Essential Components of a Real Estate Purchase Agreement
A California real estate purchase contract typically includes several key elements, which are important for both buyers and sellers to understand. First and foremost, the contract must cover the property details. This section identifies the specific piece of real estate being purchased or sold, including its address, parcel number, and any other relevant information about the land or property being transferred. The contract will also include information on the purchase price and payment terms. This section outlines not only the total cost of the property, but also how it will be paid for. Buyers should take great care in ensuring that terms such as the amount of the deposit and installment arrangements are clearly spelled out in the contract. The property closing is another important element that must be included within the contract. It should define the closing date so that both parties know exactly when the transfer will occur and other details relating to that timeline. This section should also identify who will be present at the closing , what documents or information need to be exchanged, and if there are any conditions that must be met prior to closing. Finally, contingencies ensure that the purchase agreement will only go forward if certain stipulations are satisfied or met. For instance, an appraisal can be a contingency that ensures any bank financing involved can move forward and protect a buyer from being overpaying on a property. Other types of contingencies might include financial, home sale, and buyer/seller contingencies. The latter two stipulate that the buyer or seller can back out of the agreement if their current home does not sell within a particular period of time.
Legal Considerations under California Law
California real estate purchase contracts must meet certain legal requirements specific to California. One critical requirement is the mandatory additional disclosures in the State of California, prior to closing, including: (1) Natural Hazard Disclosure Reports (2) Residential Risks Reports, (3) Lead Based Paint Disclosures, as well as (4) a Disclosure pertaining to Prop 65, and other local disclosures, and (5) a Sellers Property Questionnaire.
The seller also must provide the buyer with a Real Estate Owned Addendum if they are selling bank owned properties. The Residential Purchase Agreement ("RPA") allows for the use of either of two alternative forms to be used in lieu of the RPA (which is not mandatory). Either the Short Sale Addendum or the REO Addendum must be used. These provisions are required, comply with mandatory instead of just suggested paper work.
The California RPA is also different to other states as follows:
- Use the RPA in lieu of the 16 forms used in the past. These were used as the prior commonly used agreement in California.
- At the time of execution of the purchase agreement, the seller will need to disclose whether or not the property has a homeowners association or association fees.
- Provide for a cost of escrow, title, recording, and any applicable transfer fees to be paid by the buyer, seller or shared.
- The dispute resolution section of the RPA requires that the buyer must have the right to mediation.
This tends to makes the RPA quite different than most standard form agreements. The RPA has several paragraphs covering the real estate purchase process itself. The entire real estate business is covered, including conventional types of transactions, commercial transactions, residential transactions, or even a mixed use project. Everything about the deal is expressly covered.
The sections are quite different than a general form and as a result the terms tend to tend to be very specific for each area of the transaction. From closing costs, conditions to closing, to both parties duties, rights and obligations.
In recent years, as the market starts to realize the housing bubble burst, the RPA has changed to provide for that reality. Initially the market demand for mortgages then was not necessary. Other changes have also been added to reflect changes in the market. For example, specifically addressing public easements.
Another significant change is that the RPA now requires the seller to mortgage specifically the tax status of the property and if they plan to pay taxes according to that schedule. Sellers Repayment or charges can be made if the property will no long…
The RPA is a complete purchase agreement. In California, it is the only purchase agreement recommended for commercial or residential real estate transactions. There are other forms specifically used for these purposes, and the language can be modified to a great many degree in a negotiation to tailor the agreement to reflect the terms of the transaction.
Typical Contingencies in California Purchase Agreements
Real estate purchase contracts in California often contain a number of contingencies that are designed to protect the buyer and the seller until certain conditions are met. Some of the most common contingencies include the property inspection contingency, the loan contingency and the appraisal contingency.
The property inspection contingency gives buyers time to determine whether they want to proceed with the purchase after looking closely at the home. The duration of the contingency is typically 10 days, and during that time the buyer has obvious protections. However, if the buyer misses this time period for any reason such as the lack of an adequate home inspector or simply forgetting, he or she may have no right to terminate the contract and obtain a refund for the earnest money deposit even if problems are later discovered during the home inspection. This is an added incentive to hire a good home inspector.
The appraisal contingency means that the parties agree that, in order for the purchase to go through, the property must be valued at a certain minimum price. If the house appraises below the agreed upon sales price, the buyer can walk away with his or her deposit. Either party can call for an appraisal, and if the appraisal turns out to be too low, the buyer can terminate the agreement, although a willingness to renegotiate based on the appraisal is certainly advised.
The loan contingency, sometimes called the mortgage contingency, is one way buyers can get out of a contract if they have not been able to obtain financing. For example, if a buyer applies for a loan and anticipates that he or she will qualify for it, the loan contingency protects the buyer until that happens. If the buyer does not obtain financing before the contingency expires, he or she can be disqualified from backing out of the agreement. In this case, the buyer may lose the deposit, even if the seller can demonstrate that he or she was able to resell the home to someone else at a better price.
Working with California Real Estate Agents and Attorneys
Real estate agents and attorneys each play a distinct role in the process of drafting, reviewing and negotiating the terms of a purchase contract. Real estate agents are frequently involved in all aspects of real estate transactions, from representing buyers and sellers in negotiations, preparing, and submitting offers, and occasionally conveying advice and guidance on the real estate transaction as a whole. While real estate agents are not licensed to offer legal advice, they are knowledgeable about the industry and have an in-depth familiarity with standard marketing practices and strategies in their capacity as real estate professionals. They tend to know the local market for a particular property better than anyone and are able to provide insight into the bargaining position of the seller and the buyer. Real estate agents are therefore well positioned to advise their clients during pre-contract negotiations as to best practices and current market trends.
A real estate attorney’s involvement is appropriate for any individual or company involved in a sale or purchase of real property, regardless of the size of the transaction. Many buyers and investors also chose to rely on a real estate attorney when selling or buying real property, because of their ability to draft contingencies and advise on matters beyond the parameters of a typical transaction. A real estate attorney can help review and ensure the quality and proper form of the contract, reconcile differences in language between competing drafts, and protect the client’s best interests; they understand the specific terms to propose or avoid during negotiations to govern the exchange of property. As attorneys, they are trained to assess the broader ramifications and legal implications of a particular transaction and are generally able to envision various scenarios for the future which they consider in the context of the purchase contract. While a real estate agent may suggest the inclusion of an unusual provision in a purchase contract, an attorney has the formal training necessary to ensure that all provisions are legally sound and that the client’s interests are protected by an appropriate indemnification language or other delicately-crafted contractual protections. An attorney can provide insight into the risks and opportunities presented by certain terms and conditions in the purchase contract and advise the client on how to diminish legal risk, e.g., through the negotiation of certain representations and warranties.
A real estate attorney and real estate agent work together to ensure that the sale of real property proceeds smoothly and that the client’s best interests are protected.
Negotiating Purchasing Terms and Conditions
As with any written contract, negotiating the terms of a California real estate purchase contract should be approached as an opportunity to seek a balanced agreement that works for both parties. This means considering and understanding the priorities of both the buyer and the seller, and then reaching an accord and compromise on the main points. Experience has found that when the negotiation process is used to develop a creative and inclusive approach, with a detailed understanding and acceptance of the terms of the agreement, both parties can be empowered to achieve a mutually beneficial contract.
The terms and conditions of a California real estate purchase contract cover a variety of elements , including financing, inspections, contingencies and the closing process. When negotiating a purchase contract, it’s vital to remember that it’s not only prices that will determine its value, but also contingencies, disclosures and other obligations that will affect the buyer’s and seller’s obligations. The terms need to work on multiple levels: the immediate future, the future of the property and the future of the buyer. Figuring out what you need and want is an essential first step in any negotiation, as is the ability to keep an open mind and come up with alternative proposals that might not have been considered from the outset.
Troubling Aspects to Look Out For
Pitfalls to Look Out For and Tips to Avoid Them
One of the primary issues that can go wrong with a real estate purchase contract is that a buyer or seller will try to change it after the contract has been executed. While it is common for buyers and sellers to want to negotiate issues along the way, all negotiations should be conducted in an amendment, counter offer or other written instrument signed by the parties. For instance, if a buyer states that it needs 3 additional days to perform due diligence but no contract amendment or extension of time is executed—then that buyer may find itself bound to close even if it finds contractual breaches that it really wants addressed. Or, a Seller may need additional time to vacate the property and continue with its business on site. Again, if this negotiation is not put into a contract amendment at the end of the day, a party will not be able to enforce the alleged agreement.
Another pitfall many parties find themselves facing is when they insist on using their own forms or other forms that are more favorable to them. For instance: a "handwritten" contract often times carries no legal weight whatsoever and will not be enforceable. In California, agents and brokers should only be using CAR forms, which are already negotiated by professional groups and leadership lawyers within the real estate industry. The best advice is to always stick as closely as possible to the CAR forms whenever any issue comes up—otherwise your party could find itself exposed to significant liability for causes of action such as the negligent misrepresentation, fraud and breach of contract.
Some of the most common potential pitfalls are:
- Submit offer when it is not negotiable;
- Agreeing to terms for which one or both parties have not been properly prepared to comply with; and
- Allowing emotional arguments to win over business judgment calls.
Last-Minute Considerations Prior to Closing a Real Estate Transaction
Once you are satisfied with the terms of your contract, the purchase price and upgrades, you will want to make sure that you have the financing in place to proceed with the deal. As mentioned above, the contract should be subject to your ability to secure financing. In California, the buyer typically prepares a loan application and the application is then forwarded by the buyer to the seller. Or, the seller can make the financing arrangements, whether it be through a private lender, bank or mortgage company. If the seller does finance the deal, the seller will not only charge interest on the outstanding amount, the seller will also want a note secured by a deed of trust. The seller will charge points and/or fees for the loan. A deed of trust is the security by which the seller receives payments and each payment should be endorsed on the security instrument or on a separate writing .
Under the conditions of the contract, the seller is required to provide a title insurance policy to you at his expense and you will also get title insurance if you get a loan. The deed of trust used with new loans or current loans is the owner’s title policy. The cost of the owners policy is the responsibility of the seller. The seller will also be responsible for paying for an extended coverage policy. A lender’s policy will be provided by the lender at his expense. This policy will insure the lender up to the amount of the loan made.
It is always a good idea to review the final purchase contract immediately prior to closing the transaction. Items to take notice of include: The buyer should have the right to review any new documents before closing the transaction.