Real estate contract of sale

When you're buying or selling real estate, it's essential to have an air tight contract in place that protects your interests. A real estate contract must include the following:

• Specific information about the property being sold.
• The purchase price.
• The closing date.
• Any contingencies that need to be met.
• And finally any “subject-to” clauses

This guide walks you through the complete “Contract of Sale”.

What is a real estate contract?

A real estate contract of sale protects both the parties by setting clear expectations for the transaction. Without a contract, either party could back out of the deal at any time without any penalty.

A property contract has to meet specific standards. The contract involves proper subject and consideration. 

You, as a seller, must pay something to the buyer or vice-versa. Considerations include cash, land swap, ownership transfer, valuable item, or even a service. 

Each party signing a property contract agrees to its terms. There must be an exchange of commitment and acceptance.

Types of real estate contract/agreement

Here are 5 major types of contracts in real estate -

1. Purchase contract / Contract of Sale

When buying or selling property, buyers and sellers can use a standard real estate contract, also known as a purchase agreement.

2. Development contract / Off the plan contract

You'll likely sign a development contract aka an off-the-plan contract of sale if you buy a property off the plan from a development. This type of contract outlines the terms of the sale, including the purchase price, closing date, sunset clause and any contingencies that need to be met.

3. Lease contract / Lease agreement

If you're leasing commercial property, you'll sign a lease agreement. This type of contract outlines the lease's terms, including the lease's length, monthly rent amount, and any special conditions.

4. Auction contract / Contract of Sale with special conditions

You'll sign an auction contract if you sell property through a real estate auction. 

5. Real estate assignment contract / Assignment clause

It is a legal document that allows a buyer to assign their rights to purchase a property to another party. They are used when the original buyer cannot obtain financing or decides they no longer want to purchase the property. 

Novation clause - By executing a novation clause, a party can transfer both its rights/benefits and obligations.

Contract writing considerations for property settlement

• Do not write or execute your contracts unless you are a lawyer or have sufficient knowledge of contracts in real estate. 

• Standard fees like title insurance, escrow, transfer tax, stamp duty and so forth should be stated clearly in the agreement.
• There should be essential clauses about financing, home inspections, closing costs, and the closing date, among other things.

What's included in a real estate contract of sale?

If any term confuses you, check the below explanation; else, jump to the next heading. 

Down payment amount / Deposit

It can be an agreed-upon dollar amount or a part of the purchase price. Down payment is also called earnest money and is also known as a deposit. It can range from 5%-10% of the total purchase price.

Mortgage and financing conditions

Obtaining a 100% mortgage for buying property is tough. Often buyers obtain an 80% mortgage with a 20% down payment / deposit. All these agreed-upon mortgage and financing conditions are specified in the contract of sale. This section focuses on -

• The amount mortgaged
• The interest rate of the buyer
• Amortisation schedule
• Mortgage payback period

Attorney approval clause

An attorney approval clause in your contract of sale is required to protect you. This paragraph gives your attorney time to evaluate the contract and make any comments, changes, or revisions before signing.

Inspection period / Due diligence period

An inspection or a due diligence period is a provision in a real estate contract of sale that allows the buyer to have the property inspected by a qualified inspector.

The inspection period gives the buyer time to identify any potential problems with the property.

If the buyer decides to break the deal because of problems found during the inspection, they can do so without penalty. The inspection period is usually 7-10 days long.

Closing date

It says when the buyer gives the seller the check for the property, and the seller gives the buyer the deed to the property. On this day or date, the person who bought it becomes the owner.

Contingency / Subject to clause

A contingency clause is a provision in a contract of sale that allows the buyer or seller to back out of the deal if certain conditions are not met. Typical contingencies include things like financing, inspections, and appraisals/ property valuations.

The buyer or seller can void the contract without penalty if these contingencies are not met.

Cooling off period

The cooling-off period is a short duration that allows a buyer to withdraw from the contract before it becomes unconditional. This period is usually three-five days, but can be negotiated.

Property buyers can use the cooling-off period to perform due diligence or feasibility analysis.

Every real estate contract is unique and has standard terms to cover. Depending on the deal of a particular property, you can include special conditions of sale in your contract.

In some states, a seller may also need to attach the mandatory seller disclosure statement, problems of any defects, warranties, and the document for the conditions of the sale.

Who prepares a contract of sale during the property purchase process?

When to break a contract of sale?

The process of selling or buying real estate is lengthy and complex. Many things may go wrong, and breaking a real estate contract of sale is one of them. 

You should be aware of your rights and legal actions while backing out of a property agreement.

Reasons buyers cancel the sales contract

A potential buyer can back out of purchasing a property for several reasons.

• Job loss
• The seller doesn't disclose issues/easements.
• Title issues
• Failed home inspection
• Not qualified for the mortgage
• The seller doesn't make agreed-upon repairs or improvements.

Consequences of breaking a contract for the buyer

A buyer will face the consequences depending on the signed contract for an existing property.

• If a buyer breaks a real estate contract, they may be required to pay damages to the seller. The amount of damages will depend on the terms of the contract of sale and the extent of the breach.
• Sometimes, the buyer may be required to pay the total property price.
• In other cases, the buyer may only be required to pay a penalty fee.

Reasons a seller cancels the contract of sale

The seller also has the right to break a standard contract of sale in real estate. Though a legally binding agreement looks good on paper and provides a considerable sum of money to the seller, he may still wish to break the contract of sale. 

The reasons a seller back out of the purchase agreement are -

• Not being able to find a new property.
• Unexpected events
• Appraisal concerns
• Unclear land or strata title
• Buyer missed the deadline or failed to do scheduled deposits.
• Using the attorney review clause

Consequences of breaking a contract for the seller

The buyer has the right to sue the property seller for breaking the real estate deal, and there is always a termination penalty. According to their needs, buyers might take several different approaches, such as:

An attempt to force a purchase

If the buyer files a "specific performance" lawsuit, the court may decide to force the sale to go through and transfer the title to the buyer despite the seller's objections.

Seeking monetary compensation

If the buyer claims damages, the seller needs to pay for it. It may include legal fees, bank valuation fees, appraisal and inspection fees, etc.

Sued by real estate agents

The seller's real estate agent or listing agent could also sue them since they are often paid by commission, which they will lose if the deal falls through.

What is the backup contract?

A backup contract is usually put in place as a safety net if the first party encounters problems such as financing difficulties or failed home inspections.

The second party agrees to purchase the property under the same terms and conditions as the original buyer, but only if the first buyer cannot follow through on the purchase.

When to make the contract subject to an environmental check?

Suppose you purchase a property that was once a cattle dip, a farm, or a service station. You will need to excavate all the land and refill it with clean soil to make the land strong enough to hold a new building. 

It can be costly, so it's essential to include checks with the right environmental agency and consultants in the contract to ensure this isn't a problem.

Should you get your solicitor's approval before signing a contract?

If a solicitor can't review the agreement before signing, add a condition that makes it subject to your solicitor's approval before a specific time. 

This way, the property will be taken off the market, and no one else can purchase it before the solicitor reviews it. 

What are the risks for property buyers after signing the contract?

Within 1 to 2 days of the formation of the contract of sale, the risk of property damage passes quickly from seller to buyer.

Buyers should get a "cover" note, a temporary insurance policy that protects them in case the property gets damaged before the settlement date. Otherwise, they will have to take the property with the damage.

For some properties, getting a cover note is not possible. 

You can add a clause like this so that the seller is still responsible for any property damage until the settlement -

The bottom line

Real estate contracts are important documents that protect the interests of both buyers and sellers. It's essential to understand the terms of the contract before signing it and to make sure that all of your contingencies are listed.

Choosing an experienced real estate agent or attorney who can draft a contract for you is vital.