ANALYSIS OF THE PURCHASE AGREEMENT
Also known as deposit receipt. Important to take extra care as mistakes can have far reaching consequences. Also contains escrow instructions.
Performs 4 functions:
i) Receipt for money
ii) Formal offer to purchase property
iii) Binding contract
iv) Escrow instructions
CAR has their own form, but some use their own personal. Form is preprinted with blanks. Anything filled in by the user supersedes the preprinted type, should conflict arise. Fill in all the blanks with easy to understand terms. If necessary cross out preprinted section, initial and date. If unsure use a more experienced professional to check. PE is a blueprint or set of instructions for clients, brokers, attorneys and escrow holders. Very important.
FILLING OUT THE PURCHASE AGREEMENT OFFER
Location And Date
Indicate the present location of the individuals executing the document. e.g. Los Angeles. The date establishes a timeframe for acceptance of the offer.
Buyers
Spell names carefully and marital status. List only the person/s making the offer, even if others will take the title.
Deposits
Written out in words and then numerals. Agents tend to advise buyers to put down large deposits, as it make the buyer seem more serious.
Then specify type of payment, anything the seller will accept is ok. If the check is postdated, must be printed out and ok’ed by the seller.
Forms of deposit:
• Cash
• Personal check
• Cashiers check
• Money order
• Promissory note
• Certified check
• Irrevocable order
• Non-monetary goods
Deposit belongs to buyer until offer is accepted, then deposited in broker trust account. Buyer can specify that the deposit goes directly to seller. Also possible to make payment directly to the agent, to be held until acceptance or even after. Possibility that the check will not be honored (disclose that fact).
Price
Write in words and numerically. Words trump digits.
Property Description
Seems obvious, but if problems occur, accurate description will avoid litigation. In urban areas, street address will suffice.
Some properties need meters? and boundaries… or block and lot numbers. With new properties, recorded map or preliminary title report. Rural land requires a survey of the land. When transposing legal description, a short one is ok to do by hand, but a long one may need to be photocopied and attached.
FINANCE
This is contingent on Buyer on getting financing. Must fill out or contingency drops away making buyer liable.
A) Escrow
Can be:
• Escrow company
• Escrow dept. of a bank
• Broker
• Title co.
Generally agent is consulted. Find an escrow company you know and trust.
B) Fill out if buyer wishes to increase deposit or not.
C) Amount to go to escrow by a certain date. Escrow must wait for check to clear. Certified check or cashiers check will close escrow faster.
D) Buyers with new loans must complete, including fees and discount points. Monthly amount, interest payment and schedule must match, if not… may become unenforceable. Buyer and seller can agree if changes are made. To protect the buyer a clause stating a maximum values (%). Seller clause giving buyer a set time to obtain financing.
E) If buyer takes over existing loan.
F) Sellers carrying back a loan. Include terms, payment, interest, principal, taxes, rate and insurance, balloon payment and due dates.
G) Fill in if a second loan is needed.
H) If buyer is assuming second note. Same as (D)
I) Buyers taking over notes secured by trust deeds given limited time. If no rejection in time, assumed it’s accepted. Loan balance can be adjusted by adding cost.
J) Buyer will show due diligence to obtain financing and not stall to ‘play’ the market.
K) Extra terms: Subordination agreements, prepayment penalties/privileges.
L) Total purchase price (sum of lines A to H).
OCCUPANCY
Buyer states if primary residence because liquidated damages law is different from non. In general lenders give smaller loans in income properties.
SUPPLEMENTS
Check out and note attached documents. e.g:
Interim Occupancy Agreement (CAR Form 10A-11)
Residential Lease Agreement (CAR Form RLAS-11)
Add other agreements e.g. Items to remain behind and disclosure statements to be made.
Both parties receive copies
Buyer signs when offer prepared
Seller signs last page as acceptance
Regulation 2902 Real Estate Commission states: All who sign must receive a copy.
ESCROW PERIOD
Names escrow holder of company and time frame, based on when the offer is accepted. Buyer and seller determine time escrow is open. Extra space for fees, services and who pays.
TITLE
Buyer should see title before offer. Most time it’s not possible so ‘condition of title’ clause is inserted. Broker should investigate title of property and not sell a property subject to easements, restrictions or covenants, as these may interfere with buyers intention for the property.
Buyer should get title asap after acceptance of offer. If a problem occurs the buyer has limited time to object. Then seller has limited to correct. Buyer has right to cancel sale, seller or buyer may have to pay for title search/cancellation. If insurance purchased there is no cost. Northern California sellers pay for insurance, in southern California the buyers do. Policy is standard California Land Title Association. More than that must must be requested. If title is not delivered, buyer can cancel and receive deposit back.
PRORATIONS
What date do the bills become the buyers responsibility?
i) Close of escrow?
ii) Title recorded?
iii) Possession of property?
Responsibilities:
• Property Tax
• Insurance
• Interest
• Principal loan
• Sewer
• License fees
• Maintenance contract
• FHA insurance premium
• Impound accounts
• Leasehold payments
• Easements
• Liens
Assessment on property that will go to ‘bond’ at close has to be disclosed to buyer. Assessment attached to properties, research all.
POSSESSION
Date buyer takes possession of property. Best left at close of escrow.. If other “occupancy agreement after sale” to show seller is not a tenant.
VESTING
How the title is taken. Important for the agent not to give advice (for legal and tax reasons). Can also put “instructions to follow”, indicating not decided.
MULTIPLE LISTING SERVICE
Disclose information on property to the MLS
• Date of sale
• Sales price
• Financing
LIQUIDATED DAMAGES
If left blank, the parties agree to forgo any damages.
If buyer fails to perform the seller can back out and claim damages. If initialed, buyer and seller agree seller will keep deposit. Up to 3% of sales price (4 units or less, one of which is residence). If seller requires a larger deposit, they have to prove why. If to be used as liquidated damages, 1B must be filled out.
NOTE: If buyer and seller don’t initial, seller can take any action they deem necessary:
• Sue for damages
• Performance suit
• No penalty
If buyer and seller initial, they agree to a predetermined damages. Explain to client.
ARBITRATION
Inform client of rights in disputed deposit, handled by American Arbitration Association. Code of Civil Procedure, Section 1283.05.
ATTORNEYS FEES
The prevailing party can recoup reasonable attorney fees and costs.
KEYS
All keys to be turned over.
PERSONAL PROPERTY
Lists property left in house at close of escrow (free of liens). Furniture the buyer likes. Appliances by make, model and serial number. Attach sheet if necessary.
FIXTURES
Attached fixtures e.g. Garage door opener. Also includes what not to be included.
SMOKE DETECTOR
Mark box as to who will pay installation.
TRANSFER DISCLOSURE
Buyer states if they have received. If not, the time frame allowed the seller.
TAX WITHHOLDING
Foreign seller require backup withholding to cover tax obligations.
ENTER CONTRACT??
“Time is of the essence”
CAPTIONS
Captions are for ease of use, not referral.
ADDITIONAL TERMS AND CONDITIONS
Inspections or reports. Both buyer and seller must initial which are necessary.
OTHER TERMS AND CONDITIONS
Inspections or requirements not covered, need to be added or attached.
OFFER
Officially establishing the document is an offer to buy. Sets the time frame for reply and who, other than the buyer, the acceptance can be delivered top
AMENDMENTS
Only allowed if both buyers and sellers sign. Also used for agent and buyer contact information and sign.
Acceptance
Seller agrees to sell with all terms. Seller promises to pay brokers fees and attorneys fees if dispute. Written out in words and numbers.
If buyer pays out damages, the sellers broker receives 1/2 of damages OR the total of the expected commission, whichever is less.
If buyer and seller agree to set 3% liquidation damages, the broker… with court permission can take the 3% as commission. Leaving the seller with 0.
Acceptance is important as it’s not an actual contract until seller signs, thus accepting offer.
Brokers Consent
Consent to comply with Section 2725 of Regulations of the Real Estate Commissioner. Agrees to share commission and oversee agents working on the sale.
ESTIMATED BUYERS COSTS
This is the amount of money the buyer must lay-out to purchase home. Covering all inspections, reports and escrow fees. Also include monthly estimated cost. Don’t under estimate, or buyer will get upset.
Special Provisions
The ‘deposit receipt’ is simple to complete and fill out. If problems arise, don’t give legal advice, just explain options and advise to consult professionals.
Irrevocable Order
Or “assignment of funds”, orders money to move from 1st escrow to 2nd escrow. When such an order is made the 1st escrow may fall through and seller will loose deposit. All disclosures must be made or held liable.
Selling Without Listing
Agents selling homes without the listing are not guaranteed a commission. Commission can be obtained in the deposit receipt via a clause stating: ‘When seller accepts offer, he/she also agrees to pay agent a commission. “Selling broker has right to sell” followed by sellers signature and all names of participating brokers.
Agreement to Occupy Prior to Close of Escrow
Seller may agree to buyer moving in prior to close. If so, an attchment must be included stating:
1) Buyer may rescind if title or finance has issues.
2) Stops landlord-tenant situation developing
3) Buyer may not back-out for emotional reason.
Promissory Note Deposit
Note is in lieu of cash, which is to be borrowed at later date. 5 days is the norm. Buyer who doesn’t have funds on hand uses this method. Seller who accepts offer told by promissory note, must take house off the market.
As Is
Means “home in current condition”. Wear and tear are acceptable defects. Patent defects (imperfections) are also acceptable. Latent defects are serious defects that pose a hazard. Sellers who try to sell a home like this are possibly liable if they don’t disclose all defects. Caveat Emptor now becomes Caveat Vendor.
“Subject To” Financing
Section H states: Buyer will apply for finance ASAP with some sort of cut-off date. If buyer cannot get financing, offer is void. If buyer cannot get specified financing he is not liable.
Uncashed Check
Buyer can specify not to have deposit cashed until offer is accepted. Must be disclosed in section E to seller and seller must give it the ok.
Broker must keep record of the check, name of escrow, insurance and date on the check. No negotiating the check, follow instructions and disclose, then follow sellers instructions.
Licensee Acting As A Principal
When an agent makes an offer on a home, he/she must represent full disclosure. No “arms length” transaction. No 3rd party as that breaks the fiduciary responsibility.
If selling principal is the agent, the buyer must remember that the agent has access to information the buyer doesn’t. Full disclosure protects all.
PRESENTING SELLERS WITH THE OFFER
This is the final step in the process. There has been lot’s of work to get to this point. If seller rejects the offer outright, you’ll have to start again.
Listing price is the main hurdle for sellers, if priced well… many offers. Buyers are always looking for a bargain. Sellers seldom get what they ask for. It’s up to the agent to bridge the gap. Depending on the market this will be easy or hard. Only convince sellers to take the offer if it is in-fact good.
Steps for formal offer
(1) Face to face offer — Set up appointment. Avoid giving the offer price over the phone. Perhaps have an associate make the call.
Make a meeting with seller before the offer is in. Say:”About to take an offer on the advertised price”.
(2) Review all appropriate documents. Look over the offer and familiarize yourself with items. Look for things that may concern the seller, anticipate. Explain the buyers concerns and excitement. Do a current comp on the market to show buyers validity. Consult the original listing agent.
(3) If you’re not the original listing agent, think about bringing them with as they were the initial contact.
(4) Meet with seller. All sellers and owners must be present. e.g. Old lady, attorney and grandson.
(5) Hand out copies of offer. Some agents give the seller time to look over the offer, some start by covering minor points first, then on to the larger items. Getting seller to agree on smaller items may make them likely to agree to the sales price. Remember to humanize the process.
(6) Biggest objection will be price. Find ways to make a lower bid seem attractive. Point out that the seller will have to pay less commission. Also point out the time and money that will be wasted waiting on another buyer. Also the possible delay if seller is looking at new home. If all else fails, move on to the counter offer.
COUNTER OFFER
If seller won’t accept offer, suggest a counter offer. Also make buyer aware that an offer below asking will most likely bring back a counter offer. Explain you will work hard to persuade seller to accept or grant a counteroffer.
Counteroffer is separate form attached to original offer.
When presenting counter offer to buyer, point out what the seller agreed to. Lead into changes with the positive results. Use previous competitive market analysis to show buyer. Getting buyer to accept the new terms closes the deal. Make sure the acceptance goes back to the last counter as the deal is not closed until the counter offer is signed by the originator.