Become Familiar With Your Real Estate Contract
In the Austin market, the process of buying a house can feel rushed and overwhelming. With low housing inventory, many of our buyers make quick moves if they see a property and fall in love. This can happen even after only seeing a few homes! And then once you’ve found the home for you, an unfamiliar real estate contract is thrown your way, there’s talk of an inspection, option periods, contingencies and deadlines. It can seem like a lot to a first-time buyer!
So let’s take a moment to break it down. Most residential real estate contracts in Texas use the standard Texas Real Estate Commission contract. We suggest going to their website and talking to a lawyer if you have any specific legal questions. A contract to buy a property is pretty standard, but there are a few versions, depending on if you purchase a new home, condo, farm/ranch, etc.
The following section will show different parts of a standard contract and go over them, briefly. You can go to https://www.trec.state.tx.us to read through a complete copy.
Earnest Money
When reviewing the contract, one of the pages will discuss “option period” and “earnest money.” Earnest money (usually 1 to 3 percent of the sales price) is provided by the buyer so that the seller takes the offer seriously. You’re using these funds to show the seller you’re “earnest” about buying their house.
Don't confuse this with the down payment on the house! They are two separate things. The earnest money is turned into the title company, who will hold it in an escrow account. You will lose the earnest money if you breach the contract after your option period. Otherwise, this is a deposit, and you will get it back, or it can be applied to your down payment amount at closing.
Remember, you do not turn this money in until your offer is officially accepted! Make sure to have these funds available in a bank account. Your lender will need to see the paper trail! In the past, the most common way for buyers to deliver earnest money to the title company has been via check. Most recently, they have been allowing the buyer to wire this money if it’s easier; who has checks anymore?!
TITLE POLICY AND SURVEY
What is a title policy? The title company researches your property, checks if there is any risk in the title chain (the historical transfers of title to a property from the present owner back to the first owner of the home) and suggests ways to eliminate that risk. After reviewing the property, the title company will send you a title commitment that will inform you of any restrictions, easements or anything else affecting title. The title company is also where you will go on closing day to sign all the paperwork. Title insurance protects you as an owner from most claims and attacks on the title and is negotiated in the contract to determine who pays for this expense.
A survey is a document that shows a property's boundary lines to determine the exact amount of land that a homeowner owns. Surveys can reveal any known easements, or if your neighbor is encroaching on your land. Contractors can also use your survey to determine if and where you can build on to your home if you ever want to add an ADU or addition.
Most often, the seller will have their original survey from when they bought their home. If this is the case, you, as the buyer, may not have to pay for a new one. If unable to locate the survey, the seller can check with the title company used when they closed on the home. The lender requires a survey, so if the seller doesn’t have one, usually the buyer will purchase a new one. In the contract, there is a section that discusses the survey and who will provide a new one if needed. A new survey can cost around $500-$1,000.
Property Condition
Seller’s disclosure: By law, sellers are required to disclose the condition of their property so that you can make the best-informed decision.
“As Is”: Accepting the property “as is” does not mean you don’t get to make further negotiations after your inspection. This means from what you can visibly see; you accept the property as is. For example, if you saw a broken window and wanted the seller to repair this, you would check off “box number two” and ask them to repair. You would not be accepting the property “as is.”
Home Warranty
Also known as a residential service contract, a basic home warranty plan is about $450-$650 a year. There are different types of plans with various coverages. Simply put, a home warranty maintains, replaces, or repairs any part of the appliances, structural components, electrical, plumbing, heating, or air conditioning systems in your home caused by normal wear and tear. Although this is a service paid for by the seller, you as a buyer will need to pay the service fee every time a contractor comes to your house. This fee can be anywhere from $30-$70 a trip.
Special Provisions
This space is provided to add any other agreement between a buyer and seller that doesn’t fit into the contract. Real estate agents can be hesitant about filling out this section because they don’t want to appear to be “practicing law”.
Option Period
When you go under contract on a home, the first thing you do is turn in the earnest and option money within seventy-two hours. The option period, along with the option money, buys you time to have home inspections done and negotiate any final terms or repairs with the seller, if possible.
For example, if you have a seven-day option period written into the contract, you’ll have seven days to have your inspection completed, try to further negotiate with the seller, or back out if you decide it’s not the house for you.
If you back out of the contract within those seven days, you will not get your option money back. The option money is typically around $500-$2,000+, and you as the buyer, get to decide what amount and the number of days. I’ve seen option period lengths as long as twelve days or as little as two days. It will depend on many things and can be used as a negotiation tactic if there are multiple offers.
For example, shortening your option period and increasing your option money as a buyer will make your offer more appealing. Once under contract on the house, the ball is in the buyer's court, because the seller cannot back out of the contract, but the buyer can. The only way the seller could back out during the option period is if the buyer breaches the contract. So, it’s crucial to turn in earnest and option money within seventy-two hours once you go under contract to keep in compliance. That’s why you hire a realtor. We will make sure you stick to the deadlines of the contract!
Executed Date
The executed date will start the countdown of all of your contingencies and dates in the contract…the survey, financing contingency, option period, etc. It’s good to keep track yourself, but it is also your realtor’s job to help you with this.
Looking into buying a house this year? Jump on a call with one of our agents! Follow us on Instagram for more helpful tips and advice.
