Yes - A Real Estate Contract Is A Legal and Binding Contract
Wednesday Oct 25th, 2017
Recently, I’ve been surprised at the number of buyers who do not seem to understand that a real estate contract is a legal and binding contract the same as any other contract. Some buyers seem to think that it’s like shopping for a pair of shoes they see some other shoes they want so they just return the pair they previously purchased and obtain a refund. Still, other buyers think it’s okay to go under contract and cancel during the inspection period because they see another home and do the same thing again over and over. Those indecisive buyers typically end up without a home after they have wasted a lot of time and money. The funny thing is these same people would not try this with a car dealer.
So let’s take a look at what makes a real estate contract legally binding.
What Makes a Real Estate Contract Binding?
After a seller accepts a buyer's offer to purchase a property, it's time to make it official, in the form of a real estate contract. In general, an offer becomes a contract when both parties have signed. Once this happens, the contract is binding for both the buyer and seller.
Of course, just how binding the contract is depends on the details of the contract itself. Some contracts may have built in outs -aka contingencies. Typically a buyer's agent will try to build as many contingencies as possible into a contract to keep the client from being tied down if something unexpected comes up. A seller's agent, on the other hand, will typically advocate for as few contingencies as possible, because the seller doesn't want the buyer walking away from the deal.
Why a Buyer May Cancel a Contract
Some of the most common contingencies in real estate contracts include the property passing a home inspection, the buyer's own home selling before closing, or the home making it through a title search, ensuring that the seller has the right to sell. Sellers get some protection out of a contingency—like time limits on how long a buyer has to obtain financing—but most contingencies are written to protect a buyer and allow them an out if something goes wrong before closing.
One of the most common reasons a real estate deal falls through is because of a buyer's inability to get financing from their lender. For example, an appraisal contingency protects buyers and gives them the opportunity to walk away from the sale if the home fails to appraise for the agreed-upon purchase price. If the home appraises for lower than the purchase price, it usually means the lender won't be able to provide the buyers with as much financing as they had hoped. In the case of an appraisal contingency the buyer’s agent can often renegotiate the price of the home to the appraised value allowing the buyer and seller to continue moving forward with the transaction.
If contingencies aren't met and the buyers want to walk away from the deal, they can typically get back their earnest money (funds held in escrow). Should any of the contingencies not be met in a timely manner, the buyer should be able to dissolve the contract and walk away without repercussions. That is the whole point of the contingency.
Of course, if the contingencies were met,the buyer is then obligated to perform in accordance with the original parameters of the contract. If the buyer does not perform within the parameters of the contract then that would mean forfeiting any monies in escrow and potentially even the full value of the contract.
Why a Seller May Cancel a Contract
If the contingencies are not met in accordance with the original parameters of the contract, the seller has the option to cancel the contract. The seller will usually serve the buyer with a notice to perform, however this is not a requirement of the seller. If the buyer still fails to fulfill their obligation the seller has the option to cancel the contract and request to keep any monies the buyer has on deposit in escrow.
If the sellers are refusing to stick with the deal and want out for good, the buyers then have the authority to take them to court to push for the deal to go through, or file for compensation for costs like the home inspection.
How Are Disputes Resolved
Many of the standard board approved contracts have the resolution for earnest money written within the contract. If the resolution is not that simple- the dispute may be resolved by either arbitration or actually going before a judge in court.
Purchasing a home is likely the biggest financial transaction you will make in your lifetime. Don’t take the seriousness of the transaction lightly and do not treat it like a trip to your favorite department store.
© 2017, Tonya Brown. All rights reserved