How to Buy Real Estate on Contract

• Step 1

  Secure financing. If you will need a loan to finance your land purchase, you should obtain a pre-approval letter from your lender early in your real estate search. A pre-approval letter will make you aware of your borrowing limits and may help to convince the seller that you have the ability to complete the transaction.
  

  Financing a real estate transaction. AMagill: flickr.com

• Step 2

  Set aside earnest money. Real estate sellers typically require buyers to deposit a sum of money (often one percent of the purchase price) into an escrow account with a trusted third party, such as a realtor or closing attorney. This money will be applied to the purchase price at closing. If the sale is not completed because of the buyer's fault, the seller keeps the earnest money. If the seller is at fault, the buyer is entitled to a refund.

• Step 3

  Agree on a price. Before settling on a purchase price, you should determine whether you will have enough cash to cover your closing costs. Sellers will often agree to pay a buyer's closing costs in exchange for an increase the purchase price by same amount. Note, however, that most lenders will not allow the total contract price to exceed the appraised value of the property.

• Step 4

  Agree on a closing date. Don't be pressured to close in a hurry---agreeing to a quick closing date can be a costly mistake. Thirty days is a common deadline in residential contracts, while longer periods are appropriate in commercial transactions. Be sure to give yourself enough time to finish the tasks you must complete before closing.

• Step 5

  Plan for contingencies. Protect yourself by insisting on contingencies that will allow you to walk away from the property if there is a problem. For example, your contract should give you the right to cancel if you cannot obtain 100 percent financing, if the property appraises for less than the contract price, or if inspections reveal uncorrected damage. If you fail to include contingency provisions in your agreement, you could be required to buy property worth far less than you had originally anticipated.

• Step 6

  Get it in writing. Land contracts must be in writing to be enforceable, so it is essential that everything you agree to orally becomes part of the written document. Your realtor or attorney can provide you with the standard contract form used in real estate transactions in your state.
  

  Document execution. tdenham: everystockphoto.com

• Step 7

  Sign the document. After you are fully satisfied with the agreement, both parties must sign the document. Failure to remember basic step could make the agreement unenforceable.

• Step 8

  Notify your lender and closing attorney. Deliver the executed contract to your closing attorney as quickly as possible to minimize the possibility of confusion and misunderstandings that could delay closing.

• 5
• Loan pre-approval Letter Earnest money Contract document
• Loan pre-approval Letter
• Earnest money
• Contract document
• The law applicable to real estate transactions varies from state to state. You should consult a competent professional for specific advice concerning your situation.
• The law applicable to real estate transactions varies from state to state. You should consult a competent professional for specific advice concerning your situation.

References & Resources

• Cornell University Law School Legal Information Institute
• California Department of Real Estate Reference Guides