5 Items On A Real Estate Contract You Should Know About Before You Make An Offer On A House

Are you ready to buy a house but daunted by the mountain of paperwork that awaits? We get it. And it is crucial to sit down and understand the contract process prior to writing an offer so that you can feel confident in your purchase and educated on your options. CNBC notes that the rising interest rates and shifting market conditions deterred many buyers in the third quarter of 2022. Nearly one in eight deals were canceled throughout the latter half of summer and early fall of 2022.

A lack of education surrounding real estate contracts played a vital role in eliminating many of these buyers. But as many local markets become buyer-centric, it is more important than ever for buyers to talk to their real estate agents and understand the contract. These conversations can often save thousands of dollars and a lot of emotional turmoil in the escrow process. So with that, here are five critical contract items to know before writing an offer on the house.

The loan contingency spells out the amount of time a buyer has to get their loan fully approved and confirm their ability to finance the house. Until the contingency expiration, they can back out of the deal based on their loan approval. Before shopping for homes, aspiring buyers must get pre-approved by a lender to have a confident sense of what they will likely be able to afford. While there are occasional circumstances where the loan is unexpectedly not approved, pre-approved is a much more secure place to be in.

The Shannon Jones Team notes that a loan contingency can vary from 17 to 21 days. Over the past two years, this window has regularly been below two weeks. Yes, you will also have the option to shorten this window if you want a more competitive offer. This can be beneficial when competing with multiple buyers who want to guarantee getting the house. However, it can also be strategic if you offer a more significant down payment and are confident that the loan will get approved. Lastly, if you are a cash buyer, you can get rid of it altogether. But it is essential to speak with a local market real estate expert to get the best sense of what to put in the contract.

The inspection contingency outlines the window in which a buyer can back out of the contract due to inspection or repair request issues. So whether that be major foundation work the seller does not want to pay for or the discovery of a major fire hazard, anything along these lines constitutes as falling under the inspection contingency. Once this contingency is lifted, the buyer can no longer back out of the deal over these disputes. This contingency is also between 15 and 17 days, and it can conservatively be recommended to abide by this window if there are repair requests to work out with the seller. The National Association of Realtors notes that, historically, the inspection contingency is one of the primary reasons deals fall apart.

While buyers have had to be very selective when making these requests, that is starting to change. With increased inventory and lower demand, sellers are now more open to repair requests. If the property is a teardown or historical, this contingency may not often be very relevant. You might be looking to tear down or redo the house completely and know that you are going to uncover a lot of the issues that would be found in a traditional inspection when you begin building. In this particular instance, you might waive the inspection contingency to make your offer more enticing.

What is the appraisal contingency? It is the timeframe in which a buyer can back out of the deal with all of their money due to a home's appraised value. So how does this work? When you go into escrow on a property, an appraiser will come to the house and appraise the property's value. Rocket Mortgage notes that an appraiser determines the home's appraised value utilizing criteria such as the property's location, lot size, home size, and general exterior cosmetics. This contingency has typically not been a huge issue since 2020 because home values have been skyrocketing so intensely.

If the property appraises for less than the offered value, the buyers and sellers have one of two decisions to make. The buyer will often cancel the contract if the appraised value exceeds the purchase price. If the appraised value is somewhat close to the purchase price, the buyer may attempt to renegotiate their offer. The seller can decide whether to accept or deny the counteroffer.

Earnest money is a lesser-known element within the real estate contract that is vital to the beginning of escrow. The earnest money is the amount of money wired at the beginning of escrow as a symbolic gesture of commitment from the buyer. After a certain number of days, assuming the contract is not canceled due to relevant contingencies, this money is nonrefundable. Investopedia notes that this amount can range anywhere from 1% to 3% of the purchase price and is typically wired within the first couple of days of opening escrow. Talking to your realtor before writing a contract about what kind of earnest money you are looking to put down is essential.

If your offer is on the lower side of the down payment spectrum, you might be more conservative with this earnest money. A 3% earnest money may not be a problem if you are cash rich. In more competitive buying situations, buyers' agents occasionally recommend a shopper to even go over the 3% and offer something spicy, like 5% or 7%. This can show significant emotional investment in the property and be incredibly appealing to sellers.

Notice to perform is a term reserved for during the escrow when a buyer or a seller is not meeting the deadline of a contract point. For example, if a buyer submits a request for repairs on a Tuesday and the request has an expiration date of Thursday at noon, at 12:01 p.m., the buyer can submit a notice to perform. The seller would then have a designated amount of time to issue a response, or the buyer would back out and receive all their funds back.

Home Bay notes that the typical window for the receiving party of the notice to perform is 48 hours. This is typically not a provision within the contract that is regularly utilized, but buyers need to understand how to keep the deal moving and hold the sellers accountable. Buyers also need to know how this provision can be used against them if they are not on top of their deadlines.