California Real Estate Practice Chapter 7 Rockwell Slides
Purchase agreement
(Deposit receipt) A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Purchase Agreement: Provisions
-Identifying the parties -Property description -Purchase price -Closing date -Agency -Finance terms
interpleader action
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Purchase Agreement Provisions: Sale of buyer's property
Often, the buyer needs to sell her current home in order to have the money to purchase a new home. The buyer will not want to be obligated to go through with the transaction if she is unable to sell her current home. This problem can be solved by making the purchase agreement contingent on the sale of her current home. However, this purchase agreement form does not include this contingency. To make the sale of the buyer's current property a contingency, you must check the box in Section 13B and fill out and attach the proper contingency addendum form.
Purchase Agreement Addenda: Request for repair
Often, the buyer's inspection will reveal some problems with the property. The buyer should be advised to have the property professionally inspected. If an inspection reveals problems with the property, the buyer can ask the seller to correct the problems with a Request for Repair form. The seller can respond to the buyer's request on the same form. For example, the house may need a new roof and new exterior paint. The buyer may be willing to continue with the transaction and make repairs later, and might be able to negotiate a lower sales price as a result. More commonly, the buyer will want repairs completed before the close of escrow. If the buyer wants to ask the seller to make the repairs, she should use a Request for Repair form. Itemize the buyer's requests on the Request for Repair form itself or attach a list. You'll also want to attach any inspection reports or other documents that revealed the problems; this helps the seller understand what issues need to be addressed. In response, the seller can agree to all of the repairs, only some of them, or none at all. The buyer then has the choice of accepting the seller's response as written, or withdrawing her original request and submitting a new written request. If she chooses the second option, she will fill out a new Request for Repair form. Multiple forms can be used until the parties reach an agreement.
Purchase Agreements: Common mistakes
Some common mistakes that will invalidate a purchase agreement include: -an inadequate property description, -failure to have all parties sign, and -incomplete payment terms Most common mistakes made when filling out a purchase agreement form: 1. The description of the property is incorrect, or inadequate to clearly identify the property. 2. The payment terms are incomplete, especially when seller financing is involved. 3. The form is not signed by all the necessary parties. Be especially careful to avoid these mistakes.
Statutory Disclosures: Database disclosure
The last statutory disclosure is a notice contained in section 6D of the purchase agreement form. This notice provides the address of a state website that has information on the location of registered sex offenders.
Finance Terms: Buyer stated financing
A buyer might decide, as a transaction evolves, to pursue financing that's different from the ideal financing described in section 3C. If so, section 3K states that the seller has no obligation to help the buyer with that, and that the buyer must also continue to try to get the financing that is described in section 3C. The sale is NOT contingent on the buyer's ability to complete that alternate financing.
Purchase Agreement Provisions: Equal housing opportunity
A number of state and federal laws prohibit discrimination in residential real estate transactions. In section 20 of the purchase agreement form, the buyer and seller verify that the sale complies with these antidiscrimination laws.
Purchase Agreements: Requirements for a valid agreement
A purchase agreement MUST be in WRITING and MUST IDENTIFY the parties and the property. The agreement must also state: -the price, -the method of payment, -all liens and encumbrances, -the amount and terms of financing the buyer will use, and -any conditions of sale The requirements for a valid purchase agreement must have all of the essential elements required for any contract: -competent parties, -mutual consent, -a lawful purpose, and -consideration In addition, every purchase agreement must: -be in writing; -identify the parties and describe the property; -state the price and method of payment; -list the liens or other encumbrances that the buyer will assume or take title subject to; -specify the financing amount and terms, if any, to be obtained by the buyer; and -describe any conditions or contingencies that apply to the agreement. An agreement lacking any of these elements may be invalid.
Purchase Agreement Provisions: Expiration of offer
A purchase agreement form will typically include space for the buyer to state when his purchase offer will expire. Aside from expiration, there are a variety of other ways in which an offer may terminate. For example, an offer terminates if the offeree rejects it or proposes a counteroffer. It will also terminate after a reasonable period of time has elapsed. However, it's always best to include a definite termination date in an offer to purchase. Section 29 of this form sets forth the terms of acceptance and lets you fill in a specific date and time as a deadline. The form states that acceptance does not occur until a signed copy of the offer is received by the buyer or another specified party. Any offer that is not accepted in this manner expires when the deadline passes, and the good faith deposit is refunded to the buyer.
Purchase Agreement Provisions: Title and vesting
A purchase agreement should include provisions that discuss the condition in which title to the property will be conveyed. The purchase agreement should state the type of deed that will be used to convey title, and the type of title insurance the buyer will receive. The buyer will take title to the property subject to any nonfinancial encumbrances that exist at the time of acceptance. However, liens against the property must be removed prior to closing. Section 12 of this form specifies the type of deed the seller will use to convey title—a grant deed, including all oil, mineral, and water rights currently owned by the seller. This section also addresses how the buyer's title to the property will be insured. After the seller accepts the offer, the buyer will receive a preliminary title report from a title insurance company. The purchase agreement is contingent on the buyer's approval of this report and any other matters affecting the title. The preliminary title report lists liens and other encumbrances on the property, as well as any defects in the seller's chain of title discovered during the title search. The report is also an offer by the title company to issue a policy of title insurance. Unless otherwise agreed, the buyer has 17 days from acceptance to review the title report; she must then either approve it and remove the contingency, or cancel the agreement. Section 12E deals with the title insurance policy that will be issued for the buyer. It will be CLTA/ALTA homeowner's coverage, unless otherwise agreed. Remember that either the buyer or the seller may be paying for this policy, depending on whether you're in northern or southern California. If the buyer wants a different title insurance policy than the one specified in the purchase agreement, she can inform the closing agent and pay any additional cost. The seller must disclose to the buyer information about any matters affecting title, regardless of whether they appear in a title report. For example, if the seller is a party to some type of legal action, such as a divorce, a bankruptcy, or a foreclosure action, the seller may have trouble conveying clear title at closing. This fact must be disclosed to the buyer. If you are representing the buyer in this kind of situation, you should advise the buyer to seek legal advice on the issues related to the title. The buyer takes title to the property subject to any encumbrances, easements, covenants, and other restrictions that exist at the time her offer is accepted. However, any liens against the property must be removed prior to closing, unless the buyer agrees otherwise in writing. Title to the property will vest according to the buyer's escrow instructions. How the buyer takes title to the property can have significant legal and tax consequences. You should never give advice in this area. If your buyer has questions about how to take title, refer her to a lawyer.
Finance Terms: Appraisal contingency
Another important contingency is the appraisal contingency. Section 3I makes the purchase agreement contingent on the completion of an property's appraised value showing that the property is worth at least equal the to offered purchase price. This protects the buyer from having to go through with the purchase after finding out that the house is worth less than she thought. This contingency applies even if the buyer has found a lender willing to lend her the amount stated in section 3C. As with the loan contingency, at the end of the appraisal contingency period, the buyer must either remove the contingency or cancel the agreement. The appraisal contingency period is ordinarily the same as the loan contingency period, bt it doesn't have to be. If your buyer is confident of the property's value, she can check the box and waive the appraisal contingency altogether.
Time Periods: Seller and buyer deadlines
As we discussed earlier, unless otherwise agreed,the seller has 7 days from acceptance to give the buyer the disclosures and documents mentioned elsewhere in the purchase agreement, such as the lead-based paint disclosure from or a pest inspection report. In turn, the buyer has 17 days from acceptance to review those disclosures and documents, to conduct her inspections, and to remove contingencies or cancel the agreement. What happens if the buyer or seller misses a deadline? If the seller misses a deadline, the buyer may cancel the agreement. If the buyer misses a deadline, the seller first must give the buyer a notice to perform, and then may cancel the agreement if the buyer does not act within 24 hours. When a purchase agreement is canceled, the buyer is entitled to a refund of the good faith deposit, less any costs and fees. If the seller fails to provide any required disclosures or reports with the specified time period, the buyer can remove the applicable contingency or cancel the agreement. If the buyer fails either to remove contingencies or cancel the agreement after the specified time period has passed, the seller may cancel the agreement and return the buyer's good faith deposit. But the seller must first give the buyer a written Notice to Buyer to Perform. This notice gives the buyer an additional two days to act, after which the seller can cancel the agreement if the buyer doesn't respond. If the buyer or the seller cancels the purchase agreement, the buyer is entitled to receive her deposit back, minus any costs and fees. A notice of cancellation, along with mutually signed instructions to release the deposit, should be sent to the closing agent. At that point, the closing agent will release the funds.
Purchase Agreement Provisions: Joint escrow instructions
As we mentioned earlier, an escrow holder or closing agent holds funds and documents for the buyer and seller. Those funds and documents are released to the parties according to specific escrow instructions. The next section of this purchase agreement form tells the escrow agent where to find these instructions. Section 24 identifies specific portions of the purchase agreement that make up the escrow instructions, such as section 3, which discusses depositing funds with the escrow holder. In addition to following these instructions, the escrow agent may also be asked to distribute compensation to the brokers according to agreements between the parties and their brokers. The escrow agent may give the buyer and seller certain instructions that must be fulfilled and documents that must be executed in order for escrow to close. The parties agree to comply with these instructions and execute the documents as needed. Unless the parties agree otherwise, a copy of the purchase agreement must be delivered to the escrow holder within 3 business days after acceptance. The brokers are parties to the escrow only to the extent that they are compensated out of the funds held in escrow. The escrow holder agrees to notify the brokers if the buyer fails to make a deposit as agreed, or if the buyer and seller cancel the escrow. If the parties amend the purchase agreement and change any paragraph containing escrow instructions; they must provide the escrow agent with a copy of the amendment within 2 business days.
#4.Purchase Agreement Provisions: Statutory disclosures
As you know, the seller in a residential transaction is required to make a number of disclosures to potential buyers. Section 6 of the purchase agreement discusses how these disclosures will be handled. A residential seller is required by law to make a number of disclosures to buyers about property defects and natural and environmental hazards. If the property is a condominium or PUD, additional disclosures are required, such as information about lawsuits filed by or against the homeowners association. You do not need to fill in any information in this section of the form. But you should go over section 6 with your buyer and make sure she understands its provisions. In section 6A of the purchase agreement, the seller agrees to give the buyer a Real Estate Transfer Disclosure Statement, as required by state law. For properties in certain areas, a Natural Hazard Disclosure Statement is also required. The seller will need to make additional disclosures if he is aware of any of the following: the property is subject to special taxes or assessments, or is located in a Mello-Roos district; illegal controlled substances have been released on the property; the property is in or affected by an industrial use area; or the property is within one mile of a former military ordnance location. And if the property was built before 1978, federal law requires the seller to provide a lead-based paint disclosure statement. None of these statutory disclosure requirements can be waived by either the buyer or the seller.
Purchase Agreement Provisions: Buyer signature (offer)
Below the offer's expiration date, the buyer should sign and date the offer. Everything in the purchase agreement that's above the buyer's signature will be considered part of the offer. If an offer is not accepted by its stated deadline, it will expire and the buyer is entitled to a refund of the good faith deposit.
#2. Purchase Agreement Provisions: Agency
California law requires licensees in a residential real estate transaction to inform the buyer and seller, in writing, which party they represent. Before signing the purchase agreement, both parties must confirm, in writing, that they have received all the appropriate agency disclosures forms from the licensees involved in the transaction. The agency confirmation statement, in which the buyer and the seller acknowledge receiving these disclosures, is often included in the purchase agreement form. This written confirmation does not need to be on a separate form; it is typically contained in the purchase agreement itself, as in section 2 of this form. In section 2A, the parties acknowledge receipt of the agency disclosure form, "Disclosures Regarding Real Estate Agency Relationships." The buyer MUST receive this form BEFORE signing an offer; a seller MUST receive this form BEFORE being presented with an offer. In section 2B, the parties acknowledge that their brokers may represent other buyers or sellers with competing interests. For example, you are representing your buyer in this transaction, but your broker may have other agents representing other potential buyers. In section 2C, both the listing agent and selling agent fill in the names of their firms and check off which party each agent represents. Note that the form specifies that the brokers are not parties to the purchase agreement.
Prorations
Certain costs and fees associated with the property are usually prorated at closing. The costs are divided between the buyer and seller according to the number of days each party has possession of the property.
Purchase Agreement Provisions: Dispute resolution: Exclusions
Certain issues are excluded from both the mediation and arbitration clauses: -judicial or nonjudicial foreclosure; -unlawful detainer actions; mechanic's liens; and -matters belonging in probate court, small claims court, or bankruptcy court. If there is a dispute involving any of these issues, the parties are permitted to file a court action directly.
Purchase Agreement Provisions: Dispute resolution: Parties' initials
If the buyer and seller are willing to arbitrate any future disputes, they should initial the form in the spaces provided. You should not advise either party whether to initial this clause; if they have questions, refer them to an attorney for advice.
#8. Purchase Agreement Addenda
Depending on the circumstances of the sale, you may need to use just one or two of these addenda, or you may need to use several. -Buyer's Inspection Advisory -Request for Repair -Receipt for Reports -Notice to Perform -Contingency for Sale or Purchase of Other Property -Purchase Agreement Addendum -Seller Financing Addendum and Disclosure -Cooperating Broker Compensation Agreement and Escrow Instructions Each addendum is a specific C.A.R. form. At the top of each form, you'll fill in information identifying the purchase agreement. After the form is completed, it's attached to the purchase agreement and becomes incorporated into the agreement.
Purchase Agreement Provisions: Dispute resolution: Mediation
In section 26A, the buyer and seller agree to attempt to mediate any disputes before turning to arbitration or a lawsuit. The purchase agreement form requires the parties to attempt mediation if any disputes arise over the agreement. If mediation is unsuccessful, the parties can then proceed to arbitration or a civil lawsuit. If a party resorts to arbitration or a lawsuit without attempting mediation first, it will not be entitled to attorney fees even if it is the winning party. The mediation is conducted by a neutral third party and the costs are split by the buyer and seller.
Signatures: Business organizations
If a partnership, corporation, estate, or trust is buying or selling the property, you should put the name of the entity first, then have the authorized person sign for the entity. If a partnership is buying or selling the property, any general partner can bind the partnership to the purchase agreement. But it's better to get the signatures of all the partners, if possible, or for the signing partner to have specific written authorization from the others. In fact, an escrow agent is likely to require a written authorization. If one of the parties is a corporation, an officer of the corporation usually signs the purchase agreement. But an officer isn't automatically authorized to sign. He must be expressly authorized to buy or sell the property by a resolution of the board of directors, or in a power of attorney. It's a good idea to ask to see a copy of the officer's authorization. (Again, the escrow agent will probably require that anyway.) If one of the parties to a purchase agreement is a corporation or a partnership, the agreement should give the company's address and specify the state in which it is incorporated or organized. If one of the parties to a purchase agreement is a trust, the agreement must be signed by the trustee. If one of the parties is an estate, the agreement must be signed by the executor or personal representative of the estate.
Statutory Disclosures: Cancellation window
If any of the statutory disclosures are given to the buyer after she signs the offer, the buyer has a window of time in which she may cancel the purchase agreement in writing. If the disclosures were delivered in person, the buyer has 3 days to cancel. If they were delivered by mail, she has 5 days to cancel. There is no cancellation window, however, if the buyer receives the disclosures before signing the offer.
Buyer's Investigation: Repairs
If the buyer's inspections reveal any problems, the buyer must decide whether she wants those problems corrected before she purchases the property. If the buyer does want repair work completed, the parties must negotiate who will perform and pay for the repairs. Naturally, all repairs must be completed with proper permits and in compliance with applicable building codes. The repairs must be finished before the buyer's final verification of the property's condition. If the parties decide that the seller will pay for repairs, the seller can either make the repairs personally or have them done by a third party. The seller must give the buyer a written statement of the repairs and the dates they were performed, and also obtain receipts for any repairs made by third parties.
Purchase Agreement Addenda: Purchase agreement addendum: Tenant to Remain in Possession
If the parties agreed in the purchase agreement that the current tenant would remain in possession of the property, you'll need to fill out section 3 of the purchase agreement addendum. Unless otherwise agreed, the seller has 7 days from acceptance to provide the buyer with copies of all rental documents. If there are any subsequent changes to the terms of the current lease, the seller must inform the buyer, who will be entitled to cancel the sale. The buyer takes the property subject to the rights of the existing tenant, and the seller must transfer any tenant deposits to the buyer.
Purchase Agreement Provisions: Condominium/PUD disclosures
If the property being purchased is in a condominium, a planned unit development (PUD), or another type of common interest subdivision, the buyer will share ownership of common areas with ther neighbors. She'll also have to participate in homeowners association (HOA) and pay association dues. These are important considerations for a potential buyer. The seller is therefore required to disclose wheather the property is in a common interest subdivision and if so, provide specific information about it. Within 3 days of acceptance of the purchase agreement, the seller must request certain disclosures from the HOA and deliver these to the buyer. This includes documents required by law (such as a condominium declaration), disclosure of any claims or litigation involving the HOA, minutes from recent HOA meetings, and HOA contact information. The buyer's receipt and approval of these disclosures is a contingency of the agreement.
Closing and Possession: Tenant-occupied property
If the property is currently tenant-occupied, the purchase agreement provides that the property must be vacant at least five days prior to closing. This give the buyer time to conduct a final inspection after the tenant moves out. The parties can agree to a shorter or longer time period if necessary. Alternatively, if the buyer and seller agree that the current tenant will continue to occupy the house, check the box in section 5C(ii). You'll also need to fill out paragraph 3 of the Purchase Agreement Addendum form and attach the addendum to the purchase agreement.
Purchase Agreement Addenda: Purchase agreement addendum: Secondary/Assumed Loan
If the sale involves secondary or assumed financing, you should already have checked the appropriate box in section 2D of the purchase agreement. Use section 4 of the purchase agreement addendum to indicate the terms of the secondary or assumed financing. The addendum makes obtaining the specified financing a contingency of the agreement.
Acceptance of Offer: Counteroffer
If the seller wants to make changes to the offer's terms, he should still sign and date the form, but also check the box and attach a counteroffer form. This makes his acceptance subject to the changes contained in the counteroffer form. It changes his acceptance into a counteroffer.
Finance Terms: Balance of purchase price
In section 3E, you'll fill in the balance of the purchase price that the closing agent must receive prior to closing. Don't include any loan fees or other closing costs in this balance amount. On the next line, 3F, fill in the total purchase price. Make sure the amount of the good faith deposit and the amount you fill in for the balance of the purchase price add up to the total purchase price.
Finance Terms: All cash offer
If your buyer does have the ability to make an all cash offer without using a loan, she can waive the loan contingency, check the box in section 3J. Unless otherwise specified, she will then have 7 days from acceptance to provide the seller with written verification that she actually has the money available to complete the sale.
Allocation of Costs: Wood destroying pest inspection
In California, lenders typically require a structural pest control inspection, performed by a licensed pest control inspector. Most residential transactions require a structural pest control inspection, which must be performed by a licensed inspector. The inspection usually includes the property's main building and attached structures. Usually a seller will order an inspection at the time the house is listed. Use section 4A(1) to designate the inspection company used, and the party responsible for the inspection cost.
Identifying the Parties: Signatures
In California, when community real property is bought or sold, both spouses must join in the contract. So as a general rule, if a buyer or seller is married, his or her spouse should also sign the purchase agreement. If a seller is married but the property is separate property instead of community property, the seller's spouse is not strictly required to sign the agreement. But in that case, an explanation should be included with the seller's signature. For example, the seller's signature might be accompanied by the phrase, 'a married person dealing with her sole and separate property.' However, it can be very difficult to determine whether a specific piece of property is community property or separate property. So the safest course is to have both spouses sign the purchase agreement (and all the documents related to the transaction). If the sellers themselves aren't sure about the character of the property and one spouse resists signing the agreement, strongly encourage the parties to get legal advice. If only one spouse signs the agreement and the property is later determined to be community property, the agreement will be unenforceable. Remember that California's community property laws apply to registered domestic partners as well as to married couples.
#3.Purchase Agreement Provisions: Allocation of costs
In addition to the purchase price, a residential real estate transaction involves a number of closing costs, such as escrow, inspection, and title insurance fees. The buyer and seller can use the purchase agreement form to allocate inspection fees and other closing costs between them. Local custom may dictate which party usually pays each cost, but the buyer and seller are free to negotiate a different allocation. Section 4 of the purchase agreement allows the buyer and seller to identify which party will pay for each of these costs. Depending on your location, it may be customary for one party or the other to pay for a particular cost, but all items are negotiable. For inspections, note that section 4 deals only with the cost of the actual report, test, or service itself, not the cost of any repairs or other work needed as a result.
Allocation of Costs: Other inspections and reports
In addition to the wood destroying pest inspection, your buyer may want to order inspections for the property's septic system, sewage disposal system, or well. She may also want to arrange for other types of inspections not specifically listed on the form. Use section 4A, items 2 through 6, to indicate which party will pay for each of these inspections, and which will pay for a natural hazard zone disclosure report, if one is being ordered. (We'll discuss natural hazard zone disclosures in a later section.) Excerpt from purchase agreement covering other inspections and reports.
Purchase Agreement Addenda: Purchase agreement addendum: Court Confirmation
In certain situations, such as probate or bankruptcy, the transaction may require court approval. Using section 5 of the purchase agreement addendum makes the agreement contingent on obtaining court confirmation of the sale.
Finance Terms: Increased deposit
In certain situations, your buyer may want to offer a lower good faith deposit initially, and then increase the deposit later. For example, suppose your buyer is very interested in a home but doesn't have enough funds available to make a significant good faith deposit. However, his employer is going to pay him his annual bonus next week, and that will give him more cash for the deposit. To allow the buyer to make his offer to the seller now, you have him make an initial good faith deposit of $500, with a promise to increase the deposit by another $4,500 a week later. In this situation, you would use the Increased Deposit provision in section 3B of the purchase agreement form. Indicate the amount of the increased deposit, and when it is to be given to the escrow holder. Note that if the buyer fails to make the increased deposit, the seller is entitled to cancel the agreement. If the parties want the increased deposit to be included in the liquidated damages amount, the Receipt for Increased Deposit form should be used.
#1. Purchase Agreements: Using a standard form
In most transactions, a buyer's offer takes the form of a standard pre-printed purchase agreement. In California, the purchase agreement is sometimes referred to as a deposit receipt. As the buyer's agent, you will carefully fill out the blanks on the form and explain the various provisions to the buyer. The buyer may wonder why the offer needs to be so complex. She might think it would make more sense at this stage to just jot down the purchase price and the amount of the good faith deposit and present her offer to the seller. Then, if the seller wants to accept the offer, they can sit down and hammer out all the other terms. But the seller needs to consider all of the material terms of the buyer's offer, not just the price, before he can know whether it meets his needs and how it compares to other possible offers. Also, when the seller accepts the buyer's offer, they have a sales contract. However, it won't be an enforceable contract unless it includes all the legally required terms of a valid purchase agreement. As a real estate agent, you are allowed to fill out standard pre-printed purchase agreement forms for your buyers and sellers. But when you do so, you are held to the same standard of care as an attorney. If you make a critical error, you could face one or more of these penalties: 1. losing your commission, 2. a lawsuit brought by the buyer or seller, and 3. disciplinary action. Therefore, it is important for you to know what the various standard provisions in purchase agreements mean, and how to avoid some of the potential problems with them.
Purchase Agreement Provisions: Multiple listing service
In section 19, the parties authorize the brokers to report a pending sale to the multiple listing service, and to report the details of the transaction after it has closed. This provision enables other real estate licensees to track the status of properties listed with the MLS.
Purchase Agreement Provisions: Identifying the parties
In section 1A, fill in the name of the buyer. The purchase agreement must identify all buyers and sellers with certainty. The parties should always be identified by their full names, and each party must sign the agreement. If there is more than one buyer, they should all be listed. Both here and elsewhere in the purchase agreement, always state each party's name in full. If the buyers are a married couple, both of them should be listed here. The appropriate way to identify married parties in a legal document is "John D. Smith and Mary L. Smith." Always use the full name of each spouse, rather than "Mr. & Mrs. John D. Smith."
Purchase Agreement Provisions: Property description
In section 1B, you need to fill in the description of the property, followed by the assessor's parcel number, and the city and county in which the property is located. A purchase agreement should include a full legal description of the property. Neither the street address nor the tax assessor's parcel number is an adequate property description for a purchase agreement. You should always use a complete legal description, even though one is not strictly required to make the contract enforceable. All that is legally required is a description that allows identification of the property to the exclusion of other parcels. However, the clearest and most unambiguous description will always be the property's legal description. The street address is never sufficient. The assessor's parcel number alone is too risky to rely on, because parcel numbers may change. And the property description in the property tax statement may be incomplete. If the legal description is long or complicated, it is a good idea to simply photocopy and attach the legal description you get from the seller's deed or from the title company. That way, you don't have to hand copy the description and risk making a mistake.
Allocation of Costs: Escrow fee and closing agent
In section 4C(1), fill in who will pay the escrow fee and the name of the escrow holder, commonly called the closing agent. The closing agent performs many tasks in connection with closing a transaction, such as arranging for liens to be paid off and preparing and recording documents. Closing agents also hold funds and documents in escrow for the parties, and distribute them when all the conditions of the sale have been met. You should fill in the name of a closing agent, instead of writing "to be determined." The parties can agree to switch to a different closing agent later on if they choose to do so.
Allocation of Costs: Title insurance
In section 4C(2), indicate who will pay for the owner's title insurance policy, the policy that protects the buyer. At closing, the title insurance company will issue two title insurance policies, one to protect the buyer's interest (called an owner's policy), and one to protect the lender. In northern California, the buyer usually pays for the owner's title insurance policy. In southern California, the seller usually pays for it. The buyer pays for the lender's policy unless otherwise agreed. Next, fill in the name of the title insurance company. As with the closing agent, you should always name a title insurance company in the purchase agreement. If the parties later decide they want to use a different title company, they can agree to that change. The title insurance company will first issue a title report listing liens, other encumbrances, and defects in the property's title. Then at closing, the title company will issue both the owner's policy protecting the buyer and also a lender's policy, which protects the buyer's lender. The purchase agreement form provides that the buyer pays for the lender's policy unless otherwise agreed.
#5. Purchase Agreement Provisions: Buyer's investigation
It's always best for a buyer to inspect a property thoroughly before purchasing it. And most buyers want to be able to back out of a transaction if an inspection reveals serious flaws. So section 10 of the purchase agreement form gives the buyer the right to investigate the property, and makes the buyer's offer contingent on her approval of the property's condition. Unless otherwise specified, the buyer has 17 days from acceptance to complete her inspections and then either remove the contingency or cancel the agreement. The buyer isn't allowed to order any inspections by a government employee (such as a zoning inspector) without the seller's written permission, unless the particular inspection is required by law. And the buyer must give the seller copies of all inspection reports, free of charge. The seller must make the property available and keep the utilities on so that the inspections can be completed properly. Paragraph 10D anticipates the risks associated with injuries to persons performing inspections on the property. The buyer agrees to hold the seller harmless for any liabilities associated with injuries, and agrees to carry proper insurance (or make sure that the repair workers are properly insured). The buyer is responsible for the costs of repairing any damage that results from a buyer-paid inspection.
Purchase Agreement Provisions: Time periods and cancellation
Many of the sections we've discussed refer to deadlines for the buyer or seller to complete some task, such as performing inspections or removing a contingency. In this purchase agreement, section 14 sets the time periods that determine these deadlines. The time periods are calculated based on the date the offer is accepted, and any changes require written agreement of both the buyer and the seller. -Time periods run from date offer is accepted -Time periods can be changed only by written agreement
Statutory Disclosures: Natural hazards
Natural hazard disclosures are required if the property is located in any of the six designated types of natural hazard zones: -Earthquake Fault Zone -Seismic Hazard Zone -State Fire Responsibility Area -Very High Fire Severity Zone -Flood Zone A -Inundation Zone
Closing and Possession: Seller-occupied or vacant property
Next, if the property is currently vacant or occupied by the seller, use section 5B to indicate when possession of the property will be transferred to the buyer. The buyer and seller can specify in the purchase agreement whether the buyer will take possession of the property at closing, or on a different date. If the transfer of possession will take place either before or after the closing date, the parties need to execute a separate rental agreement. This form has three options. For each of these options, fill in the time of day in the first blank, if the default of 5 PM won't be used. A box must also be checked if the buyer will not take possession on the day of closing. If the buyer will take possession on a different date, check the first box on the second line and fill in the date. If the seller is going to remain in possession after the closing date, the next box is used to set a deadline for moving out. Having the buyer take possession on the day of closing is less complicated, but the parties may want to transfer possession on a different date for various reasons. Suppose the buyer is selling her current home, and the closing date is two weeks before the closing date on the home she's buying. She may want to take possession of the new home before closing, to avoid the inconvenience of moving twice. On the other hand, there are also circumstances in which a seller would prefer not to have to move out until several days after closing. In any case where the parties want to transfer possession on a date other than the closing date, you should have them execute a separate rental agreement. The rental agreement includes the dates of occupancy, the rental rate, and the amount of any security deposit. Often, the total amount of rent (along with the deposit) is paid in a lump sum before the rental period begins. Note that the purchase agreement form advises the buyer and seller to enter into a separate rental agreement, and also to consult with their attorneys and insurance advisors. This is because transferring possession of the property can have significant consequences if it doesn't happen at the same time as closing, and especially if the sale ultimately fails to close. For example, if the buyer moved in before closing and then defaulted on the purchase agreement or failed to fulfill a contingency, he would have to move out. If he refused to vacate immediately, it would create a tenancy at sufferance, making the property more difficult to show and to resell. The eviction process could take a considerable amount of time.
Purchase Agreement Addenda: Buyer's inspection advisory
Once the buyer's offer is accepted, she has the right to inspect the property. The Buyer's Inspection Advisory advises the buyer as to the importance of conducting a thorough inspection. It also discusses the rights and duties of the parties with respect to this inspection. If the inspection reveals problems, the buyer can request repairs or even cancel the sale. The seller and the seller's agent must disclose material facts about the property, but they do not make any guarantees as to the property's condition. Thus, the buyer should always have the property inspected by a professional. After the buyer and seller have carefully read and reviewed the form, both parties need to sign it. Their signatures verify that they have read the advisory, understood it, accept its terms, and have received copies.
Purchase Agreements: Typical provisions
Pre-printed purchase agreement forms are usually very detailed. Most forms contain essentially the same provisions, although they may be worded somewhat differently. As we discuss the typical provisions, we'll refer to the California Residential Purchase Agreement and Joint Escrow Instructions form as an example. This form is published by the California Association of Realtors. Bear in mind that the purchase agreement form used in your broker's office may present the provisions in a different order. Also, it may include additional provisions or exclude certain provisions. In addition to many clauses with blanks to be filled in for a particular transaction, a purchase agreement form includes many general provisions that apply in any transaction. While it may be tempting to dismiss the general provisions as fine print, it is important to be familiar with all the terms of the agreement, since every word will be binding on the buyer and the seller.
Purchase Agreement Provisions: Confirmation of acceptance
Remember that to make the acceptance effective, the seller must deliver the acceptance in the manner specified in the buyer's offer. This purchase agreement form provides a space for the buyer or the buyer's agent to initial and date the form, indicating receipt of the signed acceptance. This confirmation is not legally required to create a binding contract. Rather, a binding purchase agreement is created as soon as the seller's signed acceptance is properly delivered. However, the buyer should fill out this section to provide evidence of the date of acceptance.
Allocation of Costs: Government requirements and retrofit
Residential properties are required by law to have smoke detectors installed and water heaters properly braced. Prior to closing, the seller must provide the buyer with a written statement of compliance with these requirements. In addition, some communities require certain retrofit repairs, such as the installation of low-flow toilets and the use of tempered glass in sliding doors. In section 4B, the parties can designate who will pay for any needed smoke detector installation, water heater bracing, or retrofit work.
Purchase Agreement Provisions: Basic terms of offer
Section 1 of the purchase agreement form is where you fill in the basic terms of your buyer's offer. This includes identifying the buyer and the property, stating the price being offered, and setting a closing date. At the top of the form, be sure to write in the date when you are preparing the purchase agreement.
Purchase Agreement Provisions: Seller disclosures
Section 11 of the purchase agreement form allows you to indicate the addenda or other written provisions that are incorporated into the agreement. The box next to the Buyer's Inspection Advisory is pre-checked, because it should always be used with this purchase agreement form. If you are using the Purchase Agreement Addendum, check its box. Finally, list any other supplemental materials that will be attached to the agreement. For example, if the sale is contingent upon sale of the buyer's current home, you should refer to the contingency addendum on this line.
Purchase Agreement Provisions: Selection of service providers
Section 18 of the purchase agreement states that the buyer and seller are entitled to choose their vendors or service providers for the transaction (such as inspectors, repair contractors, or the title company). This section also provides that a broker who recommends a vendor isn't guaranteeing the vendor's performance.
Purchase Agreement Provisions: Attorney fees
Section 21 establishes that in an arbitration or legal action arising out of the purchase agreement, the prevailing party will be entitled to reasonable attorney fees and court costs. Remember, though, that this provision does not apply if the winning party did not attempt to mediate the dispute first.
Purchase Agreement Provisions: Definitions
Section 22 contains definitions of many of the specific terms used in this purchase agreement form. Make sure that you understand and are familiar with how they are used. Explain to your buyer that regardless of any other meanings a term might have, the definitions in the form are the ones that apply to the agreement.
#7. Purchase Agreement Provisions: Terms and conditions of offer
Section 27 of this form establishes that the terms and conditions of the purchase agreement are the buyer's offer to purchase the property. The form states that paragraphs that have spaces for initials are a part of the agreement only if they have been initialed. Note that if one party initals a paragraph, but the other does not, this must be resolved by a counteroffer. The seller may want to accept the buyer's offer without any changes, but this is rarely the case; usually the seller will want to make at least one or two changes. Remember that unless the seller accepts the buyer's offer exactly as written (including initialing all paragraphs initialed by the buyer), the seller must make a separate counteroffer.
Purchase Agreement Provisions: Acceptance of offer
Section 30 of the purchase agreement is used by the seller to accept the offer. If the seller is satisfied with the terms of the buyer's offer, he can go ahead and sign the form. By signing, the seller agrees to sell the property according to the exact terms of the buyer's offer. A binding agreement is created when the buyer or her agent receives a copy of the seller's signed acceptance. In addition, the seller agrees to the agency confirmation statement, acknowledges reading and receiving a copy of the purchase agreement, and authorizes the broker to deliver a signed copy to the buyer.
Finance Terms: Buyer's ability to qualify for loan
Section 3G obligates the buyer to provide the seller with written verification that the buyer has the funds needed for both the downpayment and the closing costs. The buyer must give this notice within seven days after acceptance (or a different number of days that the parties choose). Section 3H(1) imposes another requirement that the buyer show he's on track to receive an adequate loan. The buyer has 7 days after acceptance to give the seller a letter from a lender or loan broker stating that the buyer is preapproved or prequalified for the loan described in section 3C.
Finance Terms: Loan contingency
Section 3H(2) makes the buyer's ability to obtain financing a contingency, so that the purchase agreement is dependent on the financing, unless the parties agree otherwise in writing. As a result, the agreement will not be binding unless the buyer can actually obtain the loan. It does state, however, that the agreement is not contingent on the buyer coming up with the necessary cash for the downpayment and closing costs.
Finance Terms: Loan contingency removal
Section 3H(3) determines the financing contingency period. Typically, the buyer has 17 days after acceptence either to remove the loan contingency and proceed with the sale, or to cancel the agreement. Once the loan contingency is removed, the buyer is obigated to purchase the property even if she is eventually unable to obtain a loan. If your buyer wants, she can substitute a longer or shorter loan contingency period. She can even specify that the contingency remain in effect until the loan is actually funded. In this situation, if at any point the financing falls through, the buyer is entitled to a return of her good faith deposit. However, such an offer will be much less attractive to the seller than an offer with a standard 17-day contingency period.
Purchase Agreement Provisions: Items included and excluded
Section 8 of the purchase agreement form is used to indicate what items are included in the sale. The purchase agreement contains a detailed list of items included in the sale of the property. The buyer and seller can also indicate specific items that are included in or excluded from the sale. The form states that all fixtures and items attached to the property are included. Fixtures are legally considered part of the real property, and would be included even without this provision. However, specifying them in the agreement helps prevent disputes later on. This section also lists specific items of personal property that are included or excluded. Paragraph A reminds the parties that the listing or advertising materials may state that certain items will be either included in or excluded from the sale ... ... but these won't actually be included or excluded unless the purchase agreement says so. Section 8B has a detailed list of included items. These are included in the sale unless otherwise noted in the agreement. Among other things, it lists built-in appliances, attached floor coverings, shutters, window and door screens, television antennas, and satellite dishes. If there are any items listed in section 8B that the seller wants to exclude from the sale, you may cross those out and have the parties initial the change. If the buyer and seller want to include any other items in the sale that would not normally be included, there is a space on line 3 where they can write those in. The seller warrants that the items included in the sale actually belong to the seller. The items are transferred free from liens, but without any warranties from the seller. Even when a specific item is not listed in section 8B, the seller may want to make it absolutely clear that it will be excluded from the sale. In that case, you can write the exclusion in section 8C. For example, the seller might want to keep an antique light fixture and an ornamental bush, because of their special emotional significance. You would write in section 8C, "The antique brass light fixture in the ceiling of the bedroom, and the rose bush at the end of the front walkway, are excluded from the sale."
Purchase Agreement Provisions: Condition of property
Section 9 concerns conditions affecting the property, such as physical defects. The property is sold in its condition at the time of acceptance. The seller must maintain the property during the escrow period, and must deliver the property free of debris and personal property, except for property that is included in the sale. Like the section on statutory disclosures, this section contains general provisions that apply to any transaction. You should review this information with the buyer, but you won't need to fill anything in. The form specifies that the property will be sold in the same condition it was in when the offer was accepted, unless otherwise agreed. The seller is responsible for maintaining the property in this condition. The seller must also remove all debris and personal property before closing, except for items that are included in the sale. The form reiterates the seller's obligation to disclose all known material facts and defects affecting the property. This includes any insurance claims affecting the property. Remember, though, that the seller may not even be aware of all defects affecting the property. Because of this, the buyer is advised to arrange for thorough inspections of the whole property. If an inspection reveals that repairs are necessary and the seller refuses to make them, the buyer is entitled to cancel the contract.
Deposit receipt
See Purchase agreement
Purchase Agreement Addenda: Cooperating broker agreement and escrow instructions
The Cooperating Broker Compensation form is used to confirm the commission split between the listing and selling brokers. It isn't actually an addendum to the purchase agreement; it's a separate contract between the brokers, not between the buyer and seller. The compensation agreement provides that the selling broker will be paid out of the listing broker's proceeds in escrow. But it goes along with the purchase agreement and is contingent on the closing of that sale. Since the listing broker will receive a commission from the seller, the form provides for the listing broker to compensate the cooperating broker. To establish the terms of compensation, choose one of the four options and fill in a percentage or flat fee. If the brokers belong to the same or reciprocal multiple listing services, they will probably use standard compensation terms published by the MLS. The listing broker is then obligated to compensate the cooperating broker as agreed, provided that the sale closes and the listing broker is paid. The escrow agent is instructed to pay the cooperating broker out of the listing broker's proceeds in escrow.
Purchase Agreement Addenda: Notices to perform
The Notice to Buyer to Perform is used to give notice to the buyer to remove a contingency or perform some other action required by the purchase agreement. A seller typically uses this form when the buyer misses a deadline. The Notice to Perform generally gives the buyer 2 days to take action; after that the seller may cancel the agreement. The Notice to Seller to Perform is similarly used by the buyer to give the seller notice that he has failed to provide a disclosure or report within the agreed time period. This form does not contain a built-in deadline for the seller to take action. However, if the seller fails to take action, the buyer is entitled to cancel the agreement or delay removing a contingency.
Purchase Agreement Addenda: Receipt for reports
The Receipt for Reports addendum is used by the buyer to acknowledge receiving disclosures and reports from the seller and other parties to remove contingencies. These reports and documents may include items ordered or prepared by the seller before the purchase agreement was signed. Make sure your buyer understands that these reports and documents shouldn't be considered a substitute for her own inspections.
Purchase Agreement Addenda: Seller financing addendum and disclosure
The Seller Financing Addendum and Disclosure form must be used if the seller is providing any of the buyer's financing. The buyer agrees to provide the seller with a completed loan application within 5 days, and also authorizes the seller to obtain a credit report. If the buyer fails to provide the necessary loan application and credit documents, or if the seller reasonably disapproves of the documents, the seller can cancel the purchase agreement altogether. Be sure to indicate which credit documents the seller will use for the financing if the transaction proceeds. Sections 4 through 19 of the seller financing addendum are used to set forth the specific financing terms. Only the sections that are checked off will be included in the financing arrangement. However, the seller should read through all of the terms, so that he has a better understanding of what terms are included in the arrangement and what terms are not. The addendum also contains a warning statement regarding the risk of the buyer's default and possible difficulties in refinancing. The Seller Financing Addendum applies only to the buyer named in the form. The buyer cannot assign his rights under the purchase agreement to another party without the written consent of the seller.
Purchase Agreement Provisions: Licensee signatures
The agents responsible for the sale should also sign the purchase agreement and provide the names and contact information of their brokerages. By signing the purchase agreement, the listing and selling licensees confirm that the listing broker will compensate the selling broker as agreed. The compensation agreement may be contained in a separate written agreement. The listing broker agrees to pay the cooperating broker (selling broker) out of the listing broker's proceeds in escrow. The cooperating broker's compensation may be determined by MLS rules, or the brokers may specify the amount of compensation in a separate written agreement.
Purchase Agreement Provisions: Purchase price
The blank in section 1C is used to insert the offered purchase price of the property. You should write out the amount in words, as well as expressing it as a number. The good faith deposit is credited against the purchase price at closing, so the purchase price should include the amount of the deposit. If the buyer is assuming any mortgages or other liens, they should also be included in the purchase price. For instance, your buyer is going to assume the seller's existing mortgage of $345,000 and will also give the seller a $70,000 downpayment. The total of these two figures ($415,000) should be filled in as the purchase price.
Purchase Agreement Provisions: Closing date
The blank in section 1D is for the closing date. The closing date is the date on which all documents are recorded and sale proceeds are released to the seller. Typically, it is also the date on which the buyer takes possession of the property. You have the choice of filling in either a date or a certain number of days after acceptance of the offer. Before you choose a closing date, you need to think about all the conditions that must be met before closing. For example, the property may have to be inspected and repairs may have to be made. Arrangements for the buyer's financing must be made or completed. Choose a closing date that gives the parties enough time to meet all their obligations and fulfill all the contract conditions.
Purchase Agreement Provisions: Broker compensation
The brokers in a transaction may receive compensation from either the buyer or the seller, regardless of which party the broker represents. If the buyer entered into a representation agreement with her broker, it may include compensation terms. The purchase agreement instructs the escrow agent to pay the broker at closing as specified in that compensation agreement.
Finance Terms: Loan amount and terms
The buyer's offer is usually contingent on the buyer obtaining financing. The specific financing terms to be obtained by the buyer should be stated in the written offer. In section 3C of the purchase agreement form, the buyer can state the specific loan amount and terms that she must obtain for the sale to take place. We'll explain how to fill out this section of the purchase agreement form. First, fill out section 3C(1) with the type of loan, the loan amount, and the interest rate. By this stage of the transaction, you should have a good idea of what figures to use, based on your buyer's financial situation and market conditions. Use specific amounts; don't fill in "to be determined." If the buyer is going to pay any points, add that in here as well. When filling in the interest rate, it's a good idea to use the higher end of what the buyer can afford, even if the rate is slightly higher than current market rates. This helps ensure that the sale will go through even if interest rates go up before closing. If the buyer would like the transaction to be contingent on receiving a second loan as well, the form can be used for that too. As with the first loan, check which type of loan it is, and specify the loan amount and maximum interest rate and points. If the buyer would like an FHA or VA loan, the buyer must notify the seller of any lender-required repairs that the buyer requests the seller pay for or complete. This notice must be given within 17 days, or a different length of time if the parties agree otherwise in paragraph 3C(3). The seller is not obligated to pay for lender-required repairs unless that was already agreed to in writing. If your buyer has additional specifications, such as a specific loan term or payment structure, you'll need to describe that in section 3D. It will probably also be necessary to complete a more detailed financing addendum form, such as the seller financing addendum, and attach it to the offer. We'll take a closer look at these addenda after we've finished discussing the purchase agreement form.
Purchase Agreement Provisions: Dispute resolution: Statutory notice
The dispute resolution section includes a statutory notice that is required for enforceability of the dispute resolution provision. The notice tells both the buyer and the seller that if they agree to arbitration, they are giving up important legal rights, such as the right to file a lawsuit in court and the right to appeal a court's decision. It's important that the parties read and understand this notice.
Purchase Agreement Provisions: Escrow holder acknowledgment
The final section of the purchase agreement form is for the escrow agent's signature. Here the escrow agent acknowledges receiving a copy of the agreement (and any counteroffers) and agrees to act as the escrow holder. If he has received the buyer's good faith deposit, that should be indicated here. Write in the date of the confirmation of acceptance, then add the escrow agent's name, the escrow number, and the escrow agent's contact information.
Purchase Agreement Provisions: Time of essence; entire contract; changes
The first sentence of section 28 is an important one: "Time is of the essence." The "time is of the essence" clause makes performance on or before the purchase agreement deadlines an essential term of the agreement. A party that fails to meet a deadline will be in breach of the contract. This means that the parties are legally required to meet all deadlines set out in the purchase agreement. Performance on or before the exact dates is considered to be an essential term of the agreement. A failure to meet any deadline can be treated as a breach of the contract. In addition, section 28 states that the purchase agreement contains the entire agreement between the buyer and the seller, and that any other previous agreements are no longer valid. This type of provision is called an integration clause. Any amendments to the contract must be in writing and signed by both parties to be valid.
Purchase Agreement Addenda: Purchase agreement addendum
The form consists of five sections; each section, if checked, adds a term or contingency to the offer or counteroffer. -Seller to Remain in Possession -Tenant to Remain in Possession -Secondary/Assumed Loan -Court Confirmation Section 1 is for back-up offers, or if the seller or a tenant will remain in possession after closing, or if the transaction requires court approval or involves secondary financing, an assumption, or a short sale.
Closing and Possession: Warranties and equipment
The last two provisions in the section on closing and occupancy relate to personal property, fixtures, and equipment included in the sale. First, section 5D states that any third-party warranties for items included in the sale are automatically assigned to the buyer at closing. And section 5E states that the keys, codes, and/or remote openers to all locks, mailboxes, garage doors, and security systems are to be delivered to the buyer at closing. If there's a homeowners association and it requires a deposit for keys to common facilities, the buyer will pay the deposit.
Purchase Agreement Provisions: Finance terms
The next section of this purchase agreement form addresses the buyer's financing, starting with Section 3A, which concerns the amount and handling of the good faith deposit. A purchase agreement is sometimes referred to as a deposit receipt, because the form traditionally served as a receipt for the buyer's good faith deposit. The purchase agreement form contains default provisions for handling the deposit, but changes may be noted on the form. Fill in the amount of the deposit on the line indicated. Use Section 3A(1) if, as is commonly done, the deposit will be given directly to the person who's handling escrow for the transaction. The next issue is what form the deposit will take. For example, is the buyer going to provide a check, a money order, or a promissory note? A personal check is most common, so that's the default on the purchase agreement form. If the buyer is offering a deposit in a form other than a personal check, this should be specified in the space provided. Unless otherwise agreed, the buyer must give the escrow holder the deposit within 3 business days after acceptance. Alternatively, the buyer may give the deposit to the buyer's agent, or to someone else altogether. If the deposit is in the form of a personal check, the buyer should specify to whom the check is made payable. The agent may hold the check uncashed until acceptance, but the check must then be deposited with the escrow holder or the agent's trust account, within 3 days after acceptance.
Purchase Agreement Provisions: Liquidated damages
The next two sections of the purchase agreement address what happens if the buyer or seller breaches the contract. Section 25 of the form deals with the good faith deposit, which the seller is often permitted to keep as a remedy if the buyer defaults. The parties may agree to allow the seller to keep the good faith deposit as liquidated damages if the buyer defaults. For a one- to four-unit residential property the buyer intends to occupy, the liquidated damages cannot exceed 3% of the purchase price. To be enforceable, the liquidated damages clause must be initialed by both parties. In this situation, the good faith deposit is treated as liquidated damages—a sum of money that the parties agree in advance will be the total compensation in event of a breach. This means that the seller will not be able to pursue a different remedy, such as suing the buyer for the seller's actual damages. But most sellers prefer the ease and certainty of receiving a fixed amount (in the form of the good faith deposit) without having to file a lawsuit. Excerpt from purchase agreement covering liquidated damages, and definition of liquidated damages: a sum agreed upon in advance that will be full compensation in the event of a breach. Under California law, if the property is a one-to-four unit residential building that the buyer intends to occupy, the amount kept as liquidated damages cannot be more that 3% of the purchase price. If the buyer's good faith deposit was more that 3% of the purchase price, the seller will have to return the excess. For exampe, suppose the purchase price was $300,000 and the good faith deposit was $10,000. If the buyer defaulted, the seller could keep $9,000 as liquidated damages (3% of the purchase price), but would have to return the extra $1,000. $300,000 x 0.3 =$ 9,000 $10,000 Deposit - 9,000 Damages =$1,000 Returned to Buyer Assuming that the 3% cap applies, what is the maximum amount of liquidated damages allowed by law in each of these cases if the buyer breaches the contract? To be enforceable, the liquidated damages provision in a purchase agreement must be initialed by the buyer and the seller. If the good faith deposit has been increased since the initial deposit, the buyer and seller must sign a separate liquidated damages provision, like the Receipt for Increased Deposit form. Otherwise, the seller will not be allowed to keep the increased deposit as liquidated damages if the buyer defaults.
Escrow instructions
The parties' instructions to the closing agent are made up of certain paragraphs in the purchase agreement. These paragraphs instruct the escrow holder as to how to handle the funds and documents in escrow. The parties' instructions to the closing agent are made up of certain paragraphs in the purchase agreement. These paragraphs instruct the escrow holder as to how to handle the funds and documents in escrow. By signing the purchase agreement, the closing agent acknowledges receipt of the agreement and agrees to act as the escrow holder.
Purchase Agreement Provisions: Dispute resolution: Brokers
The procedures in the purchase agreement apply to disputes between the buyer and seller. The buyer and seller also agree to use mediation and arbitration for disputes involving the brokers who handle the transaction, as long as the brokers agree to this. The brokers are not parties to the purchase agreement, so the form does not obligate them to participate in mediation or arbitration. However, the brokers may have agreed to mediation and arbitration in a separate agreement, such as the listing agreement.
Integration clause
The purchase agreement contains the entire agreement between the buyer and the seller, and that any other previous agreements are no longer valid. The integration clause states that the purchase agreement constitutes the entire agreement between the parties. It invalidates any earlier agreements between the parties, and requires any future amendments to be in writing and signed by both the buyer and seller.
Purchase Agreements: Final verification of condition
The purchase agreement gives the buyer the right to inspect the property one last time during the five days prior to closing. This inspection is not a contingency; it simply allows the buyer to confirm that the seller has maintained the property during the escrow period, and to see that any necessary repairs have been completed as agreed.
Purchase Agreement Provisions: Closing and possession
The purchase agreement's closing and occupancy provisions. This part of the form deals with transfer of possession of the property from the seller to the buyer when the sale closes. First, indicate whether the buyer intends to make the property her primary residence. Check the box in section 5A only if she does not intend to do so; otherwise, you don't need to mark anything.
Purchase Agreement Addenda: Contingency for sale or purchase of other property
This addendum is used if the agreement is contingent on the sale or purchase of another property. For example, the buyer may want to make her offer contingent on the sale of her current home. Or the seller may want to make the agreement contingent on his purchase of a replacement home.
Statutory Disclosures: Withholding taxes
Two important tax withholding laws, one federal law and one state law, affect the transfer of real estate in California. In Paragraph 6C of the purchase agreement form, the buyer and seller agree to execute any document necessary to comply with these two laws.
Purchase Agreement Provisions: Dispute resolution
Unfortunately, disputes arising out of a real estate transaction are sometimes unavoidable. Section 26 of the purchase agreement form establishes the procedures used to resolve such disputes between the buyer and seller. The parties can agree in advance how they will handle any disagreements. This helps to streamline the dispute resolution process.
Statutory Disclosures: Deadlines
Unless otherwise agreed, the C.A.R. form allows the seller 7 days after acceptance to provide the required statutory disclosures to the buyer. In turn, the buyer has 17 days after acceptance to return signed copies of the disclosures to the seller, indicating that she has read and reviewed them. Note that these are only the default time limits; they may be changed in section 14 of the form. If the disclosures aren't provided until after the buyer signs her offer, she has a 3- or 5-day window in which to cancel the purchase agreement.
Purchase Agreement Provisions: Dispute resolution: Arbitration
Unlike the section 26A mediation clause, the section 26B arbitration clause applies only if it is initialed by both the buyer and seller. By initialing this clause, the parties agree in advance to arbitrate any disputes that have not been resolved through mediation. By doing so, they give up their rights to litigate the dispute in a court of law. Arbitration is similar to a civil legal proceeding and it is conducted according to California state law. In arbitration, both parties are entitled to discovery, which means they may request documents and interview witnesses. The arbitrator will normally be a retired judge or an experienced real estate attorney, but the buyer and seller can agree to a different arbitrator. The arbitrator's decision may be filed with the court and made into an enforceable court order. The parties must initial the arbitration provision for it to apply.
Purchase Agreement Addenda: Purchase agreement addendum: Seller to Remain in Possession
Use section 2 if the seller will briefly remain in possession of the property after the close of escrow. Fill in the length of time, the compensation the seller will pay the buyer, and how the compensation will be paid. Unless otherwise agreed, the seller will pay for utilities and services during this period. The seller must continue to maintain the property, and make it available for repairs, inspections, and visits from prospective buyers or tenants. If the seller will retain possession of the property longer than 30 days, you should fill out a Residential Lease Agreement After Sale form instead.
Allocation of Costs: Other costs
Use section 4D to indicate who will pay various other costs associated with the sale. This includes county and city transfer taxes, and may also include fees imposed by the homeowners association, and the cost of a home warranty plan. Space is provided to write in other costs that aren't already listed and allocate them between the parties.
Statutory Disclosures: Amended or additional disclosures
What happens if the seller makes the required disclosures, then later becomes aware of additional information about the property's condition that needs to be disclosed? He will be required to make an amended or additional written disclosure to the buyer. An amended disclosure reopens the buyer's window of cancellation. However, if the new information is contained in a report that was ordered and paid for by the buyer, the seller does not need to make a separate disclosure.
#6. Purchase Agreements: Prorations
When a property is sold, there are certain costs and fees associated with the property that the buyer will assume, such as property taxes, special assessments, interest, rents, and HOA dues. Since the seller will have already paid some of these costs, at closing they are prorated. This purchase agreement provides that all prorations will be based on a 30-day month. Mello-Roos special assessments and HOA special assessments are assumed by the buyer without any credit toward the purchase price. In California, when ownership changes, a property is reassessed and a new tax figure is calculated, based on the property's new sales price. The tax collected at closing, however, is based on the tax bill of the previous owner, the seller. So after closing, the buyer will be issued a supplemental tax bill for the increase in the amount of taxes owed after the close of escrow and before the next tax period begins. This supplemental tax bill is handled directly between the buyer and seller and is not part of the closing prorations.
Signatures: Power of attorney
When someone authorized by power of attorney signs a purchase agreement on behalf of one of the parties, she should sign it this way: "Mary L. Smith by Eleanor P. Withers, her attorney in fact." You should ask to see a copy of the power of attorney, to make sure that the attorney in fact has authority to enter into a real estate transaction. The Power of attorney document should be recorded in the county where the property is located (this may be required in some situations).
Finance Terms: No loan contingency
Your buyer always has the option to waive the loan contingency altogether, by checking the box in section 3H(4) of the purchase agreement. Removing the loan contingency may make her offer more attractive to the seller. However, waiving the loan contingency will obligate your buyer to purchase the property even if she can't come up with the financing to do so. So unless your buyer has the ability to make an all cash offer, waiving the loan contingency is generally not recommended.
