What is a Purchase Agreement in Real Estate?
A Real Estate Purchase Agreement is a private contractual agreement between a buyer and seller for the purchase of a property (or multiple properties). This agreement is often referred to as an Offer to Purchase in Iowa. The main purpose of an REPA is to show a good faith intention by the buyer to buy the property, and the seller to sell the property , under at least some identifiable terms. Specific terms in what is called the Purchase and Sale Agreement can be negotiated, but vital terms are often statutorily or customarily implied to the agreement if not expressly stated. While some contracts are contingent on the buyer satisfying contingencies such as receiving financing approval, the REPA itself does not typically contain substantive buyer contingencies.
Key Components of an Iowa Real Estate Purchase Agreement
A thorough understanding of real estate purchase agreements requires familiarity with the key elements contained therein. Some elements are common to all U.S. states while others are specific to Iowa’s laws and regulations.
The Parties Involved
All parties to the real estate contracts in Iowa involve the seller of the property, the buyer of the property, the seller’s agent, the buyer’s agent, the broker, and the mortgage lender, if applicable.
Property Details
For that reason, it’s essential to include a complete legal description of the property, including which fixtures are included in the sale and which fixtures are excluded from the sale. Generally, exterior fixtures that can be readily removed from the property following closing are not included as part of the sale. The listing agreement should be carefully reviewed to determine which fixtures will be included in the sale and which fixtures are considered personal property and not included in the sale.
Purchase Price
The contract must list an offer price for the property, any deposit amount, and the balance due at closing. The buyer must also specify whether closing is contingent on mortgage financing.
Inspection Contingencies
Included in the offer can be a provision that the property will only be sold after the buyer has had a full inspection, during which the buyer can back out of the deal if the condition of the property is unacceptable upon inspection. If there are multiple contingencies, any one of the contingencies could impede closing, resulting in cancellation of the contract if the conditions are not met.
Other Iowa-Specific Legal Requirements
Iowa law requires that an Iowa real estate broker provide to their clients, which includes both buyers and sellers, the Buyer’s and Seller’s Residential Real Estate Disclosure Statement. This form, or something similar, must be provided for every sale of residential real estate in Iowa unless specifically exempted by statute. This disclosure can be modified or expanded by adding additional disclosures or attachments. The Buyer Disclosure can be found at I.C.A. 558A.3. The Seller Disclosure can be found at I.C.A. 558A.5. The Iowa Code allows the Seller to indicate that they have no knowledge of any of the conditions required to be disclosed (the Buyer’s Disclosure contains a "none" box).
In addition to providing the Buyer’s Residential Real Estate Disclosure to a Buyer, Iowa law requires that a Seller provide a Residential Property Disclosure and Disclaimer Statement to a Buyer. By signing this form, the Buyer will be agreeing that they do not want a property disclosure. A Seller who chooses to have one must allow the Buyer or Seller access to the property to conduct inspections of their choice prior to the sale. The Seller is required to pay for the first $75.00 of the Buyer’s inspection if the Buyer provides notice to the Seller of a desire to conduct an inspection. Alternatively, the Seller may provide a home warranty in lieu of making certain disclosures to the Buyer. In either case, if the Buyer chooses to terminate the purchase of the Property, the Earnest Money Deposit must be returned. See 558A.11 of Iowa Code.
If a Seller chooses not to have a property disclosure stating that there are no known defects, they cannot disclose what they know about the property. They would not be able to answer any questions about the condition of the house. They must provide a Disclaimer Statement acknowledging that they have chosen not to make disclosures to the Buyer. If you choose to have the Seller provide the disclosure, then the Seller volunteers to disclose all the conditions that they know exist in the house whether or not they are required to do so.
The Iowa Supreme Court has held that when a real estate purchase agreement contains the condition that there is "free and clear title" to the property, that condition must be met. Otherwise, the Buyer can void the contract. See Brederson vs. Nelson-Dumont Assoc. Inc., 1998 WL 413689.
Steps to Drafting an Iowa Agreement
The steps involved in drafting a real estate purchase agreement are as follows:
Step 1 – Decide if you need help preparing and drafting the agreement. If not, you can go to www.IowaLandRecords.org, enter the county you own land in and research the public records to find a real estate purchase agreement that was prepared for a similar transaction. Iowa Code 558.31(2) essentially provides that a person has no liability for preparing and drafting an agreement if the form is procured from the county recorder’s office. Obviously, you would want to vary the agreement’s terms to fit your transaction and avoid including any personal information of the seller’s that could be confidential. You would also want to be sure that the agreement you obtained was not based on a purchase agreement that brought a judgment against the author. When this happens, there could be a "cloud" on your title which may take time and money to get extinguished.
Step 2 – If you decide to draft the agreement yourself, there are a few things you should know about arrangements for legal counsel:
Attorneys may either draft an agreement with specific provisions for a unique transaction or consult with a party to provide insight on how a legal concept or provision may be construed by the courts.
Real Estate Attorneys must be aware of the issue date and terms included in the title insurance policy. In recent years, title companies have refused to insure a home purchase arising out of a divorce mediated settlement agreement based solely upon the divorce court’s finding that the real estate was distributed equitably to the wife. Desiring to essentially "bring certainty" to the sale, the real estate attorney should suggest that the wife obtain a divorce court approved quit claim deed from her husband indicating the basis for the property being conveyed to her. A real estate agent is not permitted to give this advice as it constitutes providing legal advice without a license to do so.
If you decide to have a real estate attorney draft the agreement:
An attorney has the ability to customize the agreement for your specific transaction. An attorney can also explain what unclear terms in the standard agreement mean to you and how they could impact you.
Attorneys may charge an hour or could draft the agreement for a flat fee charge. They will give you an estimate of their fees up front. Your agreement cannot be "unlimited" because it has to benefit someone. An attorney who agrees to only charge for time spent on your transaction even after a dispute arises is taking a huge risk by charging only for time spent during the agreement process.
Having an experienced real estate attorney draft the agreement is the best way to avoid legal claims later on in the deal process.
Common Mistakes and How to Avoid Them
Common mistakes are made by buyers and sellers when executing purchase agreements. From my experience with Iowa real estate law, I have identified a number of the most common errors and how to avoid them.
For the purchaser, one common mistake is failing to have the agreement evaluated thoroughly by legal counsel before signing. A purchase agreement for a residential property is usually presented to the buyer by the seller’s agent. The buyer may feel pressured to sign the agreement promptly to avoid losing the property. In such a case, the purchaser should consider hiring a real estate attorney to review the agreement even if they cannot possibly sign the agreement in a timely manner due to the review of it by an attorney. The fact is that many times buyers and sellers of real estate consult with their attorney after the fact only to realize that issues are arising out of their inability to understand the terms of the purchase agreement that were previously discussed. Such consultation will require additional fees from the attorney as time must be spent assessing the situation and proposing a solution.
The biggest mistake made by sellers is failing to make the purchaser aware of defects in the property. Iowa code section 558A requires sellers and real estate agents of a property to disclose any known defects of the real estate. All offers to purchase real estate in Iowa require some type of disclosure. Real estate agents will often include a "purchase agreement seller disclosure" with the offer that lists known defects. However , as stated in the statute, the seller is required to keep the purchaser updated of any changes in the condition of the property during the period until the sale closes. Furthermore, not all issues will be addressed by the seller’s disclosures, so a seller should err on the side of caution in order to prevent suability by the purchaser after the deal closes.
Buyers and sellers also often make a mistake in not fully disclosing contingencies for the sale of a home in the purchase agreement. A contingency means that the contract to purchase the real estate depends upon both buyers and sellers meeting despite any uncertain effect. Often times buyers will purchase a new home unconditionally if the sellers have not yet purchased or sold their old home. The buyer will discover after closing that the seller had not yet purchased a new home, but were in the process of closing. This situation is devastating to a home buyer that signed a purchase agreement without adding the condition of their sellers closing on an acceptable property.
Changes and Dispute Resolution
This Agreement may not be changed or supplemented except by a written addendum dated as of the date of execution hereof, signed by Buyers and Sellers. Requests for changes to the Property, or as a result of any inspection, environmental test, survey, study or report shall be made by either Buyers and/or Sellers, in writing, upon notice to the other.
In an event of dispute, this Agreement may be declared void by the party to the Agreement adversely affected by any claim of material breach or default of the terms hereof on the part of Buyers and/or Sellers provided that, before declaring this Agreement to be void, Buyers and Sellers shall give the other written notice thereof setting forth the nature of the alleged breach or default and demand a closing, such notice and demand shall be given at least 20 days prior to any purported closing date.
Final Considerations and Tips
In conclusion, a real estate purchase agreement is a fundamental component of any successful property transaction. It not only protects the interests of the buyer and the seller but also streamlines the entire buying process. Having a solid purchase agreement can potentially save both time and money and can help reduce the stress often associated with buying a home.
For buyers, it is essential to thoroughly read and understand the terms of the purchase agreement before signing it. Consider seeking legal counsel to ensure that you know exactly what you are signing.
Sellers , on the other hand, should be transparent about their property’s condition and be sure that any representations they make are accurately reflected in the purchase agreement.
Both parties should stay involved in the process and respond promptly to any requests for additional information or documentation. Finally, remember that real estate transactions are the result of negotiation; therefore, don’t hesitate to ask for clarification or adjustments to the agreement if necessary.