When Does a Real Estate Contract Become Legal and Binding?
After a seller accepts a buyer’s offer to purchase a property, it’s time to make it official, in the form of a real estate contract. This document is one of the most important steps in the home-buying process, as it clears the way for both parties to begin the transfer of property. It means that the sellers can begin planning to move out, while the buyers can work with their agent, lender, and attorney get their ducks in a row for closing.
But at what point are both parties actually locked into the contract?
When is a real estate contract binding?
“In general, an offer becomes a contract when both parties have signed,” says Phil Lunnon, a Realtor® with Lunnon Realty in Lakewood, CO. Once this happens, the contract is binding for both the seller and buyer.
Of course, just how binding the contract is depends on the details of the contract itself. Some contracts may have contingencies—or outs—built in. Typically a buyer’s attorney will try to build as many contingencies as possible into a contract to keep the client from being tied down if something unexpected comes up. A seller’s attorney, on the other hand, will typically advocate for as few contingencies as possible, because the client doesn’t want the buyer walking away from the deal.
Why a buyer may cancel a contract
One of the most common reasons a real estate deal falls through is because of financing—or a buyer’s inability to get financing from their lender. For example, an appraisal contingency protects buyers and gives them the opportunity to walk away from the sale if the home fails to appraise for the agreed-upon purchase price. If the home appraises for lower than the purchase price, it usually means the lender won’t be able to provide the buyers with as much financing as they had hoped.
Other contingencies in contracts include the property passing a home inspector’s review, the buyer’s own home selling before closing, or the home making it through a title search, ensuring that the buyer has the right to sell. Sellers get some protection out of a contingency—like time limits on how long a buyer has to obtain financing—but most contingencies are written to protect a buyer and allow them an out if something goes wrong before closing.
If contingencies aren’t met and the buyers want to walk away from the deal, they can typically get back their funds held in escrow, like earnest money. “Should any of the contingencies not be met in a timely manner, the buyer should be able to dissolve the contract and walk away with no repercussions,” says Aaron Hendon, a Realtor® with Christine & Company in Seattle, WA. “That is the whole point of the contingency.”
Of course, if the contingencies were met, “the buyer is then obligated to perform in accordance with the original parameters of the contract,” Hendon says. That means forfeiting any monies in escrow and potentially even the full value of the contract.
Why a seller may cancel a contract
As long as the provision is written into the contract and both parties agree upon it, the sellers may cancel a contract. Why? They usually want out of a contract because a higher offer came in from another buyer. In that case, the buyers have to decide whether or not to let the sellers out of the deal. But if the buyers don’t want to let the sellers off the hook, the sellers will be bound by the provisions outlined in the contract, says Jeffersonville, NY, attorney William Chellis.
If the sellers are refusing to stick with the deal and want out for good, the buyers then have the authority to take them to court to push for the deal to go through, or file for compensation for costs like the home inspection.
Another way to settle the dispute out of court? If the higher offer is high enough, a seller can offer to buy the buyer out of the contract, essentially offering more money than just the return of the buyer’s funds in escrow, says Chellis. That extra cash might satisfy a buyer, and allow the contract to be shelved.