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The Residential Real Estate Contract developed by the numerous Chicago and suburban Boards of Realtors as well as the Northwest Suburban Bar Association includes wording and optional provisions that address virtually every aspect of the home sale/purchase process. We have attempted to explain this contract in easy-to-understand terms. Although the contract may seem lengthy and complicated, very few of the optional provisions are used on any given transaction.
Although we are a licensed Real Estate Broker and Salesperson, and deal with this contract (as well as other similar contracts) on a daily basis, we are not Attorneys. Our involvement with the text of the contract is limited to a working understanding of the contract's basic purpose. Proceeding with the sale or purchase of real estate without the assistance and guidance of a competent Attorney can be dangerous and frankly, foolish.
The following explanations refer to the contract available here in .pdf format (requires Adobe Acrobat Reader).
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Each paragraph is explained below. You may scroll through them, or use the following index to go directly to a specific paragraph's explanation.
Paragraph 1:
THE PARTIES: Both Buyers and Sellers full names are typically noted in this section. In many instances, the Sellers name(s) is not available at the time a Buyer prepares an offer for a specific property. Thus, “Owner of Record” is usually an acceptable entry for “Seller(s)”, as the property address and Tax Identification number clearly identify the subject property.
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Paragraph 2:
THE REAL ESTATE: The complete property address is noted in this section as well as the Permanent Index Number (Tax ID) and the lot size or approximate acreage.
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Paragraph 3:
FIXTURES AND PERSONAL PROPERTY: The fixtures and personal property to be conveyed with the property are identified in this section. Those items that are physically attached to the property are considered to be part of the property (i.e. furnace, light fixtures, tacked-down carpeting, fireplace screens, planted vegetation, etc), unless otherwise stated in the contract. This section allows for the specific notation of these items to avoid later confusion. Those items left unchecked are either not present on the property or are not included. This section also allows extra space to specify items not included in the list that are either included or excluded.
The Seller warrants that Included fixtures will be in working order at the time of transfer unless specifically noted in this section (i.e. “washing machine is included as-is”).
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Paragraph 4:
PURCHASE PRICE: The Buyers “offer price” is defined in this section as well as the amount of earnest money and the provisions for its delivery.
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Paragraph 5:
ACCEPTANCE: The deadline for acceptance is defined in this section. If the contract is not signed by both parties by this deadline, the offer becomes null and void. The inclusion of “upon presentation” is sometimes used but offers little protection for either party.
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Paragraph 6:
MORTGAGE CONTINGENCY: This section is one of the most important parts of the real estate contract, yet its meaning is often misunderstood. The date by which a Buyer will have an unconditional written commitment for a mortgage is defined in this section. The mortgage amount (or percentage of loan-to-value) is also specified as well as the specific parameters of the loan being sought. The type of loan, the initial interest rate, the term of the loan, limits of loan origination fees or points being paid by either Buyer or Seller, and whether the Buyer will or will not lock in their interest rate at the time of application.
This section also specifies what takes place in the event the Buyer does not secure an unconditional written loan commitment by the specified date.
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Paragraph 7:
CLOSING: The "Closing" or "Settlement" is the formal procedure that transfers ownership from the Seller to the buyer. The date of closing is defined in this section.
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Paragraph 8:
POSSESSION: The date upon which the Buyer receives possession of the property is defined in this section. “At the time of closing” simply means that the Seller leaves the closing with their proceeds and the Buyer leaves the closing with all the keys to (and possession of) the empty property.
If possession of the property is to take place at a time other than closing, it is specified here when possession will take place as well as the dollar amount of use and occupancy (rent) the Seller will pay for the days they remain in possession of the property after the day of closing.
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Paragraph 9:
RESIDENTIAL REAL PROPERTY AND LEAD-BASED PAINT DISCLOSURES: In order for the contract to be valid, the Buyer must receive (if applicable*) and sign these two required forms as well as receive the EPA pamphlet “Protect Your Family From Lead in Your Home.”
Presented in question form, the “Residential Real Property Disclosure” summarizes the Seller's knowledge of the condition of the property. The intent of this form is to document the Seller's knowledge of the property's condition.
In 1978 the Federal Government outlawed the use of lead as an ingredient in residential paint products. Prior to 1978, not all paints contained lead, and thusly any property built prior to 1978 may or may not have been painted with lead-based paint. The “Lead-Based Paint Disclosure” discloses whether the property was built prior to 1978, or after 1978. It also allows the Buyer a 10-day opportunity to conduct (at their expense) a lead paint risk assessment test.
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Paragraph 10:
PRORATIONS: Any payments for property related services made by Seller that have not been fully consumed, and that the Buyer will assume responsibility for, will be prorated up to (and including) the day of closing. Example: Seller has paid June's Townhome Association fees but transfers property to Buyer on June 15. At closing, Buyer will reimburse Seller for 15 days of prorated association fees.
Prorated Real Estate Taxes: In Cook County, taxes are paid 1 year in arrears. The total yearly real estate taxes due are not known until August/September of the next year. As a result, properties closing at a time when the prior years taxes are still unknown, the parties agree to prorate the tax credit based upon ______% of the last known tax bill. This amount is usually 110% during a triennial reassessment year, or 105% during the non-reassessment years. Since the tax bill is the responsibility of the current owner of the property, the tax credit represents the Seller's money given to the Buyer to pay the Seller's taxes when the tax bill arrives.
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Paragraph 11:
OTHER PROVISIONS: This paragraph confirms the inclusion of the GENERAL CONDITIONS on page 2, as well any of the selected OPTIONAL PROVISIONS found on pages 3 & 4. The optional provisions to be incorporated, as well as any other attachments should be noted in this paragraph.
DATE OF OFFER & DATE OF ACCEPTANCE – Line 72:
The date on which the offer is made (DATE OF OFFER) should be noted on this line. The DATE OF ACCEPTANCE should be added to the contract once agreement has been reached and the signatures and any initials of all parties have been executed. The DATE OF ACCEPTANCE represents the date from which all references to a specific number of days are calculated.
Example: Both the PROFESSIONAL INSPECTIONS (Paragraph 12) & ATTORNEY REVIEW (Paragraph 13) make reference to the “date of acceptance” in determining the length of time these paragraphs remain in effect.
SIGNATURE SECTION & OTHER INFORMATION - Bottom of page 1:
In order for the contract to be valid, the signatures of both parties must be placed on the contract. Addresses are required for written notices between the parties, and social security numbers are required for further identification and to complete the various federal, state, and county documents prepared at the closing.
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Paragraph 12:
PROFESSIONAL INSPECTIONS: The Buyer receives the right to conduct a variety of inspections (at their expense) on the property within 5 business days after the contract's date of acceptance. The most common inspection is the HOME INSPECTION which will provide the Buyer with a detailed report on the condition of the property. If issues arise as a result of the home inspection that are unacceptable to the Buyer, they shall serve written notice to the Seller along with the pertinent pages of the report within the 5 business days. If written agreement cannot be reached within 10 business days after the date of acceptance, either party may terminate the contract by written notice to the other party.
Other inspections that fall within the scope of this paragraph include: radon, lead-based paint, and/or wood insect infestation inspections.
Note:
The PROFESSIONAL INSPECTIONS contingency has the potential of creating significant misunderstandings as to the rights, responsibilities, and existence of minor repair items and routine maintenance issues that warrant further clarification before proceeding. Click here for additional information.
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Paragraph 13:
ATTORNEY REVIEW: Both seller's and buyer's attorney may approve, disapprove, or make modifications to the contract, other than the stated purchase price within 5 business days after the contract's acceptance. If written agreement cannot be reached as to the resolution of the modifications, either party may terminate the contract by written notice to the other party.
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Paragraph 14:
PLAT OF SURVEY: Part of the seller's obligation is to provide the purchaser with a recent plat of survey showing lot dimensions, easements, setbacks, etc.
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Paragraph 15:
NOTICE: This paragraph defines the ways in which notices between parties must occur.
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Paragraph 16:
THE DEED: The most important document in the sale of real estate is the deed. This paragraph defines specifically which ownership rights are being transferred from the seller to the buyer.
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Paragraph 17:
TITLE: Another obligation of the seller is to provide a title insurance policy to the buyer prior to closing. A title insurance company will perform a title search identifying any and all liens and/or restrictions on the property. Once satisfied that the property will change hands free of any complications that would hinder the buyer's use and ownership, the title company issues an insurance policy protecting the buyer's interest.
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Paragraph 18:
POSSESSION ESCROW: In the event possession of the property is to be delivered to the buyer any time after the closing, 2% of the seller's proceeds are withheld from them until possession is delivered. If possession is not delivered by the predetermined date, penalties accrue as outlined in this paragraph.
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Paragraph 19:
REAL ESTATE PROPERTY TAX ESCROW: This paragraph defines the way unpaid property taxes will be paid on property that has not previously been taxed as improved property, such as new construction.
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Paragraph 20:
PERFORMANCE: It is expected that both parties act in good faith in order to complete the transaction as written. In the event either party defaults, this paragraph defines the legal options available to the parties.
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Paragraph 21:
DAMAGE TO REAL ESTATE PRIOR TO CLOSING: If the property is significantly damaged prior to closing, the buyer has the option of canceling the contract.
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Paragraph 22:
SELLER REPRESENTATIONS: The seller warrants that they have no knowledge of any pending issues pertaining to the property.
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Paragraph 23:
CONDITION OF REAL ESTATE AND INSPECTION: This paragraph describes the condition is which the property must be delivered. It also allows the buyer to inspect the property prior to closing to confirm compliance.
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Paragraph 24:
GOVERNMENTAL COMPLIANCE: Parties agree to comply with IRS requirements.
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Paragraph 25:
ESCROW CLOSING: An escrow closing is conducted by a paid third party assuring complete compliance with the contract.
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Paragraph 26:
FLOOD INSURANCE: Federal flood insurance may be required at the buyer's expense. Maps maintained by the Federal Emergency Management Agency (FEMA) determine whether a property requires flood insurance.
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Paragraph 27:
FACSIMILE: Faxed documents are binding.
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Paragraph 28:
BUSINESS DAYS: Definition of a business day.
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Paragraph 29:
CONDOMINIUMS: Additional obligations arise in the sale of a condominium as outlined in this paragraph.
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Paragraph 30:
CHOICE OF LAW/GOOD FAITH: This contract is governed by the laws of the state of Illinois.
Note: Paragraphs 31 through 44 are optional provisions that apply only if initialed by all parties. Typically, none or very few of these provisions are used in any one transaction.
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Paragraph 31:
SALE OF BUYER'S REAL ESTATE: If the buyer currently owns real estate that must sell first in order to proceed on this contract, then paragraph 31 should be used.
Section A (REPRESENTATIONS ABOUT BUYER'S REAL ESTATE) describes the current status of the buyer's property.
(1) Address of buyer's property
(2) Buyer has or has not entered into a real estate contract to sell his real estate (check box). In the event the buyer has entered into a contract to sell his real estate, additional check boxes in this section define the current state of that contract.
(3) Buyer has or has not listed his real estate with a licensed real estate agent (check box).
(4) Buyer will or will not list his property with a licenses real estate agent (check box).
(5) Buyer authorizes seller or his agent to verify all of the above.
Section B (SALE AND/OR CLOSE OF BUYER'S REAL ESTATE) This contract is contingent upon the following actions taking place by the inserted date. In the event no contract or closing occurs by those dates and the buyer does not request an extension of time, the contract shall be null and void and all earnest money must be returned to the buyer.
(1) The date by which the buyer must have a signed offer on their real estate in order to proceed with this purchase.
(2) The date by which the buyer must close the sale of his real estate in order to proceed with this purchase.
Section C (SELLER'S RIGHT TO CONTINUE TO OFFER REAL ESTATE FOR SALE) defines the parameters of seller's rights to continue offering real estate for sale.
(1) Defines the length of time the buyer has to waive their contingency or step aside in the event the seller notifies them of another bona fide offer. This time frame is usually between 24 and 72 hours.
(2) If the buyer waives the contingencies described in paragraph #31 D (below), then the contract remains in full force and effect.
(3) If the buyer does not waive the contingency(s) in paragraph #31 B (above), then this contract shall be null and void and all earnest money must be returned to the buyer.
Section D (WAIVER OF CONTINGENCIES) defines how the buyer must waive their contingencies.
Note: This section includes the option of increasing the buyers earnest money in the event buyer waives contingencies.
Section E (NOTICE FOR THIS CONTINGENCY ONLY) defines the options for delivering notice regarding this contingency.
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Paragraph 32:
CANCELLATION OF PRIOR REAL ESTATE CONTRACT: In the event that either party has entered into a prior real estate contract, this contract is subject to the written cancellation of the prior contract by the inserted date.
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Paragraph 33:
INTEREST BEARING ACCOUNT: If the buyer's earnest money totals $10,000 or more, the buyer can request that it be deposited into an interest bearing account for their benefit.
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Paragraph 34:
SURVEY OPTIONS: With this paragraph activated, the survey shall additionally show all corners staked, flagged or otherwise monumented. Note: In typical subdivided neighborhoods with consistent lots this extra expense is often seen as unnecessary.
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Paragraph 35:
WELL AND/OR SEPTIC/SANITARY INSPECTIONS: If the property has a well (water supply) and/or septic system (waste disposal), this paragraph would be activated in order to determine the condition of these systems.
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Paragraph 36:
CONFIRMATION OF DUAL AGENCY: If the listing agent is facilitating this transaction alone and is acting as a dual agent, this paragraph must be initialed by both the buyers and sellers.
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Paragraph 37:
“AS IS” CONDITION: If the seller is offering the property in “as is” condition, the seller makes no representations, warranties, or guarantees regarding the property or the personal property being offered. The buyer agrees to accept the property in its current condition. The buyer may choose to conduct a home inspection of the property, but the provisions of the professional inspections paragraph (12) do not apply if this paragraph is activated.
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Paragraph 38:
VA OR FHA FINANCING: This paragraph is applicable if the buyer will be securing a VA (Veteran's Administration) or FHA (Federal Housing Authority) backed loan. The buyer may terminate this contract if the appraised value falls short of the agreed upon purchase price. Additionally, the seller agrees to pay additional miscellaneous expenses required by the lender not to exceed $200.00.
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Paragraph 39:
INTERIM FINANCING: This paragraph is used if the purchaser owns a property that will be sold, but does not need to sell the property in order to purchase subject property. This paragraph protects the purchaser in the event they do not receive approval for their interim loan.
Note: The mortgage contingency (paragraph 6) does not protect the buyer who is seeking interim financing.
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Paragraph 40:
ASSUMPTION OF SELLER'S MORTGAGE: If the seller has an assumable mortgage on the property, and is willing to allow the buyer to assume it, this paragraph should be used. The buyer must provide the difference between the current mortgage balance and the purchase price.
Note: Assumable mortgages are increasingly rare. Most mortgages must be paid in full at the time of sale.
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Paragraph 41:
ARTICLES OF AGREEMENT FOR DEED OR PURCHASE MONEY MORTGAGE: This paragraph outlines the details of a specific form of seller financing known as Articles of Agreement for Deed or a Purchase Money Mortgage. With this type of financing, the seller has legal title to the property until paid in full. The buyer has equitable title during the payment period.
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Paragraph 42:
VACANT LAND: If the property is unimproved (vacant land), this contingency gives the buyer the opportunity to obtain a percolation/soil test necessary to obtain building and septic system permits.
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Paragraph 43:
NEW CONSTRUCTION: When buying new construction in some areas, this paragraph may be used if the final agreement will be on a builder provided contract.
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Paragraph 44:
SPECIFIED PARTY APPROVAL: This contingency allows for the approval of a specific party within five business days before this contract is in full force.
Example: One member of a transferring couple makes a house hunting trip and finds the perfect house. After speaking to the absent member by phone, they agree to make an offer. This contingency allows the missing member the opportunity to approve or disapprove the purchase.
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