A real estate contract is a legally binding agreement associated with the sale, purchase, or rental of real property. According to real estate contracts, if one party does not comply with one or more of the terms of the agreement, the other party may be awarded money damages by a court.
A real estate contract names all of the parties involved, as well as describes the land or dwelling that is to be purchased or rented. The contract also includes the price that the buyer or lessee pays for the sale or rental. Additionally, the contract may contain other provisions, such as how payment is to be made, and when payment is due.
Many real estate contracts also include warranties, or a promise that is made by the seller or lessor associated with the property. An example of this would be how the law may require a warranty of habitability provision, which promises to provide the leased premises in a habitable condition.
What Is Escrow?
Escrow is an arrangement that is made with a third party, who is uninvolved with the buying and selling of a home; meaning, they are neither the buyer nor the seller. In real estate transactions, escrow holds all of the funds that are associated with the transfer of title, and maintains all documents and contracts.
Escrow ensures that a neutral third-party manages all of the documents and finances that are associated with the transaction. In that way, escrow makes the transaction safer by ensuring that both the buyer and seller adhere to their obligations. Additionally, escrow ensures that finances are not exchanged between the buyer and seller personally. What this means is that if one party fails to perform their obligation, the other party does not automatically receive the money.
Generally speaking, there are three parties involved in escrow in any real estate transaction:
- Buyer: The buyer, also known as the “promisor” in a contract, agrees to buy real estate in a real estate contract. In exchange for an agreed-upon sum, which is known as the purchase price, the seller (or promisee) agrees to transfer the title to the buyer. The buyer has a specific amount of time in which to perform their end of the bargain per the terms of the contract;
- Seller: The seller is the party who has title to the real estate, and sells the property to the buyer. Similar to the buyer, the seller has a specific amount of time in which to perform their end of the bargain per the terms of the contract; and
- Third Party, or Escrow Agent: The neutral third party is generally the escrow agent; however, in some states, an attorney is used instead of an escrow agent. The agent’s defining responsibility is to hold the documents and monies associated with the transaction in escrow, until both parties perform their required tasks within the contract. Once the specific duties have been completed by both parties, the escrow agent coordinates closing.
Either the buyer or the seller is allowed to open escrow. However, in most transactions, the party who pays the escrow fees can choose where to open escrow. Whether the buyer or the seller pays the escrow fees largely depends on the state in which the transaction is being conducted.
Generally speaking, the escrow process is as follows:
- The buyer and seller agree to terms of the sale or purchase of real estate;
- Either party opens escrow;
- Both parties send all contract documentation to escrow;
- The buyer deposits their earnest money deposit into escrow;
- The escrow agent tracks all pertinent dates as per the terms of the purchase contract;
- The escrow agent holds all deposits or additional monies that are deposited in escrow, in order to be disbursed at the end of escrow;
- The agent coordinates signing of final closing documents by both buyer and seller in order to transfer the deed of title into the seller’s name;
- Escrow receives documentation from the buyer’s lender, and receives purchase funds from the lender; and
- Escrow disburses the money from the buyer’s lender to the seller’s account.
What Should I Expect During A Real Estate Closing?
There are two significant tasks that you must complete at the closing stage of a real estate transaction: sign all relevant legal documents, and pay all closing costs and escrow items.
If you have obtained a mortgage loan to help you pay for the property, you will most likely sign a contract between you and the lender who is providing your mortgage. Additionally, you will most likely sign a contract between you and the seller or buyer, which will clarify the terms of transfer of ownership of the property.
In addition to the aforementioned contracts, there are several other documents that you can expect to review and sign during a real estate closing. These documents include, but may not be limited to:
- Certificate of Occupancy: This is required in order to move into a newly built house;
- Mortgage Note: A mortgage note is a promise of mortgage repayment, which contains the amount and terms of the loan as well as default consequences;
- HUD-1 Settlement Statement: It is imperative to note that you should review this specific document at least one day prior to closing. This is a precaution in case there are any discrepancies regarding closing costs;
- Final TILA Statement: This is a statement of the final cost of your loan, which explains all of the changes to your rate and points since the initial application; and/or
- Mortgage or Deed of Trust: A mortgage or deed of trust is what secures the mortgage note by acting as a form of collateral for the lender, in case of default.
Can I Have My Attorney Present At Closing?
An attorney can be present, and it is highly recommended that you do have your attorney with you in case you encounter any final questions or issues. It is important to note that the selling agent may be an attorney themselves, and will be present along with:
- The seller;
- The seller’s attorney, if they choose to have one present;
- The title company representative;
- The seller’s real estate agent; and
- Your lender.
What Else Should I Know About Real Estate Contracts In General?
Because escrow is so closely associated with real estate contracts, it can be helpful to better understand real estate contracts in general.
Should one party breach a real estate contract, the other party may file a lawsuit in civil court in order to obtain money damages. Money damages are amounts of money that are intended to compensate the non-breaching party for money lost as a result of a breach. The value of the monetary damages is generally determined by the judge.
It is important to note that neither party is guaranteed to be awarded the damages that they claim; damages must be measurable in order to be awarded. An example of this would be how if a buyer claims damages because they are “really angry” that the deal did not go through, the damages will not be awarded. This is because the monetary value of being “really angry” cannot be measured.
Do I Need An Attorney For Closing?
As was previously mentioned, if you are involved in the closing of a real estate purchase, you should work with an area mortgage attorney.
An experienced and local real estate lawyer can help you understand your legal rights and options according to your state’s specific laws, and can review all documents prior to you signing them. Additionally, an attorney will also be able to represent you in court, as needed.