How to Read a Real Estate Contract

Real estate contracts can differ greatly depending on the type and size of property (residential vs. commercial property, for example), whether the property is new or not, and the state or city in which the transaction is taking place. Simple home-purchase agreements can have as many as 20 sections; 50 sections are not uncommon among more complicated deals. Knowing the basics, whether you’re the seller or buyer, can save money, hassles and legal problems. If you’re a seller, you may want to get help when writing a real estate contract. Buyers also should get professional assistance if they’re having trouble interpreting the contract.

Check the information in the “Parties” section, which identifies the buyer and seller. If you’re preparing a purchase agreement to make an offer on a house, the seller’s name may not be immediately available, but the home information —the address, lot number and/or tax identification number — should be included. A term such as “Owner of Record” should appear with space to insert the seller’s name later. Both the buyer and seller must sign the contract for it to be legally enforceable.

Read the “Property” section to ensure that the house and land is properly described, including outdoor features like a swimming pool, acreage, boundaries and easements.

Read the “Title and Deed” section. Make sure that clear ownership to title is outlined. The seller should provide a title insurance policy before closing, in which a title insurance company performs a title search to identify liens or restrictions on the property. The deed explains in detail the ownership rights that are being transferred from the seller to the buyer.

Note the items in the “Fixtures and Personal Property” section, or what some realtors refer to as the “What Stays” section. Unless specified in the contract, items such as light fixtures, faucets, carpeting, furnace, outdoor plants and other “permanent” fixtures must remain with the home. This section also often contains a checklist for appliances that will be included with the home purchase, as well as the condition of equipment.

Read the “Price” section. This is the purchase price that has been agreed upon by both parties. Other payment considerations also may appear here, such as a down payment amount, earnest money, mortgage terms and possession date. Make sure that you understand all of this information and that you agree to the terms. If you were under the impression, for example, that you would be moving into the home on Oct. 1, but the possession date is Dec. 1, renegotiate the terms to either change the date or account for the fact that you may have to pay for temporary housing—a hotel, for instance—during the time in question.

Review the “Acceptance” section and note the date. This represents the date by which both parties must agree to the contract in order for the agreement to become enforceable.

Read the “Pro-Rated” or “Other Payments” section, which usually details issues such as neighborhood association dues or taxes. Many mortgages contain tax information and establish an escrow account to ensure taxes are paid, but you may be moving into a home in the middle of a tax year, so read this section to determine the status of the property taxes.

Review any addenda. An addendum is an additional document, usually simply a sheet of paper attached to the real estate contract, that defines issues not addressed in the contract or further defines terms. For example, there may be a disagreement over the possession date and an addendum may be added to clarify how much money the seller owes the buyer for each day that the seller remains in the home past the possession date.