If you are planning on being a homeowner someday and find the entire situation paralyzing because of the complicated process involved in purchasing a home, your feeling of overwhelm is justified. Purchasing property is a long and complicated matter.
From having to deal with the real estate brokers, to financing, to negotiations, the road to finally realizing your dream of homeownership is arduous. But the most important aspect of purchasing a piece of real estate is the sales contract that needs to be drafted. There are many conditions and clauses you need to be mindful of. In this article, I will go over the most important clauses to be aware of in a real estate contract.
Once a formal offer is made and accepted, your attorney will contact the attorney of the seller. The seller’s lawyer will then forward you a contract with various terms. This document will contain pertinent information such as the address of the property in question, the expected closing date, and the purchase price. Let’s go over the aspects of a real estate contract that most individuals aren’t aware of until they are actually in a position to move forward with a purchase.
Financing Terms and Contingencies
If you are making an all cash offer this section would not apply to you. However, most people are usually never in a position to have enough liquidity and cash on hand to buy a property out right. That means you would need financing.
The most typical and standard way of acquiring financing is by going to a bank and getting prequalified with a mortgage banker to determine if you even qualify for financing. If you do qualify, you will need to sign a long application with the bank. You will also need to provide verification of your income which entails providing several W-2s and prior year income tax returns.
Within your sales contract, it is imperative that there is a finance contingency clause. Meaning, if you are not able to acquire proper financing, the deal would need to be called off.
What happens if you don’t have this contingency? When your offer was made and accepted, you initially provide the seller with a deposit. In many cases, it is 10% of the purchase price. If you do not have a finance contingency clause and you are not able to get financing for the home purchase, your seller can keep your 10% deposit and move on to another buyer.
Home Inspection Contingency
Imagine the following scenario: you find the perfect home. It is being sold for $500,000. You put down 10% ($50,000 ) and move forward with signing the sales contract. Within the first two weeks, you hire a home inspector and an underground tank inspector.
The home inspector finds the following issues:
The main line to the sewer is damaged and will need to be replaced. This comes at an estimated cost of $10,000.
The roof is extremely damaged and needs to be replaced immediately before winter arrives. The cost is $5,000.
The current electrical wiring throughout the house is not up to code. The estimated amount to rewire the house is $10,000.
The underground tank inspector finds the following issues:
An underground tank does exist and it is located in the front yard. It is already damaging the lawn and is posing as a serious hazard. The cost to remove it and re-dig the lawn will cost $50,000.
You are now looking at $75,000 in necessary improvements. Clearly, you did not sign up for this during your initial honeymoon period with the home. Because you do not have a home inspection contingency clause, if you decide to back out of the deal, the seller will keep your initial deposit of $50,000.
This is why it is so important to have a home inspection clause. This clause typically allows you to back out of the deal within 14 business after a home inspection is performed.
Fixtures and Appliance Clause
Sometimes a home can be sold with the appliances and fixtures. The sales contract specifies whether or not these items will be disposed of or kept in the property.
Why keep the appliances? If they are in good condition, they simply need a proper cleaning to be used by the new homeowner. You will save anywhere from $2,000-$5,000 if you decide to go this route considering what the cost of new appliances are.
Be mindful that the seller may decide to use your desire to keep these items as leverage. The best time to determine the condition of appliances is during the home inspection.
If these items will be disposed of, make sure the contract states that the SELLER will be the one to pay for their removal.
Sales of Existing Home Clause
Suppose you already own a home and are seeking to purchase a new one to expand. The twist is you need to close on your first home in order to finance your new home.
You can include a clause in your sales contract to give you the opportunity to make your initial sale. Make sure you give yourself enough time to close on your current home.
Be mindful that sellers tend to want to avoid removing their property off the market while they wait on you to sell your home. Be as reasonable and generous as you can in respect to the terms you want in the sales contract. The seller of your new home is putting up with a lot to wait on your home to be sold first.
Closing Cost Clause
Here are the following closing costs you should be aware of: attorney fees, escrow fees, title search fees, title insurance, notary and recording fees, transfer taxes, and many more.
Usually the buyer covers these costs but if money is tight, you may be able to have the seller take care of these expenses.
Why would a seller be open to paying for something that is the buyer’s expense? Sometimes a person is a few thousand dollars short of closing on a deal. As the buyer, if you take care of these miscellaneous items, you are ensuring that the deal will happen. You can also halt the deal and look for a new buyer but with rapidly changing market conditions, it may just be easier to take a hit on the closing costs.
Tenant Clause
Suppose the property you are interested in has a tenant occupying one of the floors or rooms.
The first thing you have to ask yourself is if their occupancy is legal or not.
An illegal occupancy would be renting out the ground floor in a legal 2 family home. At this point it is being treated as a 3 family home. This is not allowed in New York.
A legal occupancy would entail a lease already in place with the prior homeowner.
When dealing with an illegal occupancy, the only thing that can be done is an eviction if the tenant refuses to leave. The question becomes who should be responsible for the costs of evicting this individual? Should the seller take care of it before closing or should you instead take the lead on the matter?
If you decide to deal with the eviction yourself, you are certainly positioned to ask for something return. Perhaps a credit at closing for your troubles and cash consideration for the future attorney fees as well. This should obviously be outlined in writing in the sales contract or an accompanying rider.
If the tenancy is legal and there is a lease in place, there is not much you can do. You can always ask the tenant to leave and compensate them for their troubles. Otherwise, you are stuck with them until the end of their lease. Perhaps you and the seller can come to some kind of arrangement where both of you compensate the tenant to find a new home in the event that you want the house vacant upon your arrival.
Closing Date Clause
Once the sales contract is signed by both buyer and seller, an expected closing date is recorded. It is usually 30-60 days. In my opinion, 30 days is cutting it too close since you have to deal with an inspection and the negotiations that come with it along with getting your commitment letter from the bank. 60 days should be enough time to get your mortgage and resolve any inspection issues that may come up.
Remember, the closing date is not something set in stone. The seller will most likely be willing to give you some leeway if your extension is reasonable. Make sure it is done in writing and have your attorney make the request.
If you happen to miss the closing date and are showing bad faith, the seller may decide to terminate the deal and keep your initial 10%. With that said, be mindful of your closing date and try not to play any games.
Rozhik Law Firm New York Real Estate Attorney
This blog post is simply a short summary of the most important clauses to be aware of in a real estate contract.
For a more detailed understanding of your contract, feel free to contact us directly. These contracts are in fine print and can ramble on and on for several pages. It is crucial that you have an attorney review your sales contract.
Our law firm can do the following:
– Real estate litigation and disputes
– Draft of sales contract and review
– Landlord and tenant disputes
– Co-op and condo disputes
– Office, industrial, and retail real estate services
– Review of real estate investments
CONTACT US
Should you have any questions regarding your real estate case, feel free to contact our law firm at (917) 567-1963 or email us at RRozhik@RozhikLawFirm.com.