Get it in Writing: A Homebuyer’s Guide to Creating a Solid FSBO Contract

Buying a home in a for sale by owner (FSBO) situation might seem like a low-key, ultra-casual way to conduct a purchase. You talk to the owner, agree on the price, and handshake the deal. Maybe put together a contract for buying a house from the owner if you’re feeling ambitious. Easy peasy, right?

But what happens when the inspection reveals issues the seller doesn’t want to fix? What happens if you can’t get the financing you want? And who’s responsible for paying this year’s property taxes?

Dianna Caldwell, an Accredited Buyer’s Representative in Hebron, Kentucky, emphasizes the need for a solid real estate contract, even in a FSBO deal. “It is a legal document,” she says, and one that should not be taken lightly. A solid contract is your roadmap for navigating the entire sale, including any bumps along the way.

As you’re thinking through your own real estate contract, you could start with a state-specific template, though a cookie-cutter contract doesn’t always cover everything. Don’t neglect these important details when creating or modifying your real estate purchase contract.

Who?

At the beginning of the contract, you’ll need to define the buyer(s) and seller(s) by their full legal names. After the initial definition, the terms “Buyer” and “Seller” can be used to refer to the contractual obligations of each party.

Many contracts require the buyer and seller to initial each numbered page as a way to ensure that nothing has been added or subtracted from the document.

You’ll also need to note whether or not either the buyers or sellers are married. This piece of information becomes important for property rights of ownership, including assignment and succession.

For example, in some states, married couples benefit from joint tenancy, whereas unmarried couples can claim tenancy in common — legal terms that affect who owns what proportion of the home, as well as how the property can be used and transferred.

At the end of the contract, you’ll need a spot for both buyers and sellers to sign their names, along with a witness. Usually, your witness can be anyone over the age of eighteen who can attest to the competency of the parties and the date of the contract.

What?

Legal description of the property

Start with the basics. You’re purchasing land and structures at a certain address. Those pieces of information should be the foundation of your description.

But a real estate contract should also include the full legal description of the property. This can be quite lengthy, with terms such as “tract” and “parcel,” as well as directions, distances, and degrees. The full legal description for your address can be found on the deed and should be copied verbatim onto the contract.

Additional property included

Be sure to include a section for additional property that is included with the sale. Usually, anything affixed to the property, such as light fixtures and appliances, will transfer ownership with the house.

But norms vary by state. In some places it’s common to leave the curtains; in other places, the fridge rarely stays with the home. List the items that will be included in the sale, along with the date of reference. For example, adding words like “as seen in the home on November 30, 2020,” after each item adds more specificity.

In regards to furnishings or other non-affixed items, Caldwell says, “You generally don’t want to write in a ton of personal property. All of that needs to be taken care of outside of the contract because of financing.” Appraisers have to include anything that will transfer in the sale, and putting a dollar amount on items like furniture or similar items could jeopardize your loan.

Disclosures

For the sake of full transparency, any important information regarding the property should be written into the contract. This may include (but is not limited to): easements, restrictions, buried utilities, and known defects.

Each state has different requirements for disclosures. Check our state-by-state disclosure guide for more details.

How much?

Purchase price, earnest money, and financing

The total purchase price should be clearly noted in the contract. This is the final agreed-upon sum without financing costs, closing costs, or earnest money considered.

Speaking of earnest money, the contract also needs to specify how much will be held and what entity will be holding it until closing. Usually earnest money, or a “good faith deposit”, runs between 1% and 3% of the purchase price, and it’s typically kept in a trust account with a legitimate, third-party escrow company.

If you’re walking into a seller-financed situation, those financing details could be spelled out in this section as well. The term of the loan (how long you will take to repay the seller), the monthly payment amounts, and the interest rate should all be included in the contract.

Property taxes

The calculation and payment of property taxes differs from state to state. Unless you close on the exact date that taxes are calculated (unlikely), your contract will need to account for prorating property taxes.

In states that charge property taxes in arrears (taxes due at the end of the year, for the previous year), the seller will usually need to give the buyer a credit for the portion of the year that they owned the home. The buyer will then pay the full tax bill at the end of the year.

In states where homeowners prepay taxes for the future year, it’s the opposite. The buyer will typically give the seller a credit for taxes paid based on the portion of the year that the buyer will own the home (and owe the taxes).

As you’re creating your real estate contract, first check local property tax laws. Then designate who will be giving the credit to whom, and how it will be paid.

Closing costs

A real estate contract should specify who pays for what at closing.

Typically, the buyer will pay for all loan costs, including origination charges, appraisals, flood certification, credit reports, and more. They’ll also usually pay for government recording fees and transfer taxes, along with title insurance.

The seller is usually responsible for fewer closing costs, though many can be negotiated. The bulk of the seller’s closing costs usually revolve around the real estate agent’s commission, and they typically pay the buyer’s agent commission, too. If you’re buying a FSBO house without an agent’s help, then you won’t need to worry about agent commissions (but maybe you can start to see why an agent can be a useful advocate in this exact situation!).

When?

Dates to define

Every step of the homebuying process should be written into the contract to avoid delays that could affect both parties. Define the following dates:

• Earnest money due date: The date at which earnest money should be turned over to the escrow company.
• Inspection completion date: The date for all inspections to be completed and negotiated, if necessary.
• Appraisal completion date: Similar to the inspection, the appraisal needs to be done by a certain date.
• Final walkthrough date: Caldwell says this date is imperative to ensure that any inspection repair negotiations have been met prior to closing. She recommends a date 48 to 72 hours before closing.
• Closing date: The big one! The day both parties come to the table to complete the sale.
• Possession date: When you as the buyer can move in. Often (but not always) this is the same as the closing date.
• Contract date: Include the date when you signed the contract and put it into effect.

What else?

Contingencies

Contingencies, or contractual provisions stating that certain conditions must be met before the deal can close, should also be laid out in writing, along with how to release those contingencies.

Common contingencies include …

Financing contingency

A financing contingency allows for time to secure a loan.

Caldwell says, “A financing contingency protects you should you not be able to get the financing that you want.” For example, if interest rates suddenly spike, and you can’t qualify for a loan any longer, “you want to be able to get out of that contract,” without losing your earnest money deposit.

Inspection contingency

Specify the types of inspections that you want, along with a period of time in which to complete them. Make sure the inspection contingency allows you to back out if the inspection reveals things you don’t like.

Appraisal contingency

If you’re getting a mortgage loan, you’ll need an appraisal. The contract should spell out what happens if the appraised value does not meet the purchase price — typically, you’ll need to renegotiate the purchase price, put more money down as a buyer, or decide to walk away.

Sale of property contingency

Some buyers want to make the purchase contingent upon the sale of their current home. That means, if the buyer’s current home fails to sell, this deal falls through.

Some sellers will not accept this contingency in a competitive market, but if it’s important to you as a buyer, it should be included in the contract.

Once a contingency has been satisfied, you’ll need to release it and move to the next stage of purchase — be sure the contract tells both parties how this should be done and by what date. Basically, a release is the official notification that the contingency has been fulfilled to your standards.

Sometimes a contingency release happens automatically, after a specific date has passed. For example, a contract may stipulate that an inspection contingency is assumed to be released after the inspection completion date.

Make sure that any release wording is understandable and agreeable to everyone signing.

Consequences

Finally, the contract should be written with actionable consequences, in the event that either party fails to uphold their part of the deal.

Usually, if the buyer backs out of the purchase for any reason other than those outlined in the contract, the seller is entitled to keep the earnest money. If the seller backs out, the buyer should be given a refund of their earnest money and may be allowed the option to pursue damages in court.

Caldwell mentions the need to really be thorough when it comes to a real estate contract.

“If you’re writing your own contract, you just want to make sure you’ve got yourself protected. My suggestion is, if you don’t have an agent, definitely have an attorney.”

If you’re interested in obtaining help from a professional regarding your real estate contract, consider connecting with one of our HomeLight agents, who would be glad to guide you through the process and make sure the contract is written with your best interest in mind.

This article does not constitute legal advice. If you need legal advice, please contact a real estate attorney.

Header Image Source: (thodonal88 / Shutterstock)