5 Contract Terms Every Buyer + Seller Should Know

There are many terms that every buyer & seller should know when navigating through a real estate transaction. Your Realtor should definitely give you a good idea of what all terms mean, but I wanted to break it down for you to give you a little more understanding of 5 very important terms a part of every residential real estate contract!

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1. Earnest Money

Simply put, earnest money is a "good faith deposit" that you put down on a home to show the seller you are serious about buying. The money is only given after the seller has accepted your offer and it is deposited into an escrow account to be held until closing. You get your earnest money back at the closing table to put towards your down payment or closing costs, or you get it back if you back out during the due diligence period. A typical earnest money deposit is about 1% of the purchase price of the home. You can, however, lose your earnest money if you decide to back out of the contract for reasons such as just changing your mind (after due diligence) or you break the terms of the contract.

2. Due Diligence

Due diligence period usually refers to the time after signing a contract that the buyer has to inspect the property and make a decision whether they want to buy the property or not go forward with the transaction. It’s important during due diligence period that you gather all necessary information that relates to the home, and really... do your due diligence. You should get inspections done, you should gather all the documents that relate to the property, and generally have to be one hundred percent certain that you are going to go forward with this deal. When due diligence expires, your deposit money becomes non-refundable. Before due diligence expires, you can still walk away. In a "normal" market (what even is that these days), it's usually about a 10-14 day time period, but lately, we are seeing people WAIVE due diligence. How crazy.

3. Contingency

When you put in an offer on a home, you can specify certain conditions that must be met before the deal will go through – these are called contingencies. You have to make sure you can actually get the loan (a financing contingency), that the inspection doesn’t show anything of concern (inspection contingency), and that the appraised value is close to what you’re offering to pay (appraisal contingency). Those are just a few common examples. Another pretty common example would be making the purchase of the new home contingent on the sale of your current home. If you’re in a bidding war on a home, sometimes it can help to shorten contingency periods or waive them altogether.

4. Closing Costs

Closing costs are fees & expenses you pay when you close on your new home. Closing costs are NOT a part of your down payment. These costs can run 3-5% of the loan amount and may include title insurance, attorney fees, appraisals, taxes, HOA fees and more. Majority of the closing costs are the buyer's responsibility to pay. However, in most cases, you can negotiate for the seller to help pay some of the closing costs! So remember, when you are saving to purchase a home, you need to save not only for the down payment, but also be prepared to pay closing costs!

5. Appraisal

When you apply for a mortgage, your lender will require an appraisal of the home you want to buy. A licensed appraiser will estimate the home’s value based on comparable homes that have sold in the area and an investigation of the property. If the appraised value is less than the offer you are making on the home, you might not be approved for a loan. The bank doesn’t want to invest in a home that’s overpriced (and neither do you). If the appraisal comes back lower than purchase price, you can renegotiate with the seller to either lower the purchase price to the appraised price, or you can come out of pocket to pay the difference at the closing table. If the buyer and seller cannot agree after a low appraisal and you are still in the timeframe of your appraisal contingency, the buyer can terminate the contract with no penalty. If you're the buyer and the appraisal comes back higher than purchase price, then you just made some quick equity in your new home!