For Sale By Owner (FSBO) sales accounted for just 7% of the total real estate sale in the most recent U.S. figures. However, selling your home without an agent can save you thousands of dollars in commission fees.
One of the great challenges for owners acting as their own real estate agents is the sales contract. Writing a sales contract that concisely summarizes all the agreements between a buyer and seller is not for the faint-hearted. A contract protects the buyer and the seller.
However, to be legally binding, a for sale by owner contract must follow the proper form and contain the correct elements. Read on to learn more.
All business contracts in the U.S. follow some basic guidelines for legal standing. Business and personal agreements can be made with a handshake. However, if there is a problem, a written document protects both parties.
For real estate, contracts are very detailed and you need to make every effort to clarify all possibilities and eventualities. If contracts do not have certain characteristics, they are not legally enforceable.
The legal process, or litigation, determines whether the contract has been broken (breached) or whether there are circumstances that negate the breach. The court will only hear contract disputes for valid, legally enforceable contracts.
Agreements Are Not Contracts
An agreement is a negotiated mutual understanding between parties about their relative rights and responsibilities. A contract is an agreement between parties that creates enforceable obligations.
For Sale By Owner Contract Essentials
There are six required elements for a sales contract to be enforceable.
You cannot write a legally enforceable contract to sell your grandmother into prostitution in Minnesota, for example. Contracts must be for a legal purpose. If your contract is missing one of the essential elements, it does not mean the contract is illegal. It just means your contract is unenforceable.
Both parties need to be able to understand the requirements of the contract. Competence requires that neither party be minors, not under the influence of drugs or alcohol when signing the contract, and not mentally deficient.
If one party is not competent the contract is not valid and the non-competent party can disavow the contract. If a person is underage, mentally incapacitated, or unconscious, they cannot execute a contract.
For a contract to be valid, there must be an exchange of something of value between the parties. It may be goods, money, or services. Both parties must exchange something of value, otherwise, it is considered a gift.
Offer and Acceptance
Contracts include a specific offer and acceptance of that specific offer.
“In Good Faith” Both parties must intend to create a binding agreement and both parties must agree to the same terms.
Both parties must consent to the agreement of their own free will. Neither party can be coerced to sign the contract.
Real Estate Contracts Include Additional Requirements
In most states, you can download a template for a sales contract that meets the requirements. However, consult an attorney for peace of mind. Individual state and local requirements vary widely.
Every home sale is different. An all-cash house purchase contract has very different wording than one that details a mortgage. There are some elements of an FSBO contract template that stay the same in every contract, but there are other items that need major rewrites each time.
Names, Numbers, and Titles
The first part of completing a contract is laying out all of the basic information for the contract. Start with everyone’s legal names. If the purchaser is a trust or corporation, you will need all of that info as well as the contact information for a human being.
Identify the seller and the buyer. You will need to include the buyer’s marital status. The next step is to title your document. The title needs to state the purpose of the contract.
Make sure the title of your contract clearly states the purpose. Choose an easy and descriptive one like, “Purchase Agreement for Real Estate”. Date the contract. This is important.
This isn’t the spot for the sales language that you carefully crafted for the MLS. Describe the real estate. Use the property address and the exact legal description of the property from the deed to the property. You will need a copy of the deed from your county recorder’s office.
Detail what is included in the sale of the property. For example, describe the exact list of window coverings, garden furniture, and appliances like the stove, refrigerator, washer, and dryer. These are often included, but may or may not be sold with the property. Clarify the point.
It may be tedious, but every item sold with the property or specifically excluded should be in your sales contract. Commonly, items attached to the home, stay with the home, so it is best to clarify if your great-grandmother’s chandelier is remaining in the dining room when you leave.
The last standard part of the contract is the signature block. In some states, the sellers and purchasers must initial the contract to indicate their understanding and agreement with certain sections. The full signature block for both parties is at the end.
A notary may be required to finalize signatures.
Payment Terms Are Part of an FSBO Contract
Always include the full purchase price of the property. Then deduct any earnest money. A for sale by owner contract can specify how earnest money should be paid. Earnest money is commonly understood to be 3%- 5% of the purchase price.
Your contract may include the amount of earnest money, the date it is due, and where it shall be held until closing. You then include the payment terms for the remaining amount. In most cases, the seller is paid for the home in full at closing.
The agreement outlines what will be paid in cash and what the bank or mortgage company funds. Use precise language here.
Outline who will pay real estate taxes and how they will be paid. Most frequently, the taxes are prorated. The buyer and the seller split them and pay at the closing. This section should be clear and explicit.
Make Disclosures of All Important Information
For sale by the owner, contracts must include any important disclosures to the buyer. If there are any restrictions or easements on the property, for example, you write them out in this section. For example, a buried natural gas line or an age requirement for occupancy should be disclosed.
There are certain property disclosures required by federal or state law. For example, lead exposure, structural defects, or environmental hazards require a warning. In some states like California, you must disclose a whole list of items including knowledge of death in the home or the existence of a sexual offender in the neighborhood. Check with your state and local laws for specifics for your property.
Detail any contingencies, such as a pest control report, home inspection, or mortgage funding. Contingencies are the conditions under which the offer can be withdrawn without penalty. For example, if your buyer fails to find financing or you can’t make the requested termite repairs.
If a contingency occurs that could invalidate the contract, it needs to have precise details on how. For example, a contract contingent on a home inspection needs to occur before a certain date.
The consequences of defaulting on the contract go into this section. For example, if the buyer withdraws their offer, the seller will receive the earnest money in penalty.
Detail the Closing Procedures
The final section included in a real estate contract details the closing procedures. Closing information includes the location where the sale is to be finalized and the date and time of the sale. The closing takes place anywhere from 30–60 days after you accept the buyer’s offer.
Shorter or longer closing periods are negotiable. You may close at a bank, real estate attorney’s office, or at a title company. Set forth the allocation of necessary costs for closing. The contract should detail what the closing costs are and who should pay them.
For example, deed preparation and recording by the county recorder. The deed is the document that formally transfers ownership of the property from seller to buyer. One or both parties may pay closing costs.
Also typical at closing is a title insurance policy. Title insurance ensures that the property is without liens, encumbrances, or third-party claims to ownership.
Contract Documents Used As Offers
Some states require that offers on a property be presented in writing. Many real estate professionals use a contract template to present offers. If your buyer is not represented by an agent, you may help them with a purchase contract.
If your buyer is represented by an agent, the information about the agent commission payable as detailed in the closing information. the amount of the commission and who pays it is negotiable.
Typically a seller may counteroffer for a higher purchase price, a contingency clause to allow time to purchase a suitable replacement property, or a change in the closing period.
You don’t have to draw up a new contract. Write them onto the original document, then both of you initial them. However, it does require access to the contract template. An addendum can be used to make major changes to the contract.
Write out the changes you wish to make, the date of the original agreement and the names of the parties involved, the address of the property, and then include it with the original signed document.
Typical Contract Contingencies
Buyers are free to cancel the purchase contract until any contingencies are released or removed from the contract. As mentioned, the contract details the specifics of how each contingency can be satisfied and released.
State laws differ regarding the release of contingencies. Have a professional advise you of any local requirements. Here are some typical contingency clauses in real estate contracts.
Buyers typically have an arbitrary number of days to release an appraisal contingency. A contract usually specifies an appraisal of the value by one or more independent third-parties. The time may be extended or shortened by the terms of the contract.
The seller can cancel the contract if the buyer hasn’t signed a release of contingencies by the end of this time.
If the buyer is not paying all cash, many purchase contracts customarily give buyers time to secure a loan. The time frame can run to the close of escrow or be shorter depending on the framing of the contingency.
Most contracts give buyers a certain number of days to complete all other inspections. The seller can cancel the contract with notice at the end of that time if the buyer hasn’t released contingencies.
A buyer can request repairs or consideration from a buyer for deficiencies found in the home inspection report, such as a swampy crawlspace, mice in the attic, missing floor joists, or health and safety issues. A seller can refuse to repair and the buyer may cancel without penalty.
Sometimes buyers ask for a contingency for building permits for the right to demolish or build on a property. These contingencies should contain a time frame or action to release them.
Contingency to Sell
If buyers want to purchase a home before they’ve sold their existing home they offer to buy the seller’s home contingent on the sale of their own property in a certain length of time. A seller may or may not accept this contingency.
Sellers agree to give the buyer a first-right-of-refusal period in case the sellers receive another offer.
The seller demands that the buyer perform if the buyer doesn’t sign a release of contingencies within the specified time period. The contingencies stay in place otherwise.
In some states, the contingencies don’t expire until the seller demands performance. The buyer must move forward with the purchase after all contingencies are released.
Complex But Rewarding
For sale by owner contracts require meticulous attention to detail, but completing them yourself can save thousands of dollars. Consult us at Bluematch or an attorney for more information and advice.