Illinois Residential Real Estate Contracts Explained

When you sign a contract for the purchase or sale of residential real estate, you will typically have 5 days to review the contract with your attorney in order for your attorney to modify its terms.  Check out our previous article, Attorney Modification of Residential Real Estate Contracts, for more on this topic.   In this article, we will discuss the top 5 things you should be on the look out for when reviewing the contract with your real estate attorney.

Purchase Price and Earnest Money  

The most important thing to confirm with your attorney is that the amount of the purchase price and earnest money are correct.  Earnest money is a percentage of the purchase price paid up front by the buyer and held in escrow by a third party called the "escrowee."  The escrowee can be either the buyer or seller's broker or attorney or any other third party mutually agreed by the parties.  If the deal falls through, the seller will often have the right to keep the earnest money, depending on the terms of the contract and the reason that the deal failed to close.  

It's important to carefully review the contract with your attorney to make sure that the description of how the earnest money will work is correct, and that you understand the contingencies that will allow either the seller to keep the earnest money or the buyer to have it returned.  If the contract is contingent on obtaining financing or on other factors, such as appraisal and home inspection, the buyer will have their earnest money returned.  It is important that your understanding of the terms under which the earnest money will be returned comports with the terms of the contract. 

Fixtures and Personal Property Included in the Transaction

The Multi-Board Residential Real Estate Contract that most real estate brokers use contains a section listing common appliances and other fixtures, such as refrigerator, oven, and smoke detectors, that can be checked off by the realtor to indicate that they are included in the purchase price.  

This section also contains some blank spaces where the realtor can write in other items are either included or not included in the transaction.  You should carefully review this section to make sure that you understand and agree with the items that are included in and excluded from the sale. 

Mortgage Contingency

Many residential real estate purchases are conditional upon the buyer obtaining appropriate financing for the transaction.  The key word here is "appropriate."  The contract will often be contingent upon the buyer receiving a certain type of mortgage (fixed, adjustable,  conventional, FHA, or VA) for a certain percentage of the purchase price at an interest rate not to exceed a certain percentage.  

If the buyer is unable to obtain a mortgage on these terms, they are often permitted to back out of the deal and have their earnest money returned.  It is important to ensure that all of the terms listed in this paragraph are the same as those the parties agreed to.  This paragraph will also contain deadlines for the buyer to provide certain documentation to the seller showing that the loan process is moving forward.  If the buyer fails to meet these deadlines without a written extension from the seller, the seller can back out of the deal.  Therefore, it is important for the buyer to understand and record these dead.

Tax Prorations

The purchaser will ultimately be responsible for paying the entire real estate tax bill for the year in which the transaction happened, and sometimes for the previous year.  Because the amount of property taxes for the year or years in question is uncertain, the parties will try to estimate the amount that the taxes will ultimately be.  Typically the contract will provide that the taxes for the year in question will be estimated to be 105% or 110% of the previous year's tax bill.  This amount will then be "prorated" or divided based on the number of days in the year that the seller has owned the property.  

The seller will then pay their prorated share of the tax bill to the buyer at closing.  Even though the buyer will have to ultimately pay the full amount of the tax bill when due, this prorated payment made by the seller at closing allows the buyer to be compensated for the taxes that accrued prior to his or her ownership.  It is important to review this paragraph closely with your attorney to make sure that the estimated taxes will be calculated at the correct percentage of the previous year's tax bill.  

Optional Provisions

The standard Multi-Board Residential Real Estate Contract contains several "optional provisions" that apply only if initialed by both parties such as the contract being contingent on the seller closing on a separate real estate purchase, the seller's right to continue to offer the real estate for sale prior to closing, and the property being sold in "as is" condition.  You should review this section with your attorney to make sure that any special circumstances in your deal are actually included in the contract.