In previous blogs, I've written about picking your agent, your lender, the pre-approval, and some of the basic questions you should think aboutwhen trying to find the right home for you and your family.
Hang on, folks, this is a long post.
Real Estate 101: The Contract Package
The average purchase contract and addenda package in Maryland is around 46 pages. There are a lot of things to cover but I'll attempt to give a breakdown of the documents that normally are a part of the contract offer. This is by no means an exhaustive list of everything that could appear in a purchase contract.
As a member of Maryland Realtors®, I use their sanctioned documents almost exclusively for my buyers. Other Boards of Realtors® in Maryland have the option of using their local documents. To make things easy, I'm not going to specifically address those. To dig deeper, feel free to Email Me.
Part 1: The Contract
This 11 page document covers the basics of your purchase. It explains the Who's (Seller, Buyer, Agents, Brokers), the What's (Dates of offer, settlement, financing, earnest money, inclusions, exclusions, and addenda made part of the contract), and the Where's (address of the property).
The What's and Where are the important focus here. The contract sets the ground rules for how the transaction will proceed.
The first two pages of the contract outlines:
The Property Address
The Parties to the Contract (Buyers and Sellers)
The Type of Possession(ground rent or fee simple*)
The Date of Offer
The Proposed Date of Settlement… (when the buyer will take possession officially)
The Earnest Money (EMD)** the Buyers will offer with the contract, how it is paid, and who will hold it on behalf of the buyer
The type of Financing the Buyer will use to purchase the home… Cash is considered financing for this purpose.
Financing Contingency Timeline… The buyer has a certain time in which to apply for a mortgage and then a certain time in which to receive a financing commitment from their lender. Should the buyer not be able to obtain financing within this timeline through no fault of their own, there is a right of rescission specified.
Alternative financing Contingency… The buyer is able to seek alternative financing programs provided that it doesn’t change anything for the seller. So, if a buyer can get a better set of terms with a different lender, or comes into a pile of cash and would rather not finance the purchase, this paragraph gives them the right to do so.
*Ground rent is a nominal fee paid to a person or business who owns the ground the home sits on. Although no new ground rents have been issued in Maryland for some time, there are still properties in the area that have this type of ownership. To find out if your home has ground rent or if the house you're looking for has it, check out the MD State Department of Assessment and Taxation (SDAT) web site. Fee Simple means you own the house and the land it sits on, all the way to the center of the Earth.
**EMD is an amount of money, put forth in good faith by the buyers with the contract. It is held in escrow on their behalf by the buyer's broker (generally speaking with some exceptions), and disbursed against the buyer's closing costs at settlement. Should the buyers not keep with the terms of the contract, part or all of the EMD may be forfeited.
The next few pages explain what fixtures will come with the house (major appliances, shed, swing set, etc), notices about lead paint laws, and what other addenda will be included and made part of the contract. The remainder of the contract explains the obligations and rights of both the buyer and seller, flood insurance compliance, liabilities and responsibilities of their respective agents, and what rights the parties have should there be an issue with the contract.
Throughout the contract package are places for the buyers to initial, confirming they are aware of specific terms of the contract. At the bottom of each page the buyers and sellers will also initial to show they reviewed the page.
Page 10 is the signature page. This is where Buyers and Sellers sign, and the all-important Date of Contract Acceptance goes here. That is the date by which the contract is considered "executed" or "ratified." This date is REALLY important because all of the terms of the contract start from that date and go forward.
Page 11 is the information page that outlines what agents and brokers are party to the contract, with all of their respective contact info, license numbers, and office ID's. That info is geared towards the agents.
Part 2: The Addenda
Maryland has quite a few documents that are required to go with a contract. For our purposes here, I will only go through the basics of what could be included in a basic and typical contract for a home in Ellicott City, Howard County, Maryland.
General Information Addendum
This is a glossary of terms that buyers and sellers should be familiar with.
Howard County Notices and Disclosures
HoCo has its own rules and regs for buyers and sellers. This outlines them. Each jurisdiction has its own specific addendum outlining certain rules/regs/conditions and potential rights of rescission.
Notice to Buyer and Seller of the Maryland Residential Real Property Disclosure/Disclaimer Act
Maryland requires a seller to disclose any known information, especially defects, about their property and changes/improvements/issues or disclaim that they have no knowledge of latent defects on the disclosure/disclaimer statement. Sometimes the D/D statement isn't available before the offer is written. This notice informs the buyers that a D/D will be forthcoming and what info it will contain, and what the rights of the parties to the contract are. If the D/D isn’t available at the time the contract is written and signed, there is a right of rescission outlined within.
Disclosure/Disclaimer Statement
This is the statement referenced above.
Federal Lead Paint Notice (if built before 1978)
Maryland Lead Paint Prevention Program (if built before 1978)
(If lead paint law is applicable, there is a long document called the “Protect Your Family from Lead in the Home” required)First Time Maryland Home Buyer Transfer & Recordation Tax Addendum
Maryland gives a discount on the transfer tax paid at closing to a person/persons who have never owned property in the state before.
Property Inspections Addendum
This covers all inspections: structural, mechanical, environmental, radon, chimney, etc., and creates a timeline in which to have them done, results and any requests for repairs to be delivered to the sellers, and responses from seller and buyer. Within this document are rights of rescission as well. More about Property Inspections in a future blog post.
Seller Contribution Addendum
If a seller were to be asked to contribute to a buyer's closing costs, we would use this addendum to outline the amount.
Financing Addendum
Even though Page 1 of the contract specifies the type of financing, there is an addendum required for each type (FHA, VA, Conventional, etc) and spells out specifics for each type and any specific requirements of the financing type therein.
Agency Documents
Understanding Who Agents Represent from both sides of the transaction and Dual Agency authorizations if applicable. More about Agency in a later blog post.
There are other documents that could be a part of the package like HOA/Condo disclosures, As-Is, easement notifications, etc. Each contract will have its own specifics, and one of the biggest parts of my job is to assist you with navigating through those.
Homeowner’s Association (or Condo) Notice and Transmittal of Documents
If the property is located within an HOA or is a Condo development, Maryland law requires that the seller disclose this information up front. Within this addenda, it informs a buyer that, the existence of the HOA or Condo development, and that the buyer is entitled to a document package itemizing the covenants, codes and restrictions (CC&R’s), financial statements, rules, regulations, and more. These docs have to be delivered to the buyer by the seller within a specific timeline, and also outlines a timeline for a right of rescission for the buyer if they see something they don’t like in the HOA/Condo doc package.
Although it does not go over with a contract offer, I put the transmittal document in this section. When the docs are sent to the buyer’s agent by the seller’s agent, the seller’s agent is required to include this document that summarizes some of the info within the doc package above. Since there is a right of rescission mentioned in the HOA disclosure in the original offer, the date on the transmittal document is what activates that timeline.
A note on Rights of Rescission:
Within the framework of the contract and its associated documents there are certain points where a buyer may rescind a contract. It is important to review and be aware of these points.
Part 3: The Other Stuff
So what else goes with your contract?
-Your lender's Pre-Approval letter
-A cover letter from me, summarizing the terms of the contract
-A copy of your EMD check
-Notice of Maryland’s Smoke Alarm Law (more on that later)
-Miscellaneous Contingencies (Sale/settlement of another property, easement notices/disclosures, private water and sewer agreements, sale and lease back addendum, and more)
Understanding and being able to explain all of this is a full time job on its own! As a full-time agent, I get regular training on the contract paperwork because they do change from time to time, and I have to be intimately familiar with the paperwork at all times. As they say, “the devil is in the details.”
Until next time,
Steve