What is a Purchase Contract?
A real estate purchase agreement is a legally binding contract between a buyer and seller for the purchase and sale of real property in North Carolina. In an increasingly digital world, having a physical paper agreement is reassuring for both the buyer and the seller of real estate.
The purpose of a real estate purchase agreement is to clearly outline the details of a real estate transaction, making it absolutely clear to both parties what is being exchanged, the terms of the exchange, and what circumstances would negate the agreement . A purchase agreement is also there to protect the buyer and seller if something should go wrong after the agreement is signed, and either party fails to hold up their end of the bargain. While a handshake agreement is common, and can be a good first step, the only method of committing to a deal is a signed purchase agreement.
A real estate purchase agreement will generally specify the property being purchased, the amount being paid for it, as well as how the buyer plans on paying for the property. It will also address other details such as:
A real estate purchase agreement is a crucial part of the real estate sales process in North Carolina.
Exploring the Major Aspects of a Purchase Agreement
North Carolina real estate purchase agreements contain several essential components. At a minimum, the contracts will typically include the following:
- The names of the buyer and the seller.
- The location/address of the property being sold, if the parcel has been assigned a PIN, you should use that in addition to the address.
- The purchase price. The contract needs to have the amount being paid broken down into the earnest money deposit (which is paid up front) and the amount of cash at closing. Without the payment breakdown, the contract could be deemed an "illegal contract" and, thus, unenforceable. Without cash at closing, the seller would still have a right to evict the buyer from the property after closing (if the deed actually would convey title to the property).
- No contingencies. A "contingency" clause basically describes an event or action that must happen in order for the sale to close (like a home inspection or appraisal). Using a contingency clause will keep the contract from being an "irrevocable offer" and the buyer can use the contingency to negotiate better terms with the seller.
- The date the sale will close. This is usually set for 30-60 days after the offer is made. If the parties to the contract are having difficulty closing on this date, the buyer can extend the offer by signing an "extension addendum", which will require a new closing date and possibly an additional down payment.
- Required disclosures. These are legal documents that tell the buyer things about the property (such as the age of the structure, potential flood risk and safety issues regarding gas lines, e.g.).
- Signature lines for the buyer, the seller, witnesses and notary public. The deed must be notarized in order to be legally binding. In North Carolina, the notary does not need to be present when the document is signed.
The North Carolina Bar Association offers a free Guide for North Carolina Home Buyers, which many find helpful.
Legal Mandates in North Carolina
Several legal requirements for real estate purchase agreements exist under North Carolina law. We will now lay out these requirements with an eye toward specific clauses and terms that may differ from other states. Note that Georgia has a similar list, but there are differences.
A real estate purchase agreement is not enforceable by the buyer or seller unless it is:
• In written form
• Signed by the parties
• Includes a sufficient description of the subject property
Buyer and seller must be able to understand the contract. This does not mean that a lawyer must draft the contract. In fact, most of the time they don’t, although the lawyers probably review some of the contracts (as part of due diligence if nothing else). Instead, a real estate agent will write the contract from a standard form. If the contract does not contain all of the elements identified below, then it is voidable at the request of the buyer or seller.
North Carolina specifically prohibits "contracting around these requirements by way of a handwritten addendum or attachment." Smith v. Bayer, 116 N.C.App. 632, 443 S.E.2d 97 (1994). So, you cannot have a situation where the body of the contract contains only the mandatory language but the material terms appear as an addendum to the contract.
The contract must contain:
• Names of the buyer and seller
• Property description that states "the price and terms of payment"
• Offer expiration date
• Conditions of the sale
• Signatures of the buyer and seller
For the record, a real estate purchase agreement need not be notarized. To be valid, any type of contract under North Carolina law does not need to be witnessed or acknowledged. The only exception to this rule is where it is expressly required by statute.
Contracts can be either unilateral or bilateral. With a bilateral contract, the parties must sign at the same time. One example of a bilateral contract is an employment contract. A unilateral contract does not require the signatures of both parties at the same time. An example of a unilateral contract is an offer to purchase a party’s property. These types of contracts are often referred to as an "offer and acceptance" contract.
Common Contingencies in NC Purchase Contracts
Contingencies are used to protect all those concerned with the transaction. Financing contingencies protect the buyer, seller and, thirdly, the lender. Inspection contingencies usually protect the buyer. Appraisal contingencies protect the bank. Let’s take a look at these three basic contingencies: FINANCING CONTINGENCY "Buyer’s obligation to buy the Property is contingent upon Buyer obtaining a written loan commitment on or before the Commitment Date." This language is usually included in the "Third Party Financing Addendum to Contract" (NCAR/NCBA Form 2-T). If the buyer is unable to get a written loan commitment by the "Commitment Date", here implied to be the closing date, then the buyer can pull out of the contract and there will be no liability if he does so. INSPECTION CONTINGENCY "Buyer, in the Buyer’s sole discretion, shall have a right to a professional inspection of the Property by a professional inspector on or before the Inspection Date. If the inspection discloses any structural or mechanical system defects in or on the Property, or any condition requiring treatment or testing for termites, or any other matter that would be a Non-Defective Material Fact or a Defective Material Fact, Buyer shall give Seller written notice of such fact(s) on or before the Inspection Date." This language is found in the "Residential Property and Owners’ Association Disclosure Statement" (NCAR/NCBA Form 2-T) and the "Due Diligence Request for Repair and Repairs Addendum" (NCAR/NCBA Form 3-T). Once the buyer thoroughly inspects the property, if there are any serious issues that need to be resolved, the seller may be willing to make structural or mechanical repairs, or contributors towards the buyer’s repair costs, in order to keep the deal alive and not lose the sale. APPRAISAL CONTINGENCY "Buyer’s obligation to proceed to closing is contingent upon an appraiser’s determination of the Property’s appraised value being equal to or greater than the Purchase Price or such other Purchase Price the parties may subsequently agree." This language is included in the "Appraisal Contingency" addendum to the "Offer to Purchase and Contract" (NCAR/NCBA Form 2-T) to add an appraisal contingency to the Offer to Purchase and Contract. The lender will usually require this appraisal to protect the bank and ensure that it is loaning money to buy a house that is worth the money they loan out to you.
Path to Purchase Contract
Step 1: Selection of sales price, financing and timing of closing.
The best way to begin this process is to have a conversation with your real estate agent so that you understand the financial ramifications of your offer. Your agent will also be able to recommend local lenders and be present during the mortgage process to facilitate the closing. Choose the closing attorney as soon as you have selected your lender.
Step 2. Explain how the purchase agreement protects your interests until closing.
Your real estate agent will assist in advising you on the contingencies that should be added to the contract , such as agreeing on the financing terms and an early inspection of the property.
Step 3. Collaboration between agents and attorneys ensures that contract protects clients.
You will be having conversations with your real estate agent about what happens if the seller does not fulfill the terms of the contract, and your attorney will advise on what is in the contract. The attorney will explain how the contract takes effect once it is fully signed and dated.
Step 4. Finalize the agreement.
When it is complete for both parties, the agreement will be signed and dated and provided to you, by your real estate agent, for signature. Remember that there can be no more changes once it has been signed by all parties.
Common Mistakes and Prevention
This has the potential to be one of the most troublesome areas of the purchase agreement. In my experience, the overwhelming majority of real estate contracts that have been prepared and signed by sellers have not contained enough information as to the listing broker and the commission and the commission paid to the selling agent. Consequently, while the listing broker will have a signed copy of the contract in his files containing a clearly expressed intent from the seller to pay him a commission, it is not unusual for the buyer’s lender not to recognize the contract as having been signed by the seller so as to be binding on a purchaser and authorizing a commission payable to the listing broker out of the proceeds due the seller from his lender. That is to say, the lender cannot rely on the signed purchase agreement as establishing the right to the lender’s payoff being made.
The second area where pitfalls may arise in the execution of the real estate purchase agreement is the failure of the agreement to impart the legal description to the subject property or its location. While there does not have to be a title insurance policy when a purchase transaction is conducted using a real estate purchase agreement, and apparently the agreement is rarely produced for the sale to the buyer’s lawyer for review. As a result, the seller brings to closing a deed that did not describe the correct land, and the buyer accepts the conveyance without the right legal description, which in North Carolina is invalid and the buyer has no recourse against the seller because under the standard form of purchase agreement, the seller is obligated to convey by general warranty deed.
The third area of potential pitfalls which I have encountered is the lack of understanding of the cost and manner of obtaining a loan for the buyer’s share of the purchase price. Often, one of the parties to the contract has no idea that he is going to be responsible for the payment of points and closing costs and that the terms of the mortgage loan he is obtaining are to be paid by him and not by the other party to the agreement. Frequently, the buyer has "assumed" he would receive 100 percent financing only to find out that the lending institution is now only offering 90 percent financing during the time period in which it took to get the appraisal and the owner’s title insurance secured. These price changes could have been avoided if there had been a lender that had been selected in advance of entering into the real estate purchase agreement and making the loan application prior to signing the purchase agreement.
Purchase Contract FAQ
Below is a compilation of some of the most frequently asked questions that come up with respect to real estate purchase agreements in North Carolina:
Why is a written purchase agreement important? A verbal agreement is simply not enforceable in a court of law. In a land of verbal contracts, it is hard to say who said what. If the contract is not in writing, the court is left with making a large decision on credibility. Having the agreement in writing helps evidence the actual terms of the deal and how the parties intended the deal to go down.
Should I use a standardized contract form or have an attorney draft the purchase agreement? In North Carolina, the North Carolina Association of Realtors ("NCAR") has created a series of standardized contract forms that are accessible online. The various purchase agreement forms that they have created are absolutely helpful and can be easily modified from time to time as the market dictates. These are an excellent starting point for a real estate purchase agreement. However, the forms are essentially for purchase agreements in the context of a sale of real estate with a real estate agent helping the buyer find their new property. There are other contexts where the real estate transaction may be much different and the form pre-printed in the standardized contracts may not apply. In these situations, you must have a lawyer create the form and can still utilize the contract forms as a starting point .
Do I need an inspection contingency in my purchase agreement? The simple answer is that if you are going to be the owner of the house, you should know what you are getting into before you become the owner. If not, it is a gamble. So to answer the question, a home inspection contingency is essential and should always be in the purchase agreement. If the house is perfect and has no problems, then you have the ability to walk away from the deal without loss of your earnest money if the inspection shows a problem and it cannot be fixed in a manner that is acceptable to you. If the house is in terrible shape, at least you are not surprised when you see the problems the inspector found.
What if I am buying a house that has structural issues? You need to have a contractor inspect the house and make sure you understand what needs to be done to fix it. If the plan is to fix the structural issues yourself, then this is also a good reason to have an attorney draft the form so that you have complete flexibility on how to address the issues and the date by which you must complete work.
Can my earnest money be returned? The right to have earnest money returned is entirely dependent upon the terms of the contract. If you include a provision stating the circumstances under which the earnest money would be returned, then you have that recourse if you perform your side of the bargain.