10 Crucial Real Estate Contract Terms Home Buyers Should Know Before They Sign

Updated: Oct 15, 2019

If you ever attempt to read a real estate contract, you will quickly find that this paperwork is packed with a slew of terms you might not be familiar with—which is hardly ideal, given you're poised to sign this legally binding document. So if the words in front of you look like ancient Greek, it might be time to step back and study up on some of the most common terms you'll encounter in a real estate contract. Consider this your cheat sheet: Take five minutes to peruse this list of 10 essential terms—and come to the signing table prepared and confident.


Earnest money

Also known as "good-faith money," earnest money is a sum put up by the buyer and generally held in escrow or trust to show the buyer is serious about purchasing the home, says Marcia Goodman of HomesbyMarcia.com in Virginia.


There is no defined amount, but earnest money generally runs about 1% to 2% of the purchase price. When the purchase is complete, that money is applied toward closing costs. If the contract doesn't go through, there are guidelines that vary by state that determine which party will be awarded the escrow deposit.


Effective date

The date that the last party signed or initialed any terms and/or changes in the sales contract. This is often the date that starts the clock on the contract's various deadlines (e.g., that a home inspection must happen within 10 days).


Due diligence

The contract's contingencies (see below) provide the buyer a period to conduct due diligence, which essentially means doing homework. If the buyer discovers negative information regarding the property during this time, he can cancel the escrow and receive a refund of his earnest money, says Bryan Zuetel, a real estate attorney and broker at Esquire Real Estate, in Orange County, CA.


Contingencies

Contingencies are requirements that must be met before a real estate deal can close. The customary ones for the buyer's loan are property appraisal, financing, home inspection, disclosures, homeowners association disclosures, and a title report, says Zuetel. The specific contingencies are set and agreed upon by the buyer and seller.


Disclosures

All sellers are required to fill out a property disclosure for buyers that states everything they know about the home since they've owned it, whether it's good (there's a brand-new roof) or bad (the basement leaks during heavy rains). A seller who intentionally withholds information is committing fraud, so when in doubt, it's best to fess up!


Inspections

A buyer can do any inspections within a time frame that's mutually agreed upon with the seller—typically within seven to 14 days of an accepted offer. After an inspection, the buyer can:

Accept the property in the current condition and move forward to closing.Release the contract and retain the earnest money.Ask the seller t