Entering into a Real Estate Contract: What You Should Know
Jim Geymont on 13 Jan 2021
It seems like much is written about making an offer on a house—how much to offer, what contingencies to consider and how to make your offer stand out.
But a surprising number of buyers—especially first-time would-be homeowners—do not come to the real estate process with a clear understanding that they are entering into a legal contract when making an offer on a home.
For the contract to be binding and the transfer of title to take place, all the conditions and contingencies identified in the contract must be met. When you make an offer, it should be with the intent of fulfilling your obligations under that contract.
While a contract can be voided under certain circumstances, simply saying you’ve changed your mind won’t void your contract without consequence.
Here are some of the most common ways contracts are voided:
Right of Rescission
Arizona does not have a right of rescission for real estate transactions, except for specific circumstances involving the sale of land to a buyer, sight unseen. However, a buyer typically has the right to cancel a contract within five days following receipt of the Disclosure Affidavit. That’s another reason for getting the document to the intended buyer as soon as possible, when it’s required. Buyers have a five-year right to rescission on the purchase if the affidavit was not provided or filed.
Contingency of Sale
It’s not unusual for an offer to purchase contract to contain a contingency that states the buyers will not close on the new home until they’ve sold their current residence. If that original home isn’t sold, the contract can be negotiated to keep the transaction alive and provide the buyer with more time. However, the buyer and seller also have the right to terminate the contract due to the original contingency, with the buyer’s deposit returned.
Failure to Secure Financing
Real estate contracts are almost always contingent upon the buyer’s ability to secure financing. The contract typically spells out the amount of time the buyer has to be approved for financing and at times, even the interest rate limit for the sale to go through. Related is the situation where an appraisal comes back lower than the purchase price. In all these situations, the contract may be cancelled and typically, the deposit is refunded.
Non-Disclosure and Fraud
A contract may be cancelled and the deposit refunded if a seller fails to disclose known problems or issues with the property, as often this may impact property value or the amount a buyer would likely offer. In addition, a contract can be cancelled and the deposit returned where fraud exists. An example would be if a seller is actually not the title owner.
Even when a home is being sold “as is,” a buyer has the opportunity to hire a home inspector to provide a professional analysis of the home’s condition. If a seller has written into the contract that he or she will not do any repairs or will only do repairs up to a certain dollar amount, the buyer or seller may cancel the contract if the necessary repairs are beyond the seller’s stated commitment. Likewise, if professional inspection finds that lead-based paint or toxic mold is present, buyers can typically void the contract based on the finding.