Once you have found a home of your dreams, a purchase contract form needs to be filled out. For a real estate contract to be binding and enforceable, it needs to be in writing. A typical real estate contract includes:
- Parties to the transaction – full names of buyers and sellers
- Property identified by the address and a PIN number
- Purchase price
- Consideration otherwise known as earnest money
- Closing date
- Contract contingencies
- Buyers’ and sellers’ signatures
Based on your pre-approval letter, you have a good idea on what you can afford. When making an offer, you will have to keep that in mind as your purchase price cannot go above the pre-approved amount. Your initial offer will typically not be your last offer – it is expected to go back-and-forth at least once before settling on the final number. I often get asked if there is an average percentage of asking price a buyer should expect to pay. The answer is – it depends. A few things to consider when deciding on your initial offer are:
- How long has the property been on the market? The longer the market time, the more motivated the seller will be.
- Have there been recent price reductions?
- What are the most recent comparable sales of similar homes in the area?
- Are there any other bidders at the time of the offer?
- How bad would you feel if you lost this house – in other words, how close is this house to your dream list?
A customary amount of earnest money varies depending on the market. In Chicago, a $1,000 check is expected to be presented with the initial offer. If you find yourself in a multiple offer situation and want to impress the seller, you should increase the earnest money check to $5,000 or $10,000. After attorney approval and inspection contingencies are satisfied, you will need to deposit the balance of the earnest money – typically 5% of the sale price although that number can be higher or lower in some cases. The earnest money shall be returned if a contract is cancelled with the proper notice within contingencies dates. The earnest money is a part of your down payment and NOT additional funds you need to come up with. For example, if the down payment is $50,000 and your earnest money is $25,000, all you need to come up at the closing with is $25,000 (plus closing costs).
It typically takes 30-4o days to receive your loan approval. A closing is scheduled within a week after a clear-to-close is issued, although that period may be much shorter if a loan approval extension is filed. A longer closing date can be negotiated as part of the terms of the contract. 90 days is not uncommon. Anything longer than 90 days may be difficult to get the sellers to agree. Cash closings can happen as fast as 14 days or however long it takes to pull title and prepare the closing documents. Closings take place at a title company of seller’s choice or the seller’s attorney’s office during the week and within business hours. Since buyers are expected to attend closings (unlike the sellers), you will most likely have to take time off work.
Most common loan contingencies include:
- Home Sale Contingency – you have a house to sell and can only purchase a new one with the funds from that sale. When a seller accepts an offer with a home sale contingency, they retain the right to show the property to other buyers. If another non-contingent offer is presented, you will have 24-72 hours to remove your home sale contingency or your contract becomes null and void.
- Attorney Review Contingency – Illinois is a state where lawyers are engaged by both parties to assist with closings. 5-7 business days is the most common length of this contingency. During that time, attorneys review the contract, negotiate modifications and inspection requests.
- Inspection Contingency – the inspection contingency period coincides with the attorney review period. During that time, you can bring any inspectors of your choice (home inspector, lead inspector, mold inspector, radon inspector) to make sure the house you are buying is not a lemon. If you find the condition of the house is not to your satisfaction and the seller refuses to make repairs or financial concessions, you can cancel the contract.
- Mortgage Contingency – from the time your offer gets accepted to receiving your clear-to-close, your lender will process the loan, send an appraiser to verify the value, and underwrite the loan. Mortgage contingency extensions are very common although it’s best to avoid as they make sellers nervous and if there is a better back up offer, it makes it easy for them to cancel the contract.
Contracts are signed electronically using programs like Docusign, DocuAgent or DotLoop. Separate emails will be sent to all purchasers in the contract. The document will be tagged so you only need to agree to sign electronically and follow the prompts. You can sign on your smart phone or tablet – just download the DocuSign app. You can view a short video on signing electronically here.
Once the offer is signed, your agent will present it to the seller or the seller’s broker. In our market, offers are negotiated quickly – it usually takes a day or two unless the seller is out of the country or otherwise unavailable. Each offer has an expiration date and the seller should reply to the offer before it expires.
There are two contracts most commonly used in the Chicago market.
Click here to view a contract most frequently used in the city.
Click here to view a contract used in the city and the suburban markets.
Are you thinking about buying a home? Call us at 773-234-3201