washington real estate fundamentals lesson 9: purchase and sale agreements © 2011 rockwell...

Washington Real Estate Fundamentals

Lesson 9:

Purchase and SaleAgreements

© 2011 Rockwell Publishing

Purchase and Sale Agreements

Purchase and sale agreement: Contract between real estate seller and buyer.

Also called:sales contractearnest money agreementpurchase agreementcontract of sale


Purchase and Sale AgreementsPurpose 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.


Purchase and Sale AgreementsCreating the contract

Like any contract, purchase and sale agreement created through offer and acceptance.

Offeror: buyer

Offeree: seller


Purchase and Sale AgreementsFunctions 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.


Purchase and Sale AgreementWho 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.


Who May Prepare the ContractStandard 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


Who May Prepare the ContractLimitations

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


Who May Prepare the ContractLimitations

Agent cannot:fill out form in transaction where agent

isn’t representing either partycharge separate fee for filling out forms


SummaryPurchase 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


Elements of the Agreement

Elements of a purchase and sale agreement include:

PartiesProperty descriptionPrice and method of paymentClosing datePossession dateType of deed and condition of titleLiens and other encumbrancesConditions or contingencies


Elements of the AgreementParties

Both buyer and seller must have capacity to contract.

If a party is underage or mentally incompetent, agreement is voidable or void.


Parties to the AgreementWho 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.


Elements of the AgreementProperty 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


Elements of the AgreementPrice and method of payment

Agreement should state:total purchase priceearnest 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.


Elements of the AgreementIncluded 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.


Elements of the AgreementClosing date

Agreement must set closing date, usually defined as date on which:

deed delivered to buyersales proceeds disbursed to seller documents recorded


Closing DateContingencies

Closing date must allow parties enough time to meet various contingencies, such as:

buyer arranging financingbuyer selling homeseller making repairsseller clearing liens

If either party doesn’t want transaction to close before a certain date, clause stating that may be added.


Closing DateExtension

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.


Agreement usually includes provisions:appointing escrow agent or other closing

agentallocating payment of closing costs

between parties


Elements of the AgreementClosing agent and closing costs

Elements of the AgreementPossession 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.


Elements of the AgreementCasualty 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.


Elements of the AgreementSeller’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


Elements of the AgreementConveyance 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.


Elements of the AgreementTime 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 contractwaive deadline and proceed


SummaryElements 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


Elements of the AgreementDefault provisions

Purchase and sale agreement usually allows parties to choose what seller’s recourse will be if buyer defaults (breaches contract):

election of remedies, orliquidated damages

Election of remedies: After buyer breaches, seller will be able to choose between keeping earnest money or suing for damages.


Default ProvisionsLiquidated 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.



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.



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.


Default ProvisionsAttorneys’ 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.


Elements of the AgreementAgency 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.


Elements of the AgreementEarnest 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:

cashcheckpromissory noteother


Earnest MoneyHolding 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.


Earnest MoneyDelivering 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).


Earnest MoneyDepositing check

Once seller has accepted offer, selling agent:delivers buyer’s check to designated

closing agent, ordeposits check into brokerage trust

account.


Earnest MoneyAmount of deposit

Appropriate amount varies with local custom.Can be any amount acceptable to both

buyer and seller.But seller can keep no more than 5% of

price as liquidated damages.Any amount over 5% must be refunded

to defaulting buyer.Entire deposit applied to purchase price if

transaction closes.© 2011 Rockwell Publishing

Earnest MoneyHandling 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.


Elements of the AgreementBrokerage fee provision

Purchase and sale agreement usually has brokerage fee provision.

Seller and buyer agree to compensate agents as promised in any earlier agreements.


Elements of the AgreementDeadline 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.


Purchase and Sale AgreementsCounteroffers

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.


Purchase and Sale AgreementsAmendments

Once purchase and sale agreement signed, can be modified only with:

written amendmentsigned by all parties

Amendment changes terms after contract signed.

In contrast, addendum adds to or changes terms before contract signed.


SummaryMore 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


Purchase and Sale AgreementsContingencies

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.


ContingenciesGood 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.


ContingenciesTypes of contingencies

Common types of contingencies:financing contingencysale of buyer’s home contingencyinspection contingencysecond buyer contingency


Types of ContingenciesFinancing

Most residential transactions contingent on whether buyer can obtain needed financing.

Contingency sets:type of loandownpayment amountapplication deadline

Special requirements for FHA, VA, or RD financing.


Types of ContingenciesSale 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?


Sale of Buyer’s HomeBump 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, orrescind contract


Types of ContingenciesInspection

Agreement may have contingencies for various types of inspections or tests, such as:

structural inspectiongeologic inspectionpest control inspection


InspectionStandard 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.”


InspectionOther provisions

Contingency clause should also establish:who orders and pays for inspectionhow buyer will give seller notice of

objection to inspection report contentsseller’s option to perform repairs or to

terminate saletime limit for re-inspection of repairs


Types of ContingenciesSecond 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.


SummaryContingencies

• Contingency• Good faith effort• Waiver• Financing contingency• Sale of buyer’s home contingency• Bump clause• Inspection contingency• Second buyer contingency


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 statementcomply with the lead-based paint

disclosure law


Property Disclosure LawsSeller 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 residentialmobile home (even if classified as

personal property)


Seller Disclosure StatementDisclosures

Statutory form requires seller to disclose what seller knows about:

condition of the property (including utilities)

existence of easements or encumbrances

other material information


Seller Disclosure StatementLiability

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.


Seller Disclosure StatementDeadline 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 deadlinebuyer 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.


Seller Disclosure StatementRight 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.


Seller Disclosure StatementNew information

If new information about property discovered after seller disclosure statement provided but before closing, seller must:

give buyer amended statement, ortake corrective action to make original

statement accurate

Buyer then has 3 business days to accept amended statement or rescind contract.


Property Disclosure LawsLead-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


Lead-based Paint LawRequirements

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.


Lead-based Paint LawAgent’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


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.


SummaryProperty Disclosure Laws

• Seller disclosure statement• Deadline for providing statement• Waiver rules• Right of rescission• New information• Lead-based paint disclosure law• Home warranty plan


washington real estate fundamentals lesson 9: purchase and sale agreements © 2011 rockwell...

Documents

agreement contract of

date agreement

rockwell publishing

sale agreement form

agreement elements

agreement parties

agreement price

terms of agreement