1. Washington Real Estate Fundamentals
Lesson 9:
Purchase and Sale Agreements
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2. 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
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3. 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.
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4. Purchase and Sale Agreements Creating the contract
Like any contract, purchase and sale agreement created through offer and acceptance.
Offeror: buyer
Offeree: seller
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5. 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.
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6. 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.
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7. 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
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8. 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
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9. 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
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10. 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
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11. 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
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12. 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.
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13. 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.
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14. 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
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15. 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.
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16. 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.
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17. 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
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18. 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.
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19. 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.
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20. 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
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21. 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.
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22. 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.
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23. 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
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24. 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.
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25. 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
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26. 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
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27. 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.
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28. 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.
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29. 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.
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30. 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.
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31. 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.
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32. 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.
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33. 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
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34. 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.
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35. 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).
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36. 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.
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37. 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.
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38. 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.
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39. 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.
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40. 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.
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41. 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.
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42. 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.
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43. 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
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44. 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.
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45. 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.
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46. Contingencies Types of contingencies
Common types of contingencies:
financing contingency
sale of buyer’s home contingency
inspection contingency
second buyer contingency
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47. 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.
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48. 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?
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49. 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
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50. Types of Contingencies Inspection
Agreement may have contingencies for various types of inspections or tests, such as:
structural inspection
geologic inspection
pest control inspection
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51. 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.”
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52. 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
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53. 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.
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54. Summary Contingencies
Contingency
Good faith effort
Waiver
Financing contingency
Sale of buyer’s home contingency
Bump clause
Inspection contingency
Second buyer contingency
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55. 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
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56. 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)
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57. 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
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58. 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.
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59. 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.
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60. 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.
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61. 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.
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62. 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
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63. 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.
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64. 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
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65. 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.
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66. 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
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