section will cover those guidelines.
Section 28. Additional Terms and Conditions are all included here. If it was not mentioned in a different part of the contract, it probably belongs here.
Section 29. Notices, this section details exactly how the buyer and seller will communicate with each other. Typically, most contracts state that notices must be done in writing, with certified mail, return receipt so there is no question of it the notice was received.
Section 20. Finally, you need a section for the signatures. This includes the signatures of all sellers as well as all buyers. Make no mistake this section while listed last, is not an option, but a requirement. Without signatures the entire document is void and not enforceable I any courts and leaves everyone unprotected.
Whew, we are finally done covering the main parts of a sales contract. Seems like a lot of work. By now, I am sure you are searching for the attorney to work with if you have not already gotten an attorney lined up to use. While an attorney is not a requirement, they do help make sure your protected and will look after your best interests as well as your money. Next installment will cover the closing of property. The final step in the purchase of property.
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