Common Clauses in Real Estate Contracts

Table Of Contents

What Are Financing Contingency Clauses?

Financing contingency clauses are provisions in a real estate contract allowing a buyer to cancel the agreement if the buyer cannot secure a mortgage. A financing contingency clause protects the buyer's earnest money deposit. The buyer provides evidence of loan application within a specified timeframe. The buyer also provides a lender's commitment letter by a certain date. Failure to meet these deadlines can impact the financing contingency clause.
A common financing contingency clause specifies the loan amount and the interest rate. The financing contingency clause also details the type of loan, for instance, a fixed-rate or adjustable-rate mortgage. If the buyer cannot obtain the specified financing, the real estate contract becomes void. The seller then returns the buyer's deposit. Buyers benefit from a clear understanding of the financing contingency clause terms.

How Does an Appraisal Contingency Clause Work?

An appraisal contingency clause works by allowing a buyer to withdraw from a real estate contract if the property's appraised value falls below the purchase price. The appraisal contingency clause protects the buyer from overpaying for a property. A lender typically requires an appraisal to make sure the property value supports the loan amount. If the appraisal comes in low, the buyer has options.
The buyer renegotiates the purchase price with the seller. The buyer makes up the difference in cash. Alternatively, the buyer exercises the appraisal contingency clause and terminates the real estate contract. The seller returns the buyer's earnest money deposit. Real estate contracts specify a timeframe for the appraisal contingency clause.

What Is a Home Inspection Contingency Clause?

The home inspection contingency clause permits the buyer to identify potential defects in the property. The home inspection contingency clause protects the buyer from purchasing a property with significant, undisclosed issues. The buyer typically pays for the home inspection.
The home inspection reveals major defects. The buyer has several options under the home inspection contingency clause. The buyer requests the seller to make repairs. The buyer asks for a credit towards the purchase price. Alternatively, the buyer terminates the real estate contract.

Why Is a Title Contingency Clause Important?

A title contingency clause is important because it makes sure the seller has clear legal ownership of the property. A title search is conducted to verify the property's ownership history. The title search identifies any potential problems with the title.
A title search reveals issues. The buyer requires the seller to resolve title issues. Common title issues include unpaid property taxes or undisclosed easements. The seller cannot clear the title. The buyer exercises the title contingency clause. The buyer terminates the real estate contract.

What Are Closing Date Clauses?

Closing date clauses are specific provisions in a real estate contract outlining the agreed-upon date for the property transfer. Closing date clauses establish a timeline for both the buyer and the seller to complete their respective obligations. These obligations include securing financing, conducting inspections, and resolving title issues. A clear closing date clause prevents delays and misunderstandings.
A closing date clause allows for negotiation if a party does not meet the specified closing date. Parties agree to extend the closing date. This often requires an addendum to the real estate contract. Failure to close on time without a valid extension results in penalties. The non-defaulting party retains the earnest money deposit.

Earnest Money Deposit Clauses

Earnest money deposit clauses demonstrate the buyer's serious intent to purchase the property. The earnest money deposit is held in an escrow account until the closing. The earnest money deposit is typically a percentage of the purchase price.
The earnest money deposit protects the seller if the buyer defaults on the real estate contract. If the buyer backs out without a valid contingency, the seller often keeps the earnest money deposit. If the sale completes, the earnest money deposit is applied towards the purchase price. Real estate contracts clearly outline the conditions for the return or forfeiture of the earnest money deposit.

FAQS

What is a due diligence clause?

A due diligence clause allows a buyer a specific period to investigate the property. The due diligence clause covers inspections, appraisals, and other investigations. The buyer can withdraw from the contract if dissatisfied. The seller returns the earnest money deposit under a due diligence clause.

How does a "time is of the essence" clause impact a contract?

A "time is of the essence" clause makes all deadlines in a real estate contract strict. Failure to meet a deadline becomes a breach of contract. The non-defaulting party can terminate the agreement. The "time is of the essence" clause requires strict adherence to timelines.

Which party prepares the real estate contract?

The seller's attorney typically prepares the initial draft of the real estate contract. The seller's attorney includes all necessary clauses. The buyer's attorney then reviews the real estate contract. Both parties negotiate the terms of the real estate contract.

What is a default clause in a real estate contract?

A default clause in a real estate contract outlines the consequences when a party fails to fulfil obligations. The default clause specifies remedies for the non-defaulting party. Remedies include retaining earnest money or pursuing legal action. The default clause protects both buyer and seller.

When does a real estate contract become binding?

A real estate contract becomes binding when all parties sign the agreement. All agreed-upon terms must be present. Both buyer and seller must acknowledge the real estate contract. The real estate contract then creates legal obligations for both parties.

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