The sales contract is a written document entered into by a buyer and seller to transact real estate. In general, the buyer agrees to pay an agreed-upon amount for the property, and in turn the seller agrees to convey title of the property to the buyer. The typical sales contact is a very detailed and oftentimes a complicated document, as it establishes all of the terms and conditions of the property sale.
Responsibilities and Obligations of the Buyer or Seller
Time is of the essence. This means that the parties need to understand that all dates and deadlines are both strict and absolute.
- Good Faith. A sales contract typically contains a good faith provision whereby both the buyer and seller acknowledge that they each have an obligation to act in good faith concerning the contract provisions.
- Recommendation of Legal and Tax Counsel. It is always recommended that all parties to a sales contract understand that the contract has important legal and tax consequences, and therefore should consult with legal, tax or other counsel before entering into the contract.
The fundamental provisions of a sales contract (also referred to as a Contract to Buy and Sell or a Purchase Agreement) include:
- Identification of the parties;
- Description of the property;
- The price and method of payment;
- The date for closing on the property; and
- Transferring the title and possession of the property.
Additionally, there is a potential for more detail and numerous provisions to the average sales contract (which can be very lengthy) that both the buyer and seller need to review, understand, and if needed, obtain professional advice from a real estate broker and/or attorney.
- Additional Detail of the Most Typical Provisions
Identification of the Buyer(s) and Seller(s). There must be proper identification of the parties in the contract, which means that the full ownership of the property needs to be identified and the parties to the contract must have the capacity to enter into the contract.
Property Description. The contract must be able to describe the property with certainty, which is done with the use of a legal description that is recorded in the county recorder’s office where the property is located.
Terms of Sale. The terms of sale include the sales price, amount of the down-payment, the payment method, as well as what items are included and excluded from the sale, all of which should be specified as clearly as possible.
Earnest Money. A sales contract usually requires the buyer to make a good faith monetary deposit which is done at the time of entering into the contract. This is done to make sure that the buyer is serious about the purchase, and also can serve as damages to the seller if the buyer does not go through with the sale. The language in this provision should specify the circumstances when the deposit will be refunded to the buyer or forfeited to the seller.
Financing. A sales contract specifies how the buyer will finance the purchase of the property if it is not a cash-only transaction. These provisions would include language on the buyer obtaining a new loan with a bank or mortgage company, assuming an existing loan, or possibly obtaining private financing.
Conditions of Sale. These provisions typically include language concerning a buyer’s ability to obtain financing, needing to sell their existing property in order to purchase the new one, conducting an appraisal, inspection, survey, or reviewing title, covenants, and HOA documents to their satisfaction; or for a seller that the home must be purchased by the buyer in a certain period of time, or that it must be a cash-only purchase. These provisions are called contingency clauses and their terms and conditions should be detailed as to what must occur as well as one’s rights if the conditions are not met or waived.Property Condition. These provisions typically include disclosures and warranties as to the condition of the property such as the structure, roof, plumbing, electrical, appliances or other elements.
Title and Conveyance. Title to the real estate must be marketable in order to be sold, which also includes making sure that the property is free from encumbrances and liens. In order to protect that the property is marketable, the buyer and the buyer’s lender will likely obtain title insurance. The sales contract will also specify how the buyer will take title to the property, for instance by what type of conveyance deed, and if they will take title as an individual, co-owner, or in trust.
Default and Termination. These provisions cover what happens if either the buyer or seller defaults in any of the terms and conditions of the contract. It lays out possible remedies such as specific performance of the contract, liquidated damages, and return of earnest money. Termination provisions set forth a party’s right to terminate the contract and the effect that termination has on the parties.
Closing and Escrow. These provisions will include the date of closing for the property, identifying the title and escrow company, and any other terms and conditions for the final transfer of the property.
Possession Date. This should include when the buyer takes possession of the property, which commonly is done on the date of closing, however, the parties can negotiate a date prior to or after the closing date with specific agreement.