(Daniel – 00 Beginning Slide)
Chapter 10 – Working with a P & S Agreement
In this chapter we are going to start utilizing a sample Purchase and Sale Agreement and discuss the different situations that can arise. As you will discover when practicing professional real estate, there will always be a specific situation in each transaction that is unique. For this reason the State wants us to go over the Purchase and Sale Agreements and present various situations for you to consider.
We are fortunate to have permission from the Northwest Multiple Listing Service to utilize their Residential Purchase and Sale Agreement Form 21 in this course. We will be looking over this form on various pages while showing how they affect each real estate transaction. This Purchase and Sale
Agreement is the form utilized in forming a contract. Once the buyer and seller complete an offer and acceptance of the information on the form, it becomes a contract.
(On the next page please insert Sect 10 – 001 & 001A)
The first page of Form 21 contains the vast majority of variable information applicable to the involved property and the parties to the agreement. These are known as the “specific terms” of the Purchase and Sale Agreement. Here is a sample:
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The first part of the Purchase and Sale Agreement specifies who the buyer isand who the seller is. The involved property is identified with the county parcel number as well as the street address. Note: In writing up an offer for your buying client, you will need to look up the tax parcel number at the county assessor's office. You can do this online. Also note, the MLS assigned number is typed in at the top of the form.
The next line clarifies all the personal property items that are to be included with the home. Note: The “other” check box is where you can write in personal property that is not shown on the form. In this case it includes a microwave, but other items such as furniture, home entertainment center, custom kitchen carts, etc. can be written in here.
The next line includes the offering price of the buyer to the seller. Obviously, you should take special care for good penmanship for this figure. The following line shows the earnest money deposit as a dollar value and in what form of value is being placed into escrow. There is a section for a promissory note as well as a section for other valuable items being utilized by the buyer as earnest money.
(On the next page please insert Sect 10 – 002 & 002A)
Page 1 (Continued)
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In this example, the buyer is willing to forfeit the earnest money deposit if he/she defaults in performance of the established contract. This places the buyer as a strong candidate with a strong offer to purchase. The other box “seller’s election of remedies” is stronger because the seller has legal remedies in dealing with the buyer if in default. We will look at specific rights later.
The title insurance is going to be handled by Stewart Title and they will also be the escrow service. The offer is made on April 15th with a desired closing of May 30th. Also note that the buyer’s offer expires on April 20.
Due to the box that was checked by the buyer, the seller is to pay all charges and assessments of escrow. Both the buyer and the seller have their own agents and there is no existing dual agency. The home inspection addendum and the financing addendum are attached to this purchase and sales agreement. We will discuss these addendums later in the course.
(On the next page please insert Sect 10 – 003 & 003A)
Page 1 (Continued)
The bottom of page 1 includes all the information of the involved parties. It begins with the required signatures of the buyer(s) and the seller(s) with their respective addresses and phone numbers. Below their personal information is all the information involving their agents in the transaction.
Note: Each firm that is a member of the MLS has its own office code and the lag number of the affiliated broker. So, you will need to know the appropriate numbers when filling out a Purchase and Sale Agreement.
(On the next page please insert Sect 10 – 004 & 004A)
Page 2
Page 2 of the Residential Real Estate Purchase and Sale Agreement is the start of what are called the “general terms” of the contract. The rest of the contract form is all pre-printed. If either of the buyer or the seller wishes to change the wording of the contract, it has to be done in writing by an addendum.
Purchase Price - The pre-printed form states that the buyer must present cash at closing. Very few buyers will be able to present cash at closing which means you will have to attach an addendum that explains the financing arrangement desired by the buyer. If a broker forgets to attach a financing addendum the seller will be expecting 100% cash at closing.
Earnest Money - As you recall, earnest money deposits must be placed into an interest-bearing account. However, the buyer does not have to give earnest money with the offer to buy. If there is earnest money under this contract offer, the buyer must deliver earnest money deposits within two days of the seller's acceptance. The monies can be given to the selling managing broker or a neutral escrow party; in this contract it is Stewart Title.
Upon receipt of the earnest money the selling managing broker must give a receipt to the buyer.
If the earnest money is $10,000 or more, the earned interest can be paid to the buyer. If the earnest money is less than $10,000, the interest must be paid to the Washington Housing Trust Fund account. In either case the selling managing broker must send the earnest money deposit to the escrow at closing. If the buyer cannot abide by the earnest money requirements of this agreement within 30 days, the buyer and seller authorize the party handling an inter-pleader action to be paid $250 for such costs.
(On the next page please insert Sect 10 – 005 & 005A)
Page 2 (Continued)
Included Property - Page 2 continues with a list of real property items that are to be included with the sale of the residence. It is important to go over this paragraph with your client in detail. If any of these items are to be excluded from the sale by the seller, an addendum would have to be drawn out so stating. If any of the listed items are utilized by the seller under a lease, the seller is going to have to buy out the lease contract and include them with the house.
Delivering Title - The second part of page 2 also deals with the contract consideration required of the seller. The requirement being that the seller must deliver marketable title of the property. The condition of title section specifies that community covenants and restrictions are not considered unmarketable title. It goes on to say recorded easements on encroachments that do not lessen the property value are not considered unmarketable title. However, monetary liens/encumbrances must be paid off by the seller unless the buyer is assuming responsibility.
The seller must be able to provide a statutory warranty deed to convey the property to the buyer.
(On the next page please insert Sect 10 – 006 & 006A)
Page 2 (Continued)
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Page 2 ends with the section on title insurance. This MLS Form requires the use of the non-standard ALTA title insurance policy for the benefit of the buyer. As you recall this title policy is the best policy in that it covers unrecorded items, encroachment, and adverse possession in addition to standard coverage of most title politics. It also includes the costs of surveying the property and inspecting for encroachment and adverse possession.
If the seller cannot provide a title policy for the buyer, the buyer is allowed to terminate the agreement and receive the deposited earnest monies. However, the buyer can not come after the seller for legal damages.
Finally, as required on all legal documents, the initials of the buyer and seller are required on the bottom of each page with the appropriate date.
(On the next page please insert Sect 10 – 007 & 007A)
Page 3
Page 3 begins with the clarification of the closing date as well as the possession considerations on behalf of the buyer. When working with the buyer and specifying a closing date, it is best to look at the calendar and choose a date that is not on a holiday or the weekend. The reason is that the closing cannot occur on such days. It has to be on a day that the county recording offices is open so that the transaction can be recorded.
Possession - The buyer is entitled to possession on the day of closing. If the seller is to retain possession beyond the closing date, a rental agreement must be part of the contract. The same would be true if the buyer needs possession prior to closing. One of the main mistakes made by licensees when this occurs
is not notifying the involved home owner insurance company of these extended possessions.
Property Exchange - Section “g” deals with a like-kind exchange. This is a rare event and very few licensees ever get involved with this, but it discusses the monetary requirements that are involved. If you happen to come upon an exchange sale, contract your managing broker supervisor for help.
(On the next page please insert Sect 10 – 008 & 008A)
Page 3 (Continued)
Page 3 continues with clarification of the closing cost responsibilities of the buyer and seller. You must be very careful and let your client understand the costs that they're going to have to bear in escrow. There are a lot of buyers out there that think the seller pays for the entire escrow costs and that is not the case under this contract. The buyer has to pay for loan costs, credit report, appraisal, the lender's title policy, half the escrow costs, and related proration (their share) of expenses for the home such as property tax and the amount of fuel left in the oil tank. This must be all clarified to the buyer prior to presenting the offer. If the buyer does not want to bear some of these costs and shift them to the seller, this must be spelled out in the offer presented to the seller.
Transferring Responsibility - All local improvement districts and utilities must be notified in advance so they can settle up the bill responsibilities of the seller and transfer responsibility to the buyer.
Sale Information - This MLS Form allows the listing agent/selling agent to publish the residence information on the multiple listing service. The information will go out to members, lenders, appraisers, and other entities related to the sale. If the buyer or seller does not wish information to be released to specific parties, there must be an addendum added with those instructions.
(On the next page please insert Sect 10 – 009 & 009A)
Page 3 (Continued)
The final sections of page 3 begin with the legal Federal requirements of the Patriot Act. This act is designed to prevent monies from being available for terrorist acts. It is also designed to prevent money laundering or the foreign party taking all the money out of the country without paying capital gains tax. It is the responsibility of the escrow agent to determine that the seller is not a foreign person as defined in the Foreign Investment in the Real Property Tax Act or FIRPTA. If the escrow agent feels the seller is a foreign national and not exempt under FIRPTA, the escrow agent must withhold appropriate tax and send it to the IRS. The IRS will then take over with their own investigative work.
Notices - This section is designed to meet the requirements of the Statutory of Frauds Act. As discussed in earlier chapters, the Purchase and Sale Agreements must be in writing. This further states that all communications and alterations to this contract have to be in writing. As a real estate professional you must keep copies of such communications with the initials of the involved parties on them for 3 years.
Disclosures – Appropriate disclosures include Form 17 Seller’s Disclosure Form, lead based paint notification, public offering statements, resale certificates, homeowner association documents, and rights to preliminary commitments for title insurance. Where applicable, these disclosures must be presented to the buyer.
(On the next page please insert Sect 10 – 010 & 010A)
Page 4
Notification Time Clarification – The time requirements of the contract are clarified to NOT include weekend days and holidays as part of the notification requirements. However, the buyer and seller can agree to different terms if they so wish. This is rarely done unless specific problems need to be worked out. Use of Form 22D would then be used to amend this agreement with initials by both parties.
Electronic Communication – With the extensive use of Fax machines and E-mail communication, the P & S Agreement agrees that such communication is the same as delivering the original document by hand. However, there must be an original signature on the original document that is Faxed or sent by E-mail. Any changes in this use must be agreed to by the buyer and seller in advance.
(On the next page please insert Sect 10 – 011 & 011A)
Page 4 (Continued)
This Purchase and Sale Agreement is THE CONTRACT and any changes to it must be in writing and signed/initialed by both the Seller and the Buyer. The Buyer cannot assign another person to sign on his/her behalf unless both parties agree otherwise in advance.
Default – This is a very important part of the P & S Agreement and you must explain this section to your client prior to their signing of the document. This is especially true for the buyer and his/her earnest money deposit.
1. Line 8 on Page 1 of this document offers two choices to be checked. One is “Forfeiture of Earnest Money” and the other is “Seller’s Election of Remedies”. The first box simply allows the Seller all the earnest money OR 5% of the purchase price WHICHEVER IS LESS if the buyer is in default. The seller cannot sue for other damages. The second box “opens Pandora’s Box” in that the seller can take the earnest money PLUS sue for total legal damages.
2. Legal Costs - Finally, Section “q” explains that each principal should seek professional legal advice. It also states that if legal action occurs, the losing party shall pay for all the legal costs.
(On the next page please insert Sect 10 – 012 & 012A)
Page 4 (Continued)
This part of the P & S Agreement deals with the offer and counteroffer areas that we discussed at length earlier in this course. The main factoris the time the offers and counteroffers become effective and expire. The clock hour factors cut off at 9PM and not at Midnight. If the expiration date is 4/12, the offer expires at 9PM on 4/12.
Offer – The buyer’s offer can be cut off by the buyer “at any time” prior to notification of acceptance. In the past, some agents have procrastinated themselves right out a commission because they did not deliver their client’s acceptance in a prompt manner.
Counteroffer – If the seller wants to change “anything” on the buyer’s offer, it becomes a counteroffer. The buyer then has the option of accepting the counteroffer or not from the seller. The buyer is relieved of his/her offer. An established agent tells the story where his selling client received a good offer. The seller wanted to take the refrigerator with her when she moved out. Her agent so noted the request on an amendment (counteroffer). The buyer then backed out of his offer.
The form states that counteroffers automatically expire on the 2nd business day following the counteroffer being submitted to the buyer at 9PM. If the counteroffer is to be extended beyond 2 days, the counteroffer would have to be amended accordingly.
(On the next page please insert Sect 10 – 013 & 013A)
Page 5
The first section on page 5 clarifies the agency position and disclosure of the involved licensees. The main aspect is when the seller is represented by the listing agent or selling agent who was also working on behalf of the buyer. This of course is dual agency. Both the seller and the buyer would have to agree with the dual agency and sign an agreement as such.
Agency Pamphlet - When the buyer and the seller sign thePurchase and Sale Agreement, they are acknowledging that they've received the agency pamphlet.
Commission - With the seller and buyer signing the Purchase and Sale Agreement, they agree to pay commission in accordance to the listing agreement. If the buyer or seller try to prevent commission and legal action ensues, the loser in any legal proceeding shall pay all legal fees.
Lead-Based Paint - Any involved residence that was built prior to 1978 requires the seller to present the buyer with the lead-based paint and lead-based paint hazards pamphlet printed by the Federal government as well as the Multiple Listing Service form 22 J to the buyer. The buyer then has three business days to request action or rescind the agreement by 9 p.m. on the following third business day.