The financial terms of the contract are important and should be clearly articulated. In particular, the real estate contract should include provisions on the purchase price, earnest money, financing terms (if any), taxes and assessments, HOA fees (if applicable), title insurance, and closing costs. Each of these items are integral to understanding the financial aspect of the transaction as well as preparing final numbers for your closing.
The purchase price is vital to your contract, as it is the consideration for the purchase. Without consideration, there is no contract. This also assists in determining conveyance fees and establishing the insurance limit for your title insurance policy after closing.
The purchase price is the amount agreed upon between the buyer and seller and will be used to determine conveyance fees and title insurance liability and premiums. If a negotiation is done after the contract is signed, an amendment or counter offer must be executed by all parties and provided to your title agent.
The consideration need not necessarily be an amount of money, however. If something other than money is being given in exchange for the property, that consideration will also be specifically enumerated in the agreement. That said, if something is given in exchange, the value of what is being exchanged should be expressed in monetary terms.
The financing terms lay out exactly how the purchase price will be paid.
Purchasing a property may contain a variety of finance options. A buyer may choose to purchase with cash, or a loan, or the combination of the two. The most common types of loan financing are conventional, FHA, or VA Loans, or acquiring financing through a hard-money or private lender. Once the type of financing is known and enumerated, other items in the contract will be added or amended as it pertains to other terms of the contract relating to financing, such as addendums, appraisals, etc.
If the purchase price is to be paid in cash, it will be stated in the contract. If a financing option is used, the contract will state a percentage of the purchase price that will be financed. Purchase agreements and contracts will not typically list a particular lender. This allows the buyer flexibility in the case of a lender change.
Property taxes and assessments should be addressed in the purchase agreement as to who the responsible party is and when that obligation starts or ends. The seller is often the responsible party for paying any taxes or assessments that are due, and/or certified, through the date of closing. However, a negotiation during the contract signing could place this responsibility on the buyer. The buyer is responsible for taxes or assessments that become due or certified after the date of closing. Reviewing these terms will assist you in understanding how taxes and assessments will be handled by the parties for closing and in the future.
Earnest money is a good-faith deposit made by the buyer to show the seller they are serious about purchasing the property. Earnest money amounts vary and are often based on a percentage of the purchase price or value of the property. Your contract should contain specific terms regarding earnest money such as: who will hold the deposit in escrow, how long after the contract signing before the deposit is required, and default terms that explain what happens with the earnest money if there is a breach of contract by either party or the buyer decides not to proceed with the purchase. The earnest money deposit will be applied as a credit to the final settlement statement at closing.
During the closing process, certain fees will arise for the various activities needed to fulfill the contingencies of the agreement and the transfer of clear title. As part of the negotiation process, the seller could agree to pay a portion of the closing fees for the buyer at a percentage of the purchase price. Know that certain types of financing for the buyer may dictate that percentage amount.
Closing costs may include lender and attorney’s fees, fees and premiums associated with title searches and title insurance, HOA fees, transfer tax, recording fees, and other charges, dependent upon the contract and the particulars of the property.
Closing costs can be a negotiation tool for buyers and sellers. While many contracts have a standard format of who pays which closing costs, most fees can be negotiated between the parties.
Payment and financing terms are a significant element of a purchase agreement. It is worthwhile to review these terms to ensure that the price and financing terms are accurate and acceptable so that each party understands their rights and obligations. Keep in mind that you should consult an attorney where legal advice is required for your specific situation.
Additionally, clarity of financing terms and closing costs ensure accuracy for your title agent and peace of mind for you. We will walk through each of these topics more in depth in future articles.
The information provided in Peak Title Professionals, does not, and is not intended to, constitute legal advice. All content is for general informational purposes only and is not intended to provide a complete description of the subject matter. Specific processes will vary based on applicable law. The title and closing process will be handled by a third-party attorney to the extent required by law. Product offerings vary by jurisdiction and are not available or solicited in any state where we are not licensed.
