120 Week 3 A /For WIZARD KIM
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Ch27.pdf
Chapter 27: The purchase agreement 185
After reading this chapter, you’ll be able to:
• describe the multiple functions of a purchase agreement form; • identify various types of purchase agreements; and • understand the sections and provisions that make up a purchase
agreement.
Learning Objectives
The purchase agreement
Chapter
27
A newcomer’s entry as a real estate agent into the vocation of soliciting and negotiating real estate transactions typically begins with the marketing and locating of single family residences (SFRs) as a seller’s agent or a buyer’s agent (also known as listing agents or selling agents, respectively).
Other properties an agent might work with include:
• one-to-four unit residential properties;
• apartments;
• commercial income properties (office buildings, commercial units and industrial space);
• agricultural property; or
• unimproved parcels of land.
For real estate sales conveying ownership of a property, the primary document used to negotiate the transaction between a buyer and seller
Types and variations
equity purchase (EP) agreement
purchase agreement Key Terms
For a further discussion of this topic, see Chapter 51 of Real Estate Practice.
186 Real Estate Principles, Second Edition
is a purchase agreement form. Different types of properties each require a different variety of purchase agreement. Various purchase agreement comprise provisions necessary to negotiate the sale of a particular type of property.
Three basic categories of purchase agreements exist for the documentation of real estate sales. The categories are influenced primarily by legislation and court decisions addressing the handling of the disclosures and due diligence investigations in the marketing of properties
The three categories of purchase agreements are for:
• one-to-four unit residential property sales transactions;
• other than one-to-four unit residential property sales transactions, such as for residential and commercial income properties and owner- occupied business/farming properties; and
• land acquisition transactions.
Within each category of purchase agreement, several variations exist. The variations cater to the specialized use of some properties, the diverse arrangements for payment of the price, and to the specific conditions which affect a property, particularly within the one-to-four unit residential property category.
Purchase agreement variations for one-to-four unit residential sales transactions include purchase agreements for:
• negotiating the conventional financing of the purchase price [See Figure 1, RPI Form 150 ];
• negotiating a short sale [See RPI Form 150-1];
• negotiating a cash to new or existing mortgage, or a seller carryback note [See RPI Form 150-2];
• negotiating for separate brokerage fees paid each broker by their client [See RPI Form 151];
• negotiating the government insured financing (FHA/VA) of the purchase price [See RPI Form 152 and 153];
• negotiating the sale of an owner-occupied residence-in-foreclosure to an investor, called an equity purchase agreement [See RPI Form 156];
• negotiating an equity purchase short sale [See RPI Form 156-1];
• direct negotiations between principals (buyers and sellers) without either party being represented by a real estate agent [See RPI Form 157]; and
• negotiating highly specialized transactions using a “short-form” purchase agreement which does not contain boilerplate provisions setting forth the terms for payment of the price, which allows the agent to attach specialty addenda to set the terms for payment (a carryback ARM, equity sharing addenda, etc.). [See RPI Form 155-1 and 155-2]
purchase agreement The primary document used as a checklist to negotiate a real estate sales transaction between a buyer and seller. [See RPI Form 150- 159]
Purchase agreement variations
equity purchase (EP) agreement The document used to negotiate the sale of an owner- occupied residence- in-foreclosure to an investor. [See RPI Form 156]
Chapter 27: The purchase agreement 187
Variations among purchase agreements used in income property and owner-occupied business property sales transactions include purchase agreements for:
• the conventional financing of the purchase price [See RPI Form 159]; and
• the down payment note financing of the purchase price. [See RPI Form 154]
Finally, a variation exists for land sales of a parcel of real estate which has no improvements in the form of buildings and for farm and ranch sales. [See RPI Form 158 and 158-1 through 158-6]
Editor’s note — For a full-size, fillable copy of this or any other form in this book that may be used in your professional practice, go to: realtypublications.com/forms
Escrow instructions provide yet another variation on the purchase agreement. For example, a buyer and seller having orally agreed on the terms of a sale, with or without the assistance of an agent, contact an escrow company to handle their deal. Escrow instructions are prepared and signed, without first entering into a real estate purchase agreement. Here, the escrow instructions bind the buyer and seller as though they had entered into a purchase agreement. [See RPI Form 401; see Chapter 30]
Attached to all these various purchase agreements are one or more addenda, regarding:
• disclosures about the property;
• the financing of the price paid for the property;
• agency relationship law; and
• special provisions called for by the needs of the buyer or seller.
In this Chapter, the focus is on the needs of the newly licensed agent and thus limited to documenting and managing the negotiations in an SFR real estate transaction. The document reviewed here is the purchase agreement used in SFR sales transactions structured for the conventional financing of the purchase price.
A buyer’s agent uses the Purchase Agreement (One-to-Four Residential Units – Conventional and Carryback Financing) to prepare and submit the buyer’s written offer to purchase a one-to-four unit residential property.
The pricing and terms for performance are limited to conventional financing, a takeover of existing mortgages, a carryback note or a combination of some of these arrangements. This purchase agreement is also properly used by sellers when confronted with a counteroffer situation. The seller’s agent prepares an entirely new purchase agreement, then submits it as their fresh offer to sell on terms different from those of an unacceptable purchase offer received from the buyer.
Purchase agreement addenda
Analyzing the purchase agreement
188 Real Estate Principles, Second Edition
On acceptance, the purchase agreement becomes a binding written contract between the buyer and seller. To be enforceable, the price and terms for performance need to be clear, concise and complete to prevent misunderstandings. To this end, a comprehensive purchase agreement includes as “boilerplate” all provisions that might be needed in a likely transaction. They are designed to serve as a checklist of provisions an agent is to consider when preparing an offer. The various conventional financing arrangements and conditions a prudent buyer considers when making an offer to purchase a home are tightly worded for easy selection. [See Figure 1, RPI Form 150]
Figure 1
Form 150
Purchase Agreement (One-to-Four Residential Units — Conventional and Carryback Financing)
For a full-size, fillable copy of this or any other form in this book that may be used in your professional practice, go to realtypublications.com/forms
Chapter 27: The purchase agreement 189
Each section of Form 150 has a separate purpose and need for enforcement. The parts include:
1. Identification: The date and place of preparation for referencing the agreement, the name of the buyer, the amount of the good-faith deposit, the description of the real estate, an inventory of any personal property included in the transfer and the number of pages contained in the agreement and its addenda are contained in sections 1 and 2 to establish the facts for negotiating the agreement.
2. Price and terms: All the typical variations for payment of the price by conventional purchase-assist financing or a takeover of existing financing are set forth in sections 3 through 9 as a checklist of provisions for consideration. On making an offer (or counteroffer using this form), the terms for payment and financing of the price are selected by checking boxes and filling blanks in the desired provisions.
3. Acceptance and performance: Aspects of the formation of a contract, excuses for nonperformance and termination of the agreement are provided for in section 10, such as the time period for acceptance of the offer, the broker’s authorization to extend performance deadlines, the financing of the price as a closing contingency, procedures for cancellation of the agreement, a sale of other property as a closing contingency, cooperation to effect a §1031 transaction and limitations on monetary liability for breach of contract.
4. Property Conditions: The buyer’s confirmation of the physical condition of the property as disclosed prior to acceptance is confirmed as set forth in section 11 by the seller’s delivery of reports, warranty policies, certifications, disclosure statements, an environmental, lead-based paint and earthquake safety booklet, any operating cost
Components of the purchase agreement
Figure 1
Form 150 Cont’d
Purchase Agreement (One-to-Four Residential Units — Conventional and Carryback Financing)
190 Real Estate Principles, Second Edition
and income statements, and any homeowners’ association (HOA) documents not handed to the buyer prior to entry into the purchase agreement, as well as by the buyer’s initial inspection, personally or by a home inspector, and final inspection at closing to confirm the seller has eliminated defects known, but not disclosed, prior to acceptance.
5. Closing conditions: The escrow holder, escrow instruction arrangements and the date of closing are established in section 12, as are title conditions, title insurance, hazard insurance, prorates and mortgage adjustments.
6. Notice of supplemental property tax: Notifies the buyer they will receive one or two supplemental property tax bills they are to pay when the county assessor revalues the property after a change in ownership, as set forth in section 13.
7. Notice regarding gas and hazardous liquid pipelines: Notifies the buyer of the public availability of information regarding general location of gas and hazardous liquid transmission pipelines via the National Pipeline Mapping System (NPMS) web site.
8. Brokerage and agency: The release of sales data on the transaction to trade associations is authorized, the brokerage fee is set and the delivery of the agency law disclosure to both buyer and seller is provided for as set forth in section 15, as well as the confirmation of the agency undertaken by the brokers and their agents on behalf of one or both parties to the agreement.
9. Signatures: The seller and buyer bind each other to perform as agreed in the purchase agreement by signing and dating their signatures to establish the date of offer and acceptance.
Editor’s note — For specific instructions covering the preparation of the Purchase Agreement — One-to-Four Residential Units, RPI Form 150, see Real Estate Practice Chapter 51.
As a policy of the publisher to provide users of RPI (Realty Publications, Inc.) forms with maximum loss reduction protection, the RPI purchase agreement does not contain clauses which tend to increase the risk of litigation or are generally felt to work against the best interests of the buyer, seller and broker.
Excluded provisions include:
• an attorney fee provision, which tends to promote litigation and inhibit normal contracting;
• a time-essence clause, since future performance (closing) dates are, at best, estimates by the broker and their agents of the time needed to close and are too often improperly used by sellers in rising markets to cancel the transaction before the buyer or broker can reasonably comply with the terms of the purchase agreement;
Observations
Chapter 27: The purchase agreement 191
• an arbitration provision, since arbitration decisions are final and unappealable, without any assurance the arbitrator’s award will be fair or correct; and
• a liquidated damages provision, since they create wrongful expectations of windfall profits for sellers and are nearly always forfeitures and unenforceable.
For sales, the primary document used to negotiate the transaction between a buyer and seller is a purchase agreement form. The three categories of purchase agreements are for:
• one-to-four unit residential property sales transactions;
• other than one-to-four unit residential property sales transactions, such as for residential and commercial income properties and owner-occupied business/farming properties; and
• land acquisition transactions.
Variations among purchase agreements used in income property and owner-occupied business property sales transactions include purchase agreements for:
• the conventional financing of the purchase price; and
• the down payment note financing of the purchase price.
A buyer and seller who enter into escrow instructions without entering into a real estate purchase agreement are bound by the escrow instructions as though it was a purchase agreement. Attached to all these various purchase agreements are one or more addenda, regarding:
• disclosures about the property;
• the financing of the price paid for the property;
• agency relationship law; and
• special provisions called for by the needs of the buyer or seller.
A buyer’s agent uses the conventional purchase agreement, RPI Form 150, to prepare and submit the buyer’s written offer to purchase a one- to-four unit residential property.
Chapter 27 Summary
192 Real Estate Principles, Second Edition
Each part of the purchase agreement has a separate purpose and need for enforcement. These parts include:
• identification;
• price and terms;
• acceptance and performance;
• property conditions;
• closing conditions;
• notice of supplemental property tax;
• notice regarding gas and hazardous liquid pipelines;
• brokerage and agency; and
• signatures.
equity purchase (EP) agreement ............................................ pg. 186 purchase agreement .................................................................. pg. 186
Chapter 27 Key Terms
Quiz 6 Covering Chapters 24-30 is located on page 611.
