A real estate contract is an integral part of buying or selling a home. Its primary purpose is to define the price and terms for the transaction. Every possible step of the sale is covered, from earnest money to closing date, and everything in between. The end result outlines expectations that protect both the buyer and seller.
Real estate contracts can vary significantly from state to state. The thought of a multi-page real estate contract can be overwhelming no matter what state you live in. Buyers moving to Arizona will need to understand that the process may be different from the last place they bought or sold property.
What does it all mean? What is a contingency? What happens at closing?
Basic Elements of a Real Estate Contract
It is of utmost importance that a buyer and seller fully understand the contract terms before they agree to it. Below is an easy to understand outline featuring elements found in contracts that affect both the buyer and seller.
- Identification of the parties
- A description of the property
- The essential details, rights, and obligations of the contract
- Any contingencies or conditions that must be met prior to closing
- The condition of the property
- Title report and sellers capability to perform
- What fixtures and extras are included and what is not
- The amount of the earnest money deposit
- Itemized closing costs and who is responsible for paying
- The prospective date of closing
- The signatures of each party
- Terms of possession
The Big Three Contingencies
Sellers and buyers can mandate a purchase agreement contingent upon certain conditions that must be met before the property is closed. Most real estate contracts also have what we commonly refer to as the “Big Three Contingencies” These include:
Due Diligence: Purchase agreements are typically contingent upon the buyer’s satisfaction with a third party home inspection. The seller must allow the buyer and the inspector of their choice to gain reasonable access to the property for inspection. The buyer is responsible for paying for the inspection. Most purchase agreements include a deadline of ten days for the property inspection. Repairs/replacements of any findings that are unsatisfactory to the buyer can be negotiated or the buyer can cancel escrow.
Appraisal: In addition to an inspection initiated by the buyer, an appraisal is usually
carried out by the lender. If the appraisal does not equal or exceed the contracted value of the home, it is up to the buyer to either make up the difference, negotiate a lower purchase price, or cancel the contract. The lender may also require repairs to be made prior to closing, this expense could be negotiated between buyer and seller. If this contingency is not satisfied, the lender is likely to deny the financing and the buyer would be entitled to their earnest money returned.
Financing: Most buyers place a portion of the home’s value down upon closing and obtain the rest of the necessary funding via mortgage financing. Although buyers generally obtain a pre-approval letter before making an offer, pre-approval never guarantees the buyer’s ability to obtain financing. Buyers can protect themselves against the possibility of financing falling through by including a financing contingency. This contingency states that if the buyer cannot obtain the necessary funding, they can cancel the contract and receive their earnest money back (subject to limitations and contractual time constraints).
The Closing Process
If the buyer is obtaining financing, no later than three (3) days prior to the close of escrow date, the buyer’s agent should be in constant contact with the buyer and buyer’s lender to ensure that the buyer shall either: (I) sign all loan documents; or (II) deliver to seller and escrow company notice of loan approval without PTD (or “Prior to Doc”) conditions AND dates of receipt of closing disclosure(s) from the lender.
If the buyer fails to complete any of the preceding requirements, the buyer must immediately deliver to seller and escrow, a notice of inability to obtain loan approval without PTD condition OR draft an extension of the close of escrow and present to seller for approval and signature. Failure to do so will result in a cure notice from the seller. A cure notice is a notice of potential contractual breach. If the seller cures the buyer and the buyer does not satisfy the cure, the buyers earnest money will be in jeopardy. The buyer could request an extension of close of escrow but the seller would have to agree to It.
Additional Details to Consider
The sellers’ agent needs to verify the seller has completed any necessary repairs agreed upon between buyer and seller. The seller’s agent needs to ensure the seller does not remove any items from the property that are contractually bound to stay. i.e. bathroom mirrors, smart home systems, window coverings, flat screen TV mountings, etc. Leased items should be dealt with accordingly. The seller’s agent should ensure sellers leave utilities on and insurance in place until closing and make the property accessible for the buyer to do their walkthrough.
The buyer’s agent shall schedule a walkthrough with the buyer. The property should be in “like” condition as it was when the buyer put it under contract. The buyer and buyer’s agent should confirm all requested repairs are completed. The buyer should also look for any damages
caused by the occupant (or movers) while vacating the premises.
Word of Advice: Do a Second Walkthrough
As we know, the responsible party for the property is the seller until the time stamp notice of the deed recording. Unfortunately, situations can happen such as vandalism, storm damage, fires, flood, etc. If the situation warrants, it’s a good idea to do a second walkthrough of the property as soon as practically possible prior to close of escrow to verify nothing has changed since the preceding walkthrough and immediately report any changes to the seller’s agent. Otherwise, it’s very hard to prove when something may have happened prior to or after deed recording.
Both the seller’s agent and buyer’s agent should request a preliminary closing statement no later than three days prior to close of escrow. Both agents should review the closing figures with their clients and especially look for accuracy regarding concessions, commissions, prorations, home warranty, etc. Yes, it’s escrow’s job to make sure the figures are correct but mistakes can happen. If a home warranty is being purchased, the buyer’s agent should make sure the buyer has the contact information for the home warranty company.
Remember that keys are not to be given to the buyer until confirmation of recording. The buyer’s agent does not have the authority to remove keys from the seller’s agent’s lockbox without permission. The seller agent should promptly remove the sign and lockbox after closing.
Tru Real Estate Professionals
Next time you’re in the market to buy or sell real estate in Arizona, contact Tru Realty. Tru Realty consists of like-minded real estate professionals who put the client’s needs first. Our Arizona brokerage has evolved from specializing in fix-and-flips to providing white glove service to the primary real estate markets including residential, commercial, wholesale, and vacation rentals.
Barry Nicholas is the Designated Broker at Tru Realty. He currently has active broker’s licenses in Arizona, Kansas, Missouri, and Oklahoma and is a graduate of the Realtor Institute. He also holds the Certified Residential Specialist Designation. Barry provides his clients with the expertise and acumen that addresses the ever-changing trends in home sales, property marketing, and real estate technology. As your Broker, he views customer service as his utmost priority.