Important Real Estate Clauses You Need to Understand

Important Real Estate Clauses You Need to Understand

A contingency clause explains a condition or a situation that must become true before the contract can become binding. It also gives rights to both buyer & seller to back out of their contracts under certain circumstances.

An agreement is formed to protect the rights of all parties involved. If you read a real estate contract, you’ll see different terms defending different figures such as the seller, the realtor, mortgage provider, buyer, and so on. In a typical transaction, the person benefits who has crafted the clauses carefully to protect his or his client’s interest. In this article, you’ll read about the standard terms and how they should be defined to protect you.

As-Is Sale Clause:

What does that mean?

In a word-to-word translation, it means, the seller is not going to repair the property. Let’s go into a bit more detail. It appears that for an as-is sale, the buyer will accept the house in its current condition. The buyer cannot request significant repairs from the sellers. An important step is that either the buyer or seller (or both) can inspect the property.

Let’s say you are the buyer and inspection report shows that house will require significant repairs. You can negotiate the price of the property. However, sometimes, an inspection cannot disclose the history of the house. It cannot tell you about every required repair. If after a few weeks or months, you learn about a hidden defect, the seller can’t be held responsible.

This clause is more commonly explained, “seller won’t be responsible for any latent defects.”

As a buyer, if you’re buying a “house as-is,” you need to carry out your inspections and tests. Otherwise, you are assuming a risk.

Home Sale Contingency:

You might be familiar with this one. More often, this clause is proposed by the buyer.

Sometimes, an individual is purchasing a second house. They first want to sell their first home. After getting the funds, they want to buy the first one. In that case, the property sale is contingent upon the sale of their previous house. Suppose you’re the seller.

After you and the buyer have signed the contract, the buyer will get a timeline to buy the house. If the contingency expires, the buyer must close the deal and buy your home otherwise; there will be legal consequences. Similarly, if the individual chooses to back out of the contract before the contingency expiration date, there will be no legal problems.

Bump out Clause:

If you are the buyer and your offer gets accepted, you can expect that the seller will stop marketing the house. However, the ‘bump out clause’ allows the seller to continue marketing the property even after an offer has been accepted.

Also, known as the ‘kick-out-clause,’ it allows the seller to cancel the contract if he gets another higher offer. In that case, you’ll need to withdraw your offer or come up with a higher price to beat the other offer.

Escalation Clause:

In alignment with the ‘kick out clause’ there exists an escalation clause. It is placed to ensure that the buyer is the highest bidder for the property. In other words, the highest bidder will win, but that’s not the end of the story.

Let’s say your offer gets accepted. You are waiting for the mortgage approval, but the seller receives another offer. In that case, the escalation clause asks you to pay more than the highest offer provided it doesn’t exceed a specified limit.

You can review this sample escalation clause:

“The buyer agrees to pay $2,000 more than the highest offer provided the amount doesn’t exceed $485,000”.

Backup Offer Clause

This clause also protects the seller. Let say; there are two competitive offers for the property. In that case, the seller can choose both offers. One will be the first offer, and the other one is treated as a backup option.

If for some reason, the first buyer cannot purchase the house, the seller can accept the backup offer. However, the second buyer is not obliged to form a contract. He can back out of the agreement, anytime, he wishes before he officially accepts the deal.

Want to know more details or are confused about some terms in the contract?

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