Understanding Your Purchase Contract: Key Terms to Know
The short answer
- Know every contingency deadline — and remove contingencies in writing only when you are sure
- Read every seller disclosure and compare it with your inspection
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Why this matters
Your purchase contract is the most important document in the transaction. It spells out what you are buying, for how much, under what conditions, and what happens if things go wrong. Read it carefully before you sign.
Purchase Price and Earnest Money
The contract states the agreed price, your earnest money deposit, when it is due, and who holds it. In California the deposit goes to escrow, usually within three business days of acceptance, and is often around 3% of the price, but negotiable.
Contingencies and Deadlines
Contingencies are conditions that must be met for the sale to proceed. The most common: loan (you can cancel if financing does not come through on the contract's terms), inspection (you can negotiate or cancel based on findings), and appraisal (you can cancel or renegotiate if the value comes in low). In California's standard form, most run 17 days unless you write in other dates, and you remove each one in writing. Once removed, canceling for that reason can put your deposit at risk. If a required seller disclosure, such as the Transfer Disclosure Statement, arrives after your offer, you have three days (five if mailed) to terminate in writing.
Closing Date and Possession
The contract specifies when escrow closes and when you take possession. In California the sale closes when the deed records, and possession is usually tied to close of escrow, unless a rent-back lets the seller stay for a set period. Make sure you understand exactly when you get the keys.
Default and Remedies
If you back out without a valid contingency, what you could lose depends on your contract. If both of you initialed a liquidated damages clause, the seller generally keeps the deposit instead of suing, and for a home you will live in, the amount kept is presumed reasonable only up to 3% of the price. Without that clause, the seller can sue for actual damages, which can be more than your deposit. If the seller refuses to sell, you may be able to sue for specific performance or seek damages.
Everything to remember
- Know every contingency deadline — and remove contingencies in writing only when you are sure
- Read every seller disclosure and compare it with your inspection
- Confirm when you actually take possession — it may not be the day you sign
- If you back out outside your contingencies, the seller may be able to keep your deposit, depending on your contract
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