Contracts Continued: Section 3-6

RESIDENTIAL REAL ESTATE CONTRACTS: SECTION 3-6

This is a brief summary of real estate contracts. This summary does not cover all aspects of the contract. This video has been made specifically for Real Estate Agents to use as an unofficial educational resource. Nothing in this video is intended to convey legal advice or best practices in any field. This video is only intended to give general advice on broad topics relating to contracts and the closing process at large. For legal advice please contact an attorney and for lending advice please contact a lender.

3. PURCHASE PRICE

This is what determines your commission. This is an important one for Realtors as you want to negotiate that the best you can for your client’s interests.

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4. EARNEST MONEY

Earnest money dictates how serious your offer is. It’s the money your client is giving with the signing of the contract to say that, not only is your client committed to purchasing this property, they’re going to put some money down to show they’re a serious, good faith purchaser.

In the Huntsville area, the standard earnest money is usually somewhere between $500-$1,000 depending on purchase price, but there are no limits. We’ve seen contracts come in with $0 earnest if it was between friends or family, and we’ve seen people put down up to $3,000 earnest to show they were a competitive bid and were a good faith offer.

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5. LOAN AMOUNT

This is an important one that we’re going to spend a few minutes on. In the contract you’ll see the word “contingent” is highlighted in blue. “This contract is contingent on purchaser obtaining approval.” This is important because it means this has to happen for this contract to remain valid. What you can do here is create a safety net for your buyers. This is a great way for your buyers to say, “I know a lender isn’t going to approve  my loan — even on a conventional loan — unless the property appraises for such an amount that justifies this loan, so today I’m going to assume 100% financing.” We’re going to take the earnest money, subtract that from the purchase price, and say we want a loan for that entire amount. Now, that’s almost never going to happen. Most people doing conventional loans will put down 10%, 15%, 20%, or even more because it helps them in their loan process in many, many ways. For the sake of this contract, though, it doesn’t hurt to put full funding on there. If you’re looking at an older contract, they used to have little check boxes there to select either conventional, FHA, or VA. These modern contracts don’t do that, which is really nice because it allows your client to go to their loan officer and really talk about options, but at this point your client should be pre-approved anyway if they’re a purchaser. 

From a seller standpoint, if you are a savvy seller and you really want to make sure this is going to be a smooth transaction, you may want to ask them to add their down payment and subtract that amount from their loan. This allows you more wiggle room in case the appraisal doesn’t come back exactly as high as you were expecting, especially if you negotiated a high contract price. 

Another thing to notice in this section is the little blank space highlighted in blue. “Purchaser agrees to apply for said loan within _____ working days.” This is why it’s important to have your buyers pre-approved for a loan. The standard answer in our area is 10 working days, which means your buyer has to go to a lender and seek loan approval within that time. Nowadays, though, if a seller demands to see a letter of pre-approval, they can do that and can refuse to sign the contract until they see it. This sentence doesn’t often apply to those in our area because we’re a savvy market, a sellers’ market, and people generally know what to ask for. But if you’re ever in a situation where you want to make sure the purchaser is going to make things happen quickly, you can ask for this proof within 4 days, 5 days, or whatever you deem appropriate for your sale.

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6. BALANCE

(4) Earnest Money + (5) Loan Amount + (6) Balance = (3) Purchase Price

The balance line is just another way of asking what the down payment is. The loan amount (5) is the amount you think you’ll need to get to your purchase price minus any down payment.

The down payment can really help your client with their loan options. When discussing types of funding, conventional, FHA, and VA are most common. If you put 10% or 20% down, it will change the type of interest rate your lender gives you; sometimes they’ll give you a better interest rate if you put more down. It can also change how much seller credit or contribution you can get, which we’ll discuss in an upcoming section. Lastly, it can affect mortgage insurance: if you put 20% down, generally you won’t have mortgage insurance required on any loan; 10% may be a different rate of insurance, especially if you’re FHA.

Click below to download the documents from this class

[INSERT SAMPLE REAL ESTATE CONTRACT HIGHLIGHTED AND CORRESPONDING NOTES SHEET SIDE BY SIDE]

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