Now that you’ve settled on the home you want to buy and understand the contract, here are some other important terms to make sure you’re familiar with.
Contingencies
These are provisions in a contract that require one or more certain acts to occur before the contract becomes binding. One of the most common examples is “Contingent upon Financing.” In this case, the buyer must be approved for a home loan in order to complete the sale.[1] Parties will either negotiate who should cover the costs, or back out of the deal altogether.[2] A title contingency protects the buyer from any claims of ownership that have not been resolved.[3] A person who is buying a home contingent on them selling their current home will benefit from a home sale contingency clause.[4]
Inspection Period
No one wants to buy a home with termite damage and a leaky roof. An inspection contingency allows the buyer to renegotiate or recede from the transaction if the inspection reveals problems.[5] Buyer and seller will agree on a specified amount of time in which the buyer may examine the property for any issues.[6] Take advantage of this opportunity especially if buying an older home. If a buyer fails to complete an inspection within the set timeframe, a seller may not be obligated to fix any issues discovered after the fact unless seller knew of the defects and withheld the information intentionally. Protect yourself buy getting a full inspection done on your future home.
Earnest Money
Know the difference between a deposit and earnest money. A deposit is an amount of money paid towards the purchase price of a home usually to show that the buyer is committed to the transaction. Parties will stipulate that a seller will not sell the home to another buyer once a deposit is put down.[7]
Earnest money is a bit different. When a buyer and seller agree that the amount given is in earnest, this money is regarded as the amount of damages a party will receive if the other party backs out of the sale.[8] If a buyer puts down earnest money instead of a deposit, and later decides that he no longer wants to buy the home, he forfeits the earnest money to the seller and everyone goes their separate ways.[9] The same goes for a seller who backs out of the deal. He must return the earnest money to the buyer.[10] Earnest money is held by the title company in an escrow account and distributed when necessary.[11] An escrow account is set up and funded to pay property taxes, insurance premiums, and possibly applied to your down payment.[12] Setting up an escrow account ensures that these fees are paid in a timely manner.
Agent
Your agent will be your best friend throughout this process. An agent is a person who has the power to act for another person. Buyer and Seller will each have their own representative or agent, guiding them through the transaction. Agents are not to make decisions on behalf of their clients without the client’s consent. A buyer’s agent will assist a buyer with finding the right property, negotiating the offer; finding lenders for financing, a real estate attorney, home inspectors, and more.[13] Negotiations between buyer and seller can lead to differing opinions on appraisal amount, what items need to be fixed and who should bear the costs.[14] An experienced agent will help a buyer make the right decisions and protect their interests.
On the other side, a seller’s agent will help a client set a competitive price for the home, give guidance on how to present the house when prospective buyers come to view it, develop a marketing plan including dates for showings, organize and rank offers, and represent the seller in negotiations.[15]
Commission
The is the agent’s piece of the pie. Their fee for their services in completing the deal. The commission is usually a percentage of the sales price at the time the home is listed for sale and paid by the seller.[16] The average fee is around 6% split between the agents for the buyer and seller.[17] Buyers cannot negotiate the commission since it is factored into the listing agreement between the brokerage firm and the seller.[18] Sellers who choose not to use an agent know as, “For Sale by Owner,” bear the workload of advertising, negotiating, and any other costs associated with selling the home.[19] However, there are companies offering fee-based programs allowing sellers to pick which services they want to outsource.[20]
Closing
Finally, the most rewarding phase of the home buying process is the long-awaited closing meeting. Before you take the keys to your new home, a few things must occur to complete the transaction. Closing is an event where promises made in a purchase agreement are fulfilled and funds are distributed to the seller. Who is required to attend a closing? The closing agent representing the title company, buyer and seller’s attorneys, the buyer and seller obviously, and the real estate agents representing each party will all be present.[21] A few days prior to closing, buyer will receive important documents such as the closing disclosure which has the terms of the home loan.[22] The date agreed upon may change due to unforeseen delays. Buyer and seller must agree on postponing the closing.
On the day of closing, a buyer will sign legal documents regarding the transfer of ownership from seller to buyer, and regarding the contract between a buyer and lender if the home is being financed.[23] A buyer will pay closing costs and escrow items such as mortgage insurance and real estate taxes.[24] The mortgage or deed to the property will be provided to the buyer. This document gives the lender a right to seize the home. The mortgage note provided contains the buyer’s promise to repay the mortgage according to set terms and consequences for failure to pay.[25] The certificate of occupancy has is provided if the home is newly constructed and certified that the home has passed all required inspections by the state where the home is located.[26]
[1] Id.
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Louisiana Residential Agreement to Buy or Sell, Louisiana Real Estate Commission https://www.lrec.state.la.us/files/02-01-15%20Buy%20Sell%20Agree%20FILL-IN%20FINAL2%20%281%29.pdf.
[7] La. C.C. Art. 2624
[8] Id.
[9] Id.
[10] Id.
[11] Angela Colley, The Earnest Money Deposit: What You Should Know, Realtor.com (Dec. 5, 2013) https://www.realtor.com/advice/finance/understanding-the-earnest-money-deposit-2/.
[12] Id.
[13] Liz Alterman, What Is a Buyer’s Agent? A Trusted Guide Who’ll Help You Find a Home, Realtor.com (Sep. 13, 2016) https://www.realtor.com/advice/buy/what-is-a-buyers-agent-used-for/.
[14] Id.
[15] What a Seller’s Agent Does, Zillow (November 30, 2008) https://www.zillow.com/wikipages/What-a-Seller%27s-Agent-Does/.
[16] Crystal Caruthers, What is a Real Estate Commission? A Look at How Agents Make Their Money, Realtor.com (August 1, 2014) https://www.realtor.com/advice/buy/real-estate-commission-explained/.
[17] Id.
[18] Id.
[19] supra note 18
[20] Id.
[21] Holden Lewis, Buying a home? What to expect when you’re closing, Bankrate (October 30, 2017) https://www.bankrate.com/finance/mortgages/understanding-the-closing-process-1.aspx
22] Id.
[23] Id.
[24] Id.
[25] Id.
[26] Id.