The Anatomy of a Real Estate Contract

This is going to serve as an overview of real estate contracts.

This blog post is intended to provide general information regarding real estate contracts, specifically residential resale of single family residential housing, but in no way does this constitute as legal advice.

I am not a lawyer, nor have I played one on TV.

The Parties

The parties section of the contract will typically contain information for both the buyer and the seller. If you are buying in an entity be sure to note it here. If the property is still owned by the estate, you will likely need to write in “estate of” name of deceased person on title for the sellers portion .

Similarly, if someone has power of attorney for the seller, they can write in their name here as well followed by “POA” or “Attorney in Fact”.

Sales Price & Financing

Although this section may seem fairly obvious, I have heard of many stories where both investors and real estate agents fill it out incorrectly. Typically this section will be broken into two parts, one for the cash portion of the sales price, and another for the financing portion. If you are doing an all cash offer, put the sum total sales price here and put $0 or mark through the financing section of the contract. Be sure to fill this out completely.

For example, if you are acting as a real estate agent in the transaction, and representing the buyer, if you leave one of these sections blank you will essentially have an incomplete offer. Not only that, but it looks very unprofessional if you do not fill out the absolute basics of the contract correctly.

Legal Description

The title company will need the legal description of the property. To find out this information visit your local appraisal districts website for your county. On the appraisals districts website you can input the subject properties address and it will return the legal information needed to fill out the contract such as the: lot, block, subdivision and physical address.

Earnest Money

Earnest money is sort of a interesting subject, in essence it is to show how series you are about buying the property. I find it funny because if I am writing the contract obviously I am interested in purchasing. Earnest money can sometimes be considered “hard” (non refundable) as well. Typically 1% of the purchase price is put down as earnest money.

Survey

When you are purchasing homes “as is” it should not be required to get a survey (since you will be buying with cash unless subject to loan approval), although you may sleep better at night if you have one performed.

However, if you are working with a hard money lender or something of that nature often times they will want a survey completed before they will give you a loan on the house. This will often extend the amount of time needed to close as the title company will now have loan docs and other things to work through on top of a survey.

Make sure to allocate additional time for closing if you are needing approval from a lender.

Addendums

Common addendums that you might use include: sellers disclosure or property condition, lead based paint, mineral and gas rights and any personal addendums that you use for your real estate transactions. Some addendums such as the lead based paint addendum may be required by the state but only if the property was built prior to 1978.

Special Provisions

Many promulgated contract forms will have a section for special provisions. Here is where I typically list any personal addendums that I may be attaching to the contract, or disclose that I am a licensed real estate agent but not acting as one in the transaction. You can also include special instructions like buyer to pay all normal closings costs.

In addition, you can be creative with this if you are making a ton of offers such as this offer will expire by (insert date and time here).

Use Your States Standard Promulgated Contracts

I recommend using your states standard promulgated forms for whatever type of real estate transaction you are participating in. There are multiple reasons for doing so, unless you already have a custom contract prepared for you by a real estate attorney. For one, using the states standard promulgated form typically puts both you and the seller on equal footing.

In addition, it helps you appear more professional when you go on appointments and you are using contracts they are typically already familiar with.

In Conclusion

Hopefully even if you are experienced with real estate contracts you picked up a thing or two from this post. If you are uninitiated with contracts, hopefully you have a better idea of how everything fits together now.

If you have any comments or questions please leave them in the comments below and I will do my best to help.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.