The Purchase Agreement (or Residential Purchase or Sales Agreement and Deposit Receipt) is the overriding document that will dictate the terms of your purchase or sale. It is a legal, contractual document, and the provisions are binding. Whether you have a real estate agent, a lawyer, or you draft the document yourself, it should contain all the provisions that have been agreed between the buyer and seller. The agreement must state clearly the terms of the sale and what must occur before the property can change hands.
Whether you use a pre-printed form (such as an approved Association of Realtors agreement) or a tailor-made document, the contract should provide the following “contingencies” or safeguards to protect the interest of each party in the transaction:
- The deposit received from the buyer and what will happen to it if the agreement is canceled
- Personal property to be included in the sale, spelled out very specifically. (Take the time to list all the movable items that are to be included with the real property transfer to avoid numerous problems later.)
- The date for the close of escrow and what will happen if the closing is delayed.
- The date of occupancy — it may be the day of closing or a later date to be agreed.
- Division of shared expenses between buyer and seller, called “prorations,’ and the date to be used for computing them. (Taxes, rents, etc.).
- Default provisions or what will happen if either party doesn’t live up to the agreement.
- Termite inspection, including who pays for the inspection and who pays for remedying any deficiencies disclosed in the inspections, as well as who pays for the recommended preventive measures listed in the report.
- Other property inspections (which might include a roofing inspection or a general building inspection). The buyer is typically given 10-14 days to inspect the property or have a professional inspection made of the house, its systems and structure. There may be inspections for lead and radon levels.
- Financing arrangements. A clause should be written in the purchase agreement that allows ample time for the buyer to apply for and be approved for a loan. Time to make an application is typically 10-14 days and time for loan approval is usually 30 days.
- Occupancy date when the buyer may move in. (Will the seller remain in the residence after the close of escrow? If so, what will his rent be?)
- Stipulation for payment of real estate commissions, closing costs and title fees. The buyer should be given ample time to review the preliminary title report. Usually the buyer is given 10 days from receipt of the report to give approval.
- Covenants, conditions, and restrictions (CC & R’s). (These are limitations placed upon the use of land by its owner, the governing operation of a condominium, cooperative, or common interest development). A provision for the approval of the condominium documents, bylaws, budget, or other conditions should be included. Usually the buyer is given 10-14 days from receipt for this approval.
- Contingency for the sale of the buyer or seller’s current home. Either party may need to add a contingency for the sale of their current home. The time limit on this condition is usually 30-60 days.
- You may want to write a contingency into the agreement that allows for cancellation in the event the buyer is not able to obtain homeowner’s insurance.
- A contingency will be written into the agreement that provides for the buyer to approve the seller’s disclosures as to such items as earthquake hazards, flood hazard, lead in the home (if built prior to 1978) or other material facts or defects as required in your state. The time limit for these disclosures is typically 10 days.
- Attorney review. You may want to provide for the review of the agreement by your attorney. The time limit is generally set at between five and 10 days of signing the initial agreement.
Although these contingencies may be inclued in the pre-printed agreement form, you may need to add an addendum to provide for any special concerns that you have. The contingency time periods are negotiable and can vary according to the special circumstances of your purchase or sale. When a contingency cannot be satisfied, the purchase agreement may be canceled and your deposit returned. Each contingency should be approved and signed by all parties in the contract, nothing their agreement.
Typically, on the West Coast, lawyers do not become involved in drafting purchase, sale, or exchange agreements unless circumstances, such as a pending probate, a lawsuit, or a divorce complicate the matter. On the East Coast, however, lawyers play a large part in real estate transactions. In some areas, they draw up the agreement, examine the title, and prepare the necessary legal documents, such as the deed, mortgage (or Deed of Trust) promissory notes, and any other necessary legal documents.