Washington Real Estate Fundamentals Lesson 9: Purchase and Sale Agreements © 2011 Rockwell Publishing

Purchase and Sale Agreements Purchase and sale agreement: Contract between real estate seller and buyer. Also called: sales contract earnest money agreement purchase agreement contract of sale © 2011 Rockwell Publishing

Purchase and Sale Agreements Purpose and effect Main purpose: to bind buyer and seller to terms of agreement until transaction closes. Contract can’t prevent one party from backing out, but gives other party a legal remedy if that happens. © 2011 Rockwell Publishing

Purchase and Sale Agreements Creating the contract Like any contract, purchase and sale agreement created through offer and acceptance. Offeror: buyer Offeree: seller © 2011 Rockwell Publishing

Purchase and Sale Agreements Functions of contract form Form initially serves as buyer’s offer. When seller signs form to accept offer, it becomes binding contract. Buyer has equitable title (court could order seller to deed property). Seller still has legal title. © 2011 Rockwell Publishing

Purchase and Sale Agreement Who may prepare the contract Generally, only lawyers may draw up contracts for other people. Non-lawyer drafting a contract is unauthorized practice of law. Exception: real estate agents may fill in blanks on approved purchase and sale agreement form. © 2011 Rockwell Publishing

Who May Prepare the Contract Standard of care Agent preparing purchase and sale agreement: held to same standard of care as an attorney can’t use ignorance of legal requirements as defense against claims of negligence © 2011 Rockwell Publishing

Who May Prepare the Contract Limitations Agent should not go beyond filling in blanks and attaching simple addenda. If more complicated clauses needed, agent should: find more appropriate form for client’s needs, or arrange for parties to have agreement or addendum drawn up by attorney © 2011 Rockwell Publishing

Who May Prepare the Contract Limitations Agent cannot: fill out form in transaction where agent isn’t representing either party charge separate fee for filling out forms © 2011 Rockwell Publishing

Summary Purchase and Sale Agreements Purpose of purchase and sale agreement Creating the contract Offeree and offeror Functions of contract form Who may prepare the contract Unauthorized practice of law Standard of care © 2011 Rockwell Publishing

Elements of the Agreement Elements of a purchase and sale agreement include: Parties Property description Price and method of payment Closing date Possession date Type of deed and condition of title Liens and other encumbrances Conditions or contingencies © 2011 Rockwell Publishing

Elements of the Agreement Parties Both buyer and seller must have capacity to contract. If a party is underage or mentally incompetent, agreement is voidable or void. © 2011 Rockwell Publishing

Parties to the Agreement Who must sign Agreement must be signed by everyone with an ownership interest in the property. Otherwise contract may only be partially enforceable (or not enforceable at all). If a party is married, always best to have spouse sign, too. Joinder requirement for community real property. © 2011 Rockwell Publishing

Elements of the Agreement Property description Agreement must contain description adequate to identify the property. Full legal description always best. If it won’t fit in space available, agent should add attachment. Any attachment to agreement must be: referenced in main form (addenda) initialed by all parties © 2011 Rockwell Publishing

Elements of the Agreement Price and method of payment Agreement should state: total purchase price earnest money and downpayment amounts Assumption: attach payment terms addendum. Seller financing: attach payment terms addendum and copy of finance instruments. Institutional loan: agreement should usually include financing contingency. © 2011 Rockwell Publishing

Elements of the Agreement Included items Provision lists appliances, window coverings, and other items that will be included in sale and covered by purchase price. Many items listed would be included anyway, since they qualify as fixtures. Any fixtures seller plans to take should be specifically excluded from sale in an addendum. © 2011 Rockwell Publishing

Elements of the Agreement Closing date Agreement must set closing date, usually defined as date on which: deed delivered to buyer sales proceeds disbursed to seller documents recorded © 2011 Rockwell Publishing

Closing Date Contingencies Closing date must allow parties enough time to meet various contingencies, such as: buyer arranging financing buyer selling home seller making repairs seller clearing liens If either party doesn’t want transaction to close before a certain date, clause stating that may be added. © 2011 Rockwell Publishing

Closing Date Extension Closing date is also termination date of purchase and sale agreement. If contingency may not be fulfilled by agreed closing date, parties should sign extension agreement. Extension agreement amends original contract to defer closing date. © 2011 Rockwell Publishing

Elements of the Agreement Closing agent and closing costs Agreement usually includes provisions: appointing escrow agent or other closing agent allocating payment of closing costs between parties © 2011 Rockwell Publishing

Elements of the Agreement Possession date Possession of property ordinarily transferred from seller to buyer on closing date. If possession will be transferred before or after closing, parties should execute separate rental agreement. © 2011 Rockwell Publishing

Elements of the Agreement Casualty loss Agreement may address what happens if property destroyed or damaged before closing. Typically, buyer won’t be required to complete the transaction. Possible exception if buyer has already taken possession of property. © 2011 Rockwell Publishing

Elements of the Agreement Seller’s representations Agreement usually contains provisions in which seller: makes representations or warranties about condition of certain aspects of property, such as utilities states that there are no known violations of laws relating to the property, such as zoning ordinances © 2011 Rockwell Publishing

Elements of the Agreement Conveyance and title Agreement should specify type of deed that will be used to convey title. Ordinarily warranty deed Seller agrees to provide marketable title: title free of undisclosed encumbrances or title defects. Seller will remove any liens buyer is not assuming before closing. © 2011 Rockwell Publishing

Elements of the Agreement Time is of the essence clause Time is of the essence clause: Provision stating that deadlines set in agreement may be strictly enforced. Failure to meet deadline may be treated as material breach of contract. Non-breaching party decides whether to: sue for breach of contract waive deadline and proceed © 2011 Rockwell Publishing

Summary Elements of the Agreement Parties Property description Price and method of payment Included items provision Closing date Possession and casualty loss provisions Seller’s warranties Conveyance and title Time is of the essence clause © 2011 Rockwell Publishing

Elements of the Agreement Default provisions Purchase and sale agreement usually allows parties to choose what seller’s recourse will be if buyer defaults (breaches contract): election of remedies, or liquidated damages Election of remedies: After buyer breaches, seller will be able to choose between keeping earnest money or suing for damages. © 2011 Rockwell Publishing

Default Provisions Liquidated damages In most cases, instead of giving seller election of remedies, parties agree earnest money will be liquidated damages. Liquidated damages: Sum the contracting parties agree in advance will serve as compensation if one party breaches. Nonbreaching party gives up right to sue for more money. © 2011 Rockwell Publishing

Default Provisions Liquidated damages If purchase and sale agreement provided that earnest money will be liquidated damages, seller keeps deposit if buyer defaults. Seller doesn’t need to prove any actual financial loss. But seller also can’t sue buyer for more money. Keeping deposit is seller’s sole remedy. © 2011 Rockwell Publishing

Default Provisions Liquidated damages In Washington, real estate seller may keep no more than 5% of sales price as liquidated damages. Under provision in many listing agreements, seller’s brokerage firm entitled to half of seller’s liquidated damages as compensation. © 2011 Rockwell Publishing

Default Provisions Attorneys’ fees Purchase and sale agreement usually has attorneys’ fees provision. In lawsuit related to contract, losing party required to pay other party’s court costs and attorneys’ fees. © 2011 Rockwell Publishing

Elements of the Agreement Agency disclosure Washington law requires agents in a transaction to disclose, in writing, which party they’re representing. Disclosure must be made to each party before that party signs an offer. Most purchase and sale agreements have provision that fulfills this disclosure requirement. © 2011 Rockwell Publishing

Elements of the Agreement Earnest money Purchase and sale agreement has space to fill in amount of buyer’s earnest money deposit. Agreement also usually has checkboxes to indicate form of deposit: cash check promissory note other © 2011 Rockwell Publishing

Earnest Money Holding check pending acceptance Buyer often gives deposit check to selling agent before offer submitted to seller. Form may authorize agent to hold check undeposited until seller decides whether to accept offer. If seller rejects offer, agent returns check to buyer. © 2011 Rockwell Publishing

Earnest Money Delivering check after acceptance Form may also allow buyer to wait until after seller accepts offer to deliver check to agent. Sets time limit for delivery (certain number of days after acceptance). © 2011 Rockwell Publishing

Earnest Money Depositing check Once seller has accepted offer, selling agent: delivers buyer’s check to designated closing agent, or deposits check into brokerage trust account. © 2011 Rockwell Publishing

Earnest Money Amount of deposit Appropriate amount varies with local custom. Can be any amount acceptable to both buyer and seller. But seller can keep no more than 5% of price as liquidated damages. Any amount over 5% must be refunded to defaulting buyer. Entire deposit applied to purchase price if transaction closes. © 2011 Rockwell Publishing

Earnest Money Handling disputed deposit If transaction falls through and parties can’t agree who’s entitled to deposit: In some states, brokerage turns funds over to court by filing interpleader action. Under Washington law, brokerage notifies all parties of intention to disburse funds. Purchase and sale agreement may also have provision concerning disputed funds. © 2011 Rockwell Publishing

Elements of the Agreement Brokerage fee provision Purchase and sale agreement usually has brokerage fee provision. Seller and buyer agree to compensate agents as promised in any earlier agreements. © 2011 Rockwell Publishing

Elements of the Agreement Deadline for acceptance Form has clause in which buyer sets deadline for acceptance of offer. Required manner of acceptance may also be specified. Acceptance must always be in writing to satisfy statute of frauds. If seller fails to accept in required manner by deadline, offer expires. © 2011 Rockwell Publishing

Purchase and Sale Agreements Counteroffers Offeree who changes any terms is making counteroffer, not accepting offer. Counteroffer terminates offer, so contract formed only if other party accepts counteroffer. Best to use separate counteroffer form to avoid confusion. © 2011 Rockwell Publishing

Purchase and Sale Agreements Amendments Once purchase and sale agreement signed, can be modified only with: written amendment signed by all parties Amendment changes terms after contract signed. In contrast, addendum adds to or changes terms before contract signed. © 2011 Rockwell Publishing

Summary More Elements of the Agreement Default provisions Seller’s election of remedies Liquidated damages Attorneys’ fees Agency disclosure Earnest money provision Interpleader Brokerage fee provision Counteroffer Amendment © 2011 Rockwell Publishing

Purchase and Sale Agreements Contingencies Most purchase and sale agreements are contingent on one or more events or conditions. If a condition not fulfilled, agreement terminates without liability. Buyer entitled to have earnest money refunded. Contingency addendum form should be attached for most contingencies. © 2011 Rockwell Publishing

Contingencies Good faith effort and waiver Good faith effort to fulfill contingency required. Party can’t get out of contract by failing to take steps to meet condition on time. However, party benefited by contingency may choose to waive it and proceed with contract. © 2011 Rockwell Publishing

Contingencies Types of contingencies Common types of contingencies: financing contingency sale of buyer’s home contingency inspection contingency second buyer contingency © 2011 Rockwell Publishing

Types of Contingencies Financing Most residential transactions contingent on whether buyer can obtain needed financing. Contingency sets: type of loan downpayment amount application deadline Special requirements for FHA, VA, or RD financing. © 2011 Rockwell Publishing

Types of Contingencies Sale of buyer’s home Residential transactions often contingent on whether buyer can sell current home. Contingency should set deadline and specify what event will fulfill it: Acceptance of offer? Closing? © 2011 Rockwell Publishing

Sale of Buyer’s Home Bump clause Contract contingent on sale of buyer’s home usually has bump clause. Bump clause: Allows seller to keep property on market pending fulfillment of contingency. If seller gets another offer, can demand that buyer: waive contingency, or rescind contract © 2011 Rockwell Publishing

Types of Contingencies Inspection Agreement may have contingencies for various types of inspections or tests, such as: structural inspection geologic inspection pest control inspection © 2011 Rockwell Publishing

Inspection Standard for judging results Inspection contingency should establish standard for acceptable inspection results. May just say results must be “satisfactory” to buyer. Or objective standard may be set. For example, “if necessary repairs don’t exceed $500.” © 2011 Rockwell Publishing

Inspection Other provisions Contingency clause should also establish: who orders and pays for inspection how buyer will give seller notice of objection to inspection report contents seller’s option to perform repairs or to terminate sale time limit for re-inspection of repairs © 2011 Rockwell Publishing

Types of Contingencies Second buyer Second buyer contingency allows seller who already has a contract to accept second offer. Second sale is made contingent on failure of first sale. If contingency in first sale not fulfilled or first sale fails for some other reason, second contract becomes binding. © 2011 Rockwell Publishing

Summary Contingencies Contingency Good faith effort Waiver Financing contingency Sale of buyer’s home contingency Bump clause Inspection contingency Second buyer contingency © 2011 Rockwell Publishing

Property Disclosure Laws Under state and federal statutes, sellers in residential transactions must make certain disclosures to buyers. Unless exempt, a seller must: provide a seller disclosure statement comply with the lead-based paint disclosure law © 2011 Rockwell Publishing

Property Disclosure Laws Seller disclosure statement Washington law requires seller of residential property to provide disclosure statement to buyer. Residential property includes: real property with 1-4 dwelling units vacant lot zoned residential mobile home (even if classified as personal property) © 2011 Rockwell Publishing

Seller Disclosure Statement Disclosures Statutory form requires seller to disclose what seller knows about: condition of the property (including utilities) existence of easements or encumbrances other material information © 2011 Rockwell Publishing

Seller Disclosure Statement Liability Statement is for disclosure purposes only. Not part of contract between buyer and seller. Not a seller’s warranty. If inaccuracies in statement: neither seller nor seller’s agent liable, unless they knew information was wrong. © 2011 Rockwell Publishing

Seller Disclosure Statement Deadline and waiver Statement must be given to buyer within 5 business days after purchase and sale agreement signed, unless: parties agree in writing to different deadline buyer gives written waiver of right to receive statement However, buyer can’t waive right to receive Environmental section of form, if seller would answer any of those questions Yes. © 2011 Rockwell Publishing

Seller Disclosure Statement Right of rescission Buyer may rescind purchase and sale agreement within 3 business days after receiving disclosure statement. For any reason, or for no reason. Must notify seller or seller’s agent in writing. Entitled to full refund of deposit. If no disclosure statement provided, buyer may rescind agreement any time up to closing. © 2011 Rockwell Publishing

Seller Disclosure Statement New information If new information about property discovered after seller disclosure statement provided but before closing, seller must: give buyer amended statement, or take corrective action to make original statement accurate Buyer then has 3 business days to accept amended statement or rescind contract. © 2011 Rockwell Publishing

Property Disclosure Laws Lead-based paint Federal law requires sellers and landlords of housing built before 1978 to: disclose location of any known lead-based paint to buyers or tenants provide a copy of any existing inspection report concerning lead-based paint provide EPA pamphlet on lead-based paint © 2011 Rockwell Publishing

Lead-based Paint Law Requirements Buyers must also be given 10 days to have home tested for lead-based paint. This 10-day testing period doesn’t apply to tenants. Purchase and sale agreement or lease must have specific warnings and signed acknowledgments that law’s requirements were fulfilled. © 2011 Rockwell Publishing

Lead-based Paint Law Agent’s responsibilities Real estate agent in transaction with housing built before 1978 is required to make sure: seller or landlord knows and fulfills requirements of lead-based paint law purchase and sale agreement or lease contains required warnings and signatures © 2011 Rockwell Publishing

Home Warranty Plans Home warranty plan: Insurance policy that reimburses homeowner for cost of replacing failed systems, components, or appliances. Also called home protection plan. Usually short-term (a few years). Buyer may purchase coverage, or seller or agent may offer to purchase it. © 2011 Rockwell Publishing

Summary Property Disclosure Laws Seller disclosure statement Deadline for providing statement Waiver rules Right of rescission New information Lead-based paint disclosure law Home warranty plan © 2011 Rockwell Publishing