Real Estate Contracts: Common Clauses and Legal Pitfalls

5 August 2025

Real estate contracts are the backbone of buying and selling properties. Whether you're purchasing your first home or investing in commercial real estate, contracts ensure everything is legally binding and fair. However, not all contracts are created equal. Some contain tricky clauses, while others leave loopholes that can lead to legal nightmares.

In this article, we’ll cover the most common clauses in real estate contracts and the legal pitfalls to watch out for. If you’re diving into a property transaction, this guide will help you avoid costly mistakes.

Common Clauses in Real Estate Contracts

Real estate contracts aren’t just about the price and location. They contain multiple clauses that protect buyers, sellers, and even lenders. Here are some key ones:

1. Purchase Price and Payment Terms

This clause defines how much is being paid for the property and how it will be paid. Typically, it includes details on:

- The total purchase price
- Initial deposit (earnest money)
- Financing terms (if applicable)
- Payment schedule

A vague or poorly written payment clause can cause disputes, especially if payment deadlines aren’t clearly defined.

2. Financing Contingency

Not all buyers have the full amount ready upfront. A financing contingency allows buyers time to secure a mortgage. If they can’t get approved, they can back out without penalties.

However, if this clause isn’t well-structured, it may lead to legal battles, especially if the seller assumes the buyer is locked into the deal.

3. Inspection Contingency

A home inspection contingency gives buyers the right to inspect the property before finalizing the deal. If major issues (like structural damage or plumbing failures) are found, the buyer can:

- Request repairs
- Renegotiate the price
- Walk away from the contract

Without this clause, buyers may be forced to purchase a property with hidden defects.

4. Appraisal Contingency

This clause protects buyers using a mortgage. If the home’s appraisal comes in lower than the agreed purchase price, the buyer can renegotiate or withdraw from the deal.

Sellers should be cautious, though. If not structured correctly, this clause can give buyers too much leeway to back out at their convenience.

5. Closing Date and Possession

The contract should clearly state:

- When the sale will close
- When the buyer takes possession of the property

Ambiguities in this clause can lead to delays or even legal action if the seller refuses to vacate on time.

6. Earnest Money Deposit

Earnest money is a deposit showing that the buyer is serious about purchasing the property. The contract should specify:

- How much is required
- Conditions under which the deposit is refundable
- Who holds the deposit (buyer’s agent, escrow company, etc.)

A poorly defined earnest money clause can lead to disputes if the buyer backs out and wants their money returned.

7. Title and Ownership Clauses

This outlines the seller's obligation to provide a clear title. It ensures the property is free of liens or legal disputes. If this clause isn’t properly structured, the buyer may inherit legal troubles tied to the property.

8. Default and Remedies Clause

This section explains what happens if either party breaches the contract. It defines:

- Consequences for failing to meet contract obligations
- Legal actions the non-breaching party can take

Without a clear default clause, it may be difficult to resolve legal disputes without lengthy (and costly) court battles.

9. Contingency for Selling Existing Home

Many buyers need to sell their current home before purchasing another. This clause allows a buyer to withdraw if they can’t sell their existing property within a set period.

Sellers should be cautious—agreeing to this condition might mean keeping their property off the market with no guarantee the buyer will follow through.

10. Dispute Resolution Clause

Real estate deals don’t always go smoothly. This clause determines how disputes will be handled—through mediation, arbitration, or court proceedings.

Without a dispute resolution clause, legal conflicts can drag on, costing both parties time and money.

Legal Pitfalls to Watch Out For

Even with well-crafted contracts, some legal pitfalls can blindside buyers and sellers. Here are some red flags to be aware of:

1. Unclear or Vague Language

A contract full of legal jargon or unclear language can lead to misunderstandings. If a clause is ambiguous, it may be interpreted differently, leading to disputes. Always ensure contract terms are specific and leave no room for assumptions.

2. Omitting Important Contingencies

Skipping contingencies (like financing, inspection, or appraisal) can be risky. Without them, a buyer might be forced to complete a purchase even if they discover serious issues later.

3. Not Checking for Liens or Title Issues

Some properties have outstanding debts or ownership disputes. Failing to conduct a title search can mean inheriting someone else’s legal mess. Always ensure the contract requires a clear title before closing.

4. Missing Deadlines and Expiration Dates

Contracts contain deadlines for financing approval, inspections, and closing. If these aren't clearly defined, one party may try to delay the process indefinitely. Ensure all deadlines are realistic and clearly stated.

5. Forgetting to Include an Escape Clause

Life is unpredictable. A buyer might lose their job, or a seller might find a better deal. An escape clause (also known as a kick-out clause) allows either party to back out under specific conditions without major penalties.

6. Overlooking Legal Fees and Closing Costs

Real estate transactions come with hidden costs—taxes, legal fees, and closing costs. The contract should clearly state who covers these expenses to avoid last-minute surprises.

7. Not Consulting a Real Estate Attorney

Many people rely on agents to handle contracts, but agents aren’t lawyers. If a contract feels complex or includes unusual terms, hiring a real estate attorney can prevent costly legal mistakes.

How to Protect Yourself

- Read Every Clause Carefully – Don’t skim through the contract. Pay attention to the fine print.
- Negotiate Terms When Necessary – If something doesn't sit right, negotiate before signing.
- Don’t Rush the Process – Give yourself time to review everything thoroughly.
- Get Everything in Writing – Verbal agreements hold no legal weight. Ensure all terms are documented.

Final Thoughts

Real estate contracts are legally binding agreements that require careful review. The smallest mistake or overlooked clause can lead to major financial and legal problems. Whether you're buying or selling, understanding these common clauses and legal pitfalls can save you from future headaches.

If you’re ever in doubt, don’t hesitate to consult a real estate attorney. It’s better to pay for legal advice upfront than to face a lawsuit later.