REAL ESTATE PRACTICES - Realestateschool.org

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REAL ESTATE PRACTICES UNIT F PURCHASE AND SALE AGREEMENTS INTRODUCTION Forms are an essential part of the transfer of real estate. It is important that you, as the real estate professional are familiar with these forms, know how to use them and have the ability to explain the terms contained within these forms to your clients. These forms aid in the development of a legally binding contract between the parties and express the terms, conditions, timeline and promises of the seller and the purchaser. Should an issue or dispute ever arise between the parties to a contract, these forms and their content will be of the utmost importance in arbitration or in a court of law. This chapter focuses on the standard forms used for buyers in a transaction. OBJECTIVES After completing this transaction you should be able to: 9 Complete a residential Purchase and Sale Agreement with common addenda 9 Explain or discuss the typical contingency clauses that would be used in a residential Purchase and Sale Agreement. Be able to explain these contingencies to a client 9 Identify the necessary components that will make the agreement an enforceable contract 9 Identify the main types of contracts most commonly used in residential sales transactions and explain their function 9 Identify the appropriate circumstances on when to consult your broker or manager when writing a Purchase and Sale Agreement 162 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
9 Explain when to seek legal assistance when writing a Purchase and Sale Agreement 9 Explain possible problems areas, such as modifying a contact after mutual acceptance, canceling a contract and other law issues 9 Discuss the necessity of obtaining and using a correct legal description in a Purchase and sale Agreement. 9 Explain when a street address is not sufficient 9 Describe appropriate methods of addressing the following circumstances in a written agreement: a pending divorce action, partnership or corporate sellers or buyers, builder or seller guarantees, pending foreclosure action, pending personal bankruptcy of a seller and sales involving estates. 9 Explain the importance if notification of acceptance 9 Explain the legitimacy of facsimile versus e‐mail or original copies 9 Describe the importance of the Statute of Frauds regarding real estate contracts 9 Explain the terms “contingency” and “subject to” and explain how they are used in a Purchase and Sale Agreement 9 Define the term “enforceable” and explain what conditions are necessary for a Purchase and Sale Agreement to be enforceable. 9 Define the term “earnest money” and describe three acceptable forms of earnest money and demonstrate proper handling procedures 9 Describe appropriate conduct and behavior when showing property and presenting offers regarding Fair Housing Laws 9 Discuss the importance of communication with all parties in the transaction 9 Discuss the fine line between multiple contract addenda and unauthorized practice of law 9 Understand that forms change often, and know the necessity to review the content of these standard forms COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
163 RESIDENTIAL PURCHASE AND SALE AGREEMENT The Residential Purchase and Sale Agreement is the most commonly used form for purchasing property. See Insert Residential Purchase and Sale Agreement Form # 21 (5 pages) 164 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
Note: Do not leave any spaces blank on any preprinted forms. If the space does not apply, put a hyphen through it. This applies to all forms that we will be discussing in this chapter. PAGE ONE OF THE RESIDENTIAL PURCHASE AND SALE AGREEMENT (PSA) Key provision of the Purchase and Sale Agreement From (Page 1 NWMLS form 21) Date: (1) This is the date that the PSA is written and NOT the date that the transaction will close. MLS No: (2) Enter the multiple listing number. If there is no MLS number, such as in the case of a “for sale by owner” transaction, place a hyphen in the blank. Buyer: (3) Enter the names of all the purchasers. Each purchaser should have their full name stated. The correct form is John K. Smith and Mary L. Smith and not John K. and Mary L. Smith. Note: for purposes of identity, use a middle initial for each purchaser whenever possible. Seller: (4) Enter the names of all of the sellers. Property: Tax Parcel Number and Street Address (5) This is the tax identification number assigned by the county tax assessor. On listed property, this identification number can usually be found on the MLS printout. On a property that is not listed, this information can be obtained through a local title company. County: (6) Enter the county where the property is located Street Address: (7) Enter the street (common) address here. Do not enter the legal description. Legal Description: (8) Attached as Exhibit A Attach a full legal description from the last deed and label it Exhibit “A”. Do not “write in” the legal description. This is one of the most important entries in the contact. Without a full legal description initialed by both parties, the contact is voidable. 170 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
Included Items: (9) Specify all included items that may not be attached to the property such as appliances, wood stove, security systems, etc. Note that these items must be specifically identified in the contract even if they are stated as included in a MLS printout. This is because an MLS printout is not a contact and it is not sufficient to rely on the comments stated on the listing printout. Purchase Price: (10) This is the amount that the purchaser is offering the seller. It can be stated as a figure amount ($659,000.) or a legal amount (six hundred and fifty‐nine thousand dollars) or both as long as the figures match. Earnest Money: (11) Check the box which applies to where the earnest money will be held. Note that all earnest moneys are required to be held in a trust account in Washington State. If your brokerage does not have a trust account, then the earnest money will need to be held by the closing (escrow) agent. Next enter the amount of the earnest money and the form of the earnest money. While cash is a legal form of earnest money, it is not preferred form. Many brokerages will not accept cash as earnest money because of the lack of accounting and the liability. Default: (12) This provision addresses consequences of the earnest money should a purchaser default. Check either the (1) Forfeiture of Earnest Money box or the (2) Seller’s Election of Remedies. If box number 1 is checked then the purchaser is limited to the amount that they could lose equal to the earnest money should they default. If box number 2 is checked, then there is a possibility that the purchaser could lose their earnest money and be sued for specific performance or damages in the event of a buyer default. Disclosures in Form 17 (Sellers Property Disclosure Statement): (13) Check the box to state if the purchaser will or will not have a remedy for seller’s negligent errors, inaccuracies or omissions on this form. Title Insurance Company: (14) While the selling agent can list any local title company that they choose, it might be best to check with the listing agent before choosing the insurer. Many times, the listing agent has already ordered a preliminary commitment for title insurance with a specific company and will want to continue to work with that insurer. Closing Agent: (15) The closing agent is the escrow company which is a neutral third party where the purchaser and the seller will sign closing documents. The closing agent will ensure that all the terms of the PSA have been met and will be responsible for the exchange of funds from the purchaser and their lender to the seller. In addition, they will be responsible for the transfer of the deed from the seller to the purchaser and the recording of any documents with the county. The closing agent may be an escrow division at a title company, a private escrow company or an attorney. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
171 Closing date: (16) Specify the date that you would like the transaction to close. Keep in mind the following: • This date should not be on a weekend or holiday since the county will not be able to record the documents during this time frame. • Allow sufficient time for the lender to process the loan and produce loan documents prior to closing. • Check with your purchasers to find out if they have obligations regarding their current living situation. An example would be a client who has a lease on an apartment for 55 days from the date of writing the PSA. Possession: (17) Check either box: On Closing or Other. On closing is self explanatory. Here’s an example of “other”. Closing + 3 days. This tradition of allowing the seller to occupy after closing originated from the idea that the seller may need the net proceeds from their current residence before they can purchase their next residence. When a seller occupies the property after closing the issues of liability for the purchaser increase exponentially. Whenever possible attempt to negotiate for possession on closing. Offer Expiration Date: (18) Enter the date that the offer expires. Please make note of the following: • If the offer expiration date is shorter than the seller will have a less likely chance to accept a higher offer from another interested buyer. • If the seller is not living locally, especially if they are living out of the country, you may want to allow extra time for their response. • What happens if the expiration date has expired and the purchaser and the seller both still want to proceed? No problem. Change the expiration date and have both parties initial the change. Services of Closing Agent for Payment of Utilities: (19) Check either box: Requested (attach Identification of Utilities form such as NWMLS Form 22K) or Waived. If this item is requested, then the seller will be required to identify the names and address of the water district, sewer district, irrigation district, garbage pick‐up, provider for electricity, gas supplier and any other special districts (local improvement districts or utility local improvement districts). In most circumstances, there will be a charge if escrow is instructed to pay all the final utility bills. Charges and Assessments Due After Closing: (20) Check either box: Assumed by Buyer or Prepaid in Full by Seller at Closing. Agency Disclosure: (21) Check one box for each line: 172 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
Selling Licensee Represents: Buyer Seller Both Parties Neither Party Listing Licensee Represents: Seller Both Parties Addenda: (22) List all addenda to the Purchase and Sale Agreement. Examples of these would include a financing addendum, a structural inspection addendum, a utilities addendum Etc. Buyer’s Signature: (23) Requires the full signature of all persons who are purchasing. Buyer’s Address, Phone, Fax and E‐mail Address: (24) It is always best to specify location of the phone number (such as home, work or cell) and the location of the fax number (such as work or home) Selling Broker: (25) This is the brokerage that is writing the offer. MLS Office No.: (26) Enter your office MLS number here. Selling Licensee: (27) This is the licensee who is writing the offer Lag # (28) Selling Broker’s MLS number (LAG #) Phone # (29) Selling Broker’s Phone #. Specify cell, office or home Fax # (30) Selling Broker’s fax #. Specify home of office Seller’s Signature (31) Signature of all sellers Seller’s Contact Information (32) Seller’s address, phone, fax and e‐mail address Listing Broker (33) The name of the brokerage that listed the property Listing broker MLS Office # (34) MLS Office number Listing Licensee (35) Licensee who listed the property Listing Licensee’s Lag # (36) Listing Licensees MLS number (LAG) # Listing Licensee’s Phone # (37) Specify cell, home or office # Listing Licensee’s Fax # (38) Specify home office or real estate brokerage # Pages 2‐5 of the Residential Purchase and Sale Agreement Initials and dates from the sellers and purchasers are required at the bottom of pages 2, 3, 4 and 5. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
173 VACANT LAND PURCHASE AND SALE AGREEMENT See Insert Vacant Land Purchase and Sale Agreement Form # 25 (5 pgs) 174 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
PAGE ONE OF THE VACANT LAND PURCHASE AND SALE AGREEMENT (PSA) Date: (1) This is the date that the PSA is written and NOT the date that the transaction will close. MLS No: (2) Enter the multiple listing number. If there is no MLS number, such as in the case of a “for sale by owner” transaction, place a hyphen in the blank. Buyer: (3) Enter the names of all the purchasers. Each purchaser should have their full name stated. The correct form is John K. Smith and Mary L. Smith and not John K. and Mary L. Smith. Note: for purposes of identity, use a middle initial for each purchaser whenever possible. Seller: (4) Enter the names of all of the sellers. Property: (5) Tax Parcel Number This is the tax identification number assigned by the county tax assessor. On listed property, this identification number can usually be found on the MLS printout. County: (6) Insert the county where the property is located Street Address: (7) Insert the street (common) address Legal Description: (8) Attached as Exhibit A Attach a full legal description from the last deed and label it Exhibit “A”. Do not “write in” the legal description. This is one of the most important entries in the contact. Without a full legal description initialed by both parties, the contact is voidable. Purchase Price: (9) This is the amount that the purchaser is offering the seller. It can be stated as a figure amount ($378,000.) or a legal amount (three hundred seventy eight thousand dollars) or both as long as the figures match. Earnest Money: (10) Check the box which applies to where the earnest money will be held. Note that all earnest moneys are required to be held in a trust account in Washington State. If your brokerage does not have a trust account, then the earnest money will need to be held by the closing (escrow) agent. Next enter the amount of the earnest money and the type. While cash is a legal form of earnest money, it is not preferred form. Many brokerages will not accept cash as earnest money because of accounting and liability. Earnest Money: (11) State the amount and form of the earnest money 180 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
Default: (12) This provision addresses consequences of the earnest money should a purchaser default. Check either the (1) Forfeiture of Earnest Money box or the (2) Seller’s Election of Remedies. If box number 1 is checked then the purchaser is limited to the amount that they could lose equal to the earnest money should they default. If box number 2 is checked, then there is a possibility that the purchaser could lose their earnest money and be sued for specific performance or damages in the event of a default. Disclosures in Form 17 or 17C (Sellers Property Disclosure Statement): (13) Check the box to state that the purchaser will or will not have a remedy for seller’s negligent errors, inaccuracies or omissions on this form. If there is a structure, of any type on the property the listing agent should use form 17. If the land is vacant use form 17C Unimproved Property Disclosure. Title Insurance Company: (14) While the selling agent can list any local title company that they choose, it might be best to check with the listing agent before choosing the insurer. Often times, the listing agent has already ordered a preliminary commitment for title insurance with a specific company and will want to continue to work with that insurer. Closing Agent: (15) Specify the closing agent. Closing date: (16) Specify the closing date Possession: (17) Check either box: On Closing or Other. On closing is self explanatory. Here’s an example of “other”. Closing + 3 days. This tradition of allowing the seller to occupy after closing originated from the idea that the seller may need the net proceeds from their current residence before they can purchase their next residence. When a seller occupies the property after closing the issues of liability for the purchaser increase exponentially. Whenever possible attempt to negotiate for possession on closing. Offer Expiration Date: (18) Enter the date that the offer expires. Services of Closing Agent for Payment of Utilities: (19) Check either box: Requested (attach Identification of Utilities form such as NWMLS Form 22K) or Waived Charges and Assessments Due After Closing: (20) Check either box: Assumed by Buyer or Prepaid in Full by Seller at Closing. Subdivision: (21) Choose one of the following: • The property is subdivided • The property must be subdivided on or before ______ • The property is not legally required to be subdivided COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
181 Feasibility Contingency Expiration Date: (22) The feasibility contingency allows the potential purchaser to check on certain aspects of the property for the feasibility of certain types on improvements such as: availability of utilities, wetlands, zoning, permits, etc. Choose one: _____ days after mutual acceptance Other _____________ Agency Disclosure: (23) Check one box for each line: Selling Licensee Represents: Buyer Seller Both Parties Neither Party Listing Licensee Represents: Seller Both Parties Addenda: (24) List all addendums to the Purchase and Sale Agreement. Examples of these would include a financing addendum, a structural inspection addendum, a utilities addendum, feasibility addendum, Etc. Buyer’s Signature and Date: (25 and 26) Requires the full signature of all persons who are purchasing. Buyer’s Address, Phone, Fax and E‐mail Address: (27, 28,29, 30) Specify the location of the phone and fax number. Selling Broker: (31) This is the brokerage that is writing the offer. MLS Office No: (32) Enter your office MLS number here. Selling Licensee: (33) This is the licensee who is writing the offer MLS LAG No: (34) Insert the LAG # of the Licensee Phone: (35) Phone number of selling licensee. Specify location of phone number (such as office, home or cell) Fax: (36) Selling agent’s fax number. Specify location of fax number (such as office or home) Seller’s Signature and Date: (37, 38) Requires the signature of all sellers and the date Seller’s Address, Phone, Fax and E‐mail Address: (39, 40, 41,42) Again specify location of the phone and fax. Listing Broker: (43) This is the brokerage that listed the property. MLS Office No: (44) MLS office number of the listing brokerage 182 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
Listing agent: (45) Licensee that listed the property for sale. MLS LAG No: (46) Insert the MLS number (LAG #) number of the listing broker Phone: (47) Insert phone number of the listing broker Fax: (48) Listing licensee’s fax number. Specify location. Pages 2‐5 of the Vacant Land Purchase and Sale Agreement Initials and dates from the sellers and purchasers are required at the bottom of pages 2, 3, 4 and 5. TYPICAL CONTINGENCY CLAUSES IN PURCHASE AND SALE AGREEMENTS A contingency is a provision in a real estate contract that specifies the contract would cease to exist upon the occurrence or non‐occurrence of a certain event. A contingency should be clearly written, concise and have a definite time limit. As a real estate professional, it will be your duty toward your client to watch these time lines very carefully and act within their limits. Many of the contingency forms essentially state that silence construes acceptance, meaning that if do don’t respond within the time period specified, then you have waived the contingency. A contract could be contingent on many items but some of the most commonly used in residential real estate are: • Inspection Addendum • Financing Addendum • Optional Clauses Addendum • Homeowner Insurance Addendum • An addendum which would address what personal property was included in the sale • Possession Addendum (if not at the time of closing) • Seller’s Representation addendum INSPECTION ADDENDUM An inspection addendum usually covers an inspection of the property and deals with structural issues, some pest infestations, underground residential heating oil tanks, and on‐ site sewage disposal systems. See Insert Inspection Addendum to Purchase and Sale Agreement Form 35 (2 Pages) COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
183 Form 35
Inspection Addendum
Rev. 12/09
Page 1 of 2
©Copyright 2009
Northwest Multiple Listing Service
ALL RIGHTS RESERVED
INSPECTION ADDENDUM TO PURCHASE & SALE AGREEMENT
1
The following is part of the Purchase and Sale Agreement dated
between
("Buyer")
2
and
("Seller")
3
("the Property").
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a. INSPECTION CONTINGENCY. This Agreement is conditioned on Buyer's subjective satisfaction with inspections
of the Property and the improvements on the Property. Buyer's inspections may include, at Buyer's option and without limitation, the structural, mechanical and general condition of the improvements to the Property, compliance with
building and zoning codes, an inspection of the Property for hazardous materials, a pest inspection, and a soils/
stability inspection.
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Buyer's Obligations. All inspections are to be (a) ordered by Buyer, (b) performed by inspectors of Buyer's choice,
and (c) completed at Buyer's expense. Buyer shall not alter the Property or any improvements on the Property without first obtaining Seller's permission. Buyer is solely responsible for interviewing and selecting all inspectors. Buyer
shall restore the Property and all improvements on the Property to the same condition they were in prior to the
inspection. Buyer shall be responsible for all damages resulting from any inspection of the Property performed on
Buyer's behalf.
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BUYER'S NOTICE. This inspection contingency SHALL CONCLUSIVELY BE DEEMED WAIVED unless within
days (10 days if not filled in) after mutual acceptance of this Agreement (the "Initial Inspection Period"), Buyer gives
notice (1) approving the inspection and waiving this contingency; (2) disapproving the inspection and terminating the
Agreement; (3) that Buyer will conduct additional inspections; or (4) proposing repairs to the Property or modifications to the Agreement. If Buyer disapproves the inspection and terminates the Agreement, the Earnest Money
shall be refunded to Buyer. If Buyer proposes repairs to the Property or modifications to the Agreement, including
adjustments to the purchase price or credits for repairs to be performed after closing, the parties shall negotiate as
set forth in paragraph 1.c, below. The parties may use NWMLS Form 35R to give notices required by this
Addendum.
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ATTENTION BUYER: If Buyer fails to give timely notice, then this inspection contingency shall be deemed waived
and Seller shall not be obligated to make any repairs or modifications.
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b. Additional Inspections. If an inspector so recommends, Buyer may obtain further evaluation of any item by a
specialist at Buyer’s option and expense if, on or before the end of the Initial Inspection Period, Buyer provides
Seller a copy of the inspector’s recommendation and notice that Buyer will seek additional inspections. If Buyer
(5 days if not filled in) after giving the notice
gives timely notice of additional inspections, Buyer shall have
to obtain the additional inspection(s) by a specialist.
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c. Buyer's Requests for Repairs or Modifications. If Buyer requests repairs or modifications under paragraph
1.a above, the parties shall negotiate as set forth in this paragraph. All requests, responses, and replies made in
accordance with the following procedures are irrevocable for the time period provided.
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concerning
1.
(i) Seller's Response to Request for Repairs or Modifications. Seller shall have
days (3 days if
not filled in) after receipt of Buyer's request for repairs or modifications to give notice that Seller (a) agrees to
the repairs or modifications proposed by Buyer; (b) agrees to some of the repairs or modifications proposed by
Buyer; (c) rejects all repairs or modifications proposed by Buyer; or (d) offers different or additional repairs or
modifications. If Seller agrees to the terms of Buyer's request for repairs or modifications, this contingency shall
be satisfied and Buyer's Reply shall not be necessary. If Seller does not agree to all of Buyer's repairs or
modifications, Buyer shall have an opportunity to reply, as follows:
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(ii) Buyer's Reply. If Seller does not agree to all of the repairs or modifications proposed by Buyer, Buyer shall
have
days (3 days if not filled in) from either the day Buyer receives Seller's response or, if Seller
fails to respond, the day Seller's response period ends, whichever is earlier, to (a) accept the Seller's response
at which time this contingency shall be satisfied; (b) agree with the Seller on other remedies; or (c) disapprove
the inspection and terminate the Agreement, in which event, the Earnest Money shall be refunded to Buyer.
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Initials: BUYER:
DATE:
SELLER:
DATE:
BUYER:
DATE:
SELLER:
DATE:
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Form 35
Inspection Addendum
Rev. 12/09
Page 2 of 2
©Copyright 2009
ALL RIGHTS RESERVED
INSPECTION ADDENDUM TO PURCHASE & SALE AGREEMENT
(continued)
ATTENTION BUYER: These time periods for negotiating repairs or modifications shall not repeat. The parties
must either reach a written agreement or Buyer must terminate this Agreement by the Buyer's Reply deadline set
forth in paragraph 1.c.ii. Buyer's inaction during Buyer's reply period shall result in waiver of this inspection
condition, in which case Seller shall not be obligated to make any repairs or modifications whatsoever AND THIS
CONTINGENCY SHALL BE DEEMED WAIVED.
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d. Repairs. If Seller agrees to make the repairs proposed by Buyer, then repairs shall be accomplished at Seller's
expense in a commercially reasonable manner prior to the Closing Date. In the case of hazardous materials, "repair"
means removal or treatment (including but not limited to removal or, at Seller's option, decommissioning of any oil
storage tanks) of the hazardous material at Seller's expense as recommended by and under the direction of a
licensed hazardous material engineer or other expert selected by Seller. Seller's repairs are subject to reinspection
and approval, prior to Closing, by the inspector who recommended the repair, if Buyer elects to order and pay for
such reinspection.
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e. Oil Storage Tanks. Any inspection regarding oil storage tanks or contamination from such tanks shall be limited
solely to determining the presence or non-presence of oil storage tanks on the Property, unless otherwise agreed
in writing by Buyer and Seller.
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f. Licensed Home Inspector. If the person performing the inspection is required to be licensed under Chapter
18.280 RCW, then that person must be so licensed.
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2.
ON-SITE SEWAGE DISPOSAL SYSTEMS ADVISORY. Buyer is advised that on-site sewage disposal systems,
including "septic systems," are subject to strict governmental regulation and occasional malfunction and even failure.
Buyer is advised to consider conducting an inspection of any on-site sewage system in addition to the inspection of
the Property provided by this Form 35 by including an appropriate on-site sewage disposal inspection contingency
such as NWMLS Form 22S (Septic Addendum).
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3.
NEIGHBORHOOD REVIEW CONTINGENCY. Buyer's inspection includes Buyer's subjective satisfaction that the
conditions of the neighborhood in which the Property is located are consistent with the Buyer's intended use of the
Property (the "Neighborhood Review"). The Neighborhood Review may include Buyer's investigation of the schools,
proximity to bus lines, availability of shopping, traffic patterns, noise, parking and investigation of other neighborhood,
environmental and safety conditions the Buyer may determine to be relevant in deciding to purchase the Property. If
Buyer does not give notice of disapproval of the Neighborhood Review within
(3 days if not filled in) of
mutual acceptance of the Agreement, then this Neighborhood Review condition shall conclusively be deemed
satisfied (waived). If Buyer gives a timely notice of disapproval, then this Agreement shall terminate and the Earnest
Money shall be refunded to Buyer.
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4.
PREINSPECTION CONDUCTED. Buyer, prior to mutual acceptance of this Agreement, conducted a building,
hazardous substances, building and zoning code, pest or soils/stability inspection of the Property, and closing of
this Agreement is not conditioned on the results of such inspections. Buyer elects to buy the Property in its present
condition and acknowledges that the decision to purchase the property was based on Buyer's prior inspection and
that Buyer has not relied on representations by Seller, Listing Agent or Selling Licensee.
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5.
WAIVER OF INSPECTION. Buyer has been advised to obtain a building, hazardous substances, building and
zoning code, pest or soils/stability inspection, and to condition the closing of this Agreement on the results of such
inspections, but Buyer elects to waive the right and buy the Property in its present condition. Buyer acknowledges
that the decision to waive Buyer's inspection options was based on Buyer's personal inspection and Buyer has not
relied on representations by Seller, Listing Agent or Selling Licensee.
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Initials: BUYER:
DATE:
SELLER:
DATE:
BUYER:
DATE:
SELLER:
DATE:
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Form 35R
Inspection Response for Form 35
Rev.7/08
Page 1 of 1
INSPECTION RESPONSE FOR FORM 35
©Copyright 2008
ALL RIGHTS RESERVED
between
("Buyer")
and
("Seller")
concerning
("the Property")
I. BUYER'S RESPONSE OR REQUEST FOR REPAIRS OR MODIFICATION.
Buyer’s inspection of the Property is approved and the inspection contingency is satisfied.*
Buyer's inspection of the Property is disapproved and the Agreement is terminated. The Earnest Money shall be
refunded to Buyer.*
Buyer gives notice of an additional inspection. The inspector's recommendation is attached. The time for Buyer's
response to the initial and additional inspection is extended as provided in paragraph 1(b) of Form 35.*
Buyer requests the following modifications and/or repairs. If Seller agrees to these modifications or repairs, the
inspection contingency shall be deemed satisfied.**
Buyer
Date
Buyer
Date
If Buyer requests modifications and/or repairs, this Form 35R and any other addenda or notice pertaining to the modifications and/or repairs and amendment to the Agreement related to or resulting from the request for modifications and/or
repairs shall become a part of the Agreement.
II. SELLER'S RESPONSE TO BUYER'S REQUEST FOR REPAIRS OR MODIFICATION.
Seller acknowledges receipt of Buyer’s request for modification or repair, and responds as follows:
Seller agrees to all of the modifications or repairs in Buyer's request for modification or repair. The inspection
contingency is satisfied, the parties agree to proceed to Closing as provided in the Agreement, and Buyer's reply,
below, is not necessary.**
Seller offers to repair only the following conditions:**
Seller rejects all proposals by Buyer.*
Seller rejects all proposals by Buyer, but proposes the following alternative modifications or repairs:**
Seller
Date
Seller
Date
III. BUYER’S REPLY TO SELLER’S RESPONSE.
Buyer accepts Seller's response and agrees to proceed to Closing as provided in the Agreement.**
Buyer rejects Seller's response. Buyer disapproves of the inspection and this Agreement is terminated. The Earnest
Money shall be refunded to Buyer.*
Buyer rejects Seller's response, but offers the attached alternative proposal for modification or repair. Buyer
acknowledges that the inspection contingency will be waived unless Buyer and Seller reach written agreement or
Buyer gives notice disapproving the inspection and terminating the Agreement before the deadline in paragraph
1(c)(ii) of the inspection contingency (NWMLS Form 35).**
Buyer
Date
* This is a notice which requires only one Buyer's or one Seller's signature.
** This is not a notice and requires all Buyer's or Seller's signatures.
Buyer
Date
FINANCING ADDENDUM When an offer is contingent upon the buyer obtaining financing NWMLS Form 22A can be used for example. This form specifies: • Type of loan that the buyer will acquire • Percentage of down payment • Time frame to make application if they have not already done so • Time frame for a loan commitment • Consequence of an appraisal being less than the sale price • Closing costs that the seller will pay for the buyer • Homeowner insurance contingency TIP: Consider using this form even if your buyer is paying cash or the offer is not contingent upon financing for the following reasons: In the event that your clients decide to have an independent appraisal performed, the appraisal paragraph will allow the buyer to terminate the deal if the appraisal is less than the sale price. Most importantly however, is paragraph #10 (See Form 22A below) NOTICE TO BUYER CONCERNING INSURANCE. This paragraph is, in effect, an insurance contingency and will allow the buyer to terminate the contract if they are unable to obtain home owner’s (hazard) insurance. Another option for assuring that your buyer will have an insurance contingency is to use NWMLS Form 22 VV which is shown later in this section. See Insert Financing Addendum Form 22A (two pages) 188 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
Form 22A
Financing Addendum
Rev. 12/09
Page 1 of 2
©Copyright 2009
ALL RIGHTS RESERVED
FINANCING ADDENDUM
PURCHASE & SALE AGREEMENT
1
between
("Buyer")
2
and
("Seller")
3
("the Property").
4
concerning
1.
5
DOWN PAYMENT/LOAN APPLICATION.
a. Loan Application. This Agreement is contingent on Buyer obtaining the following loan or loans to purchase the 6
Property (the “Loan(s)”):
Conventional First;
Development ("RD");
Home Equity Line of Credit;
"Financing Contingency"). Buyer agrees to pay
Conventional Second;
Bridge;
VA;
Other
FHA;
Rural 7
(the 8
down, 9
in addition to the Loans and to make written application for the Loans to pay the balance of the Purchase Price
10
and pay the application fee, if required, for the subject Property within
days (5 days if not filled 11
in) after mutual acceptance of this Agreement. If not waived, the Financing Contingency shall survive the Closing 12
13
Date.
b. Waiver of Financing Contingency. If Buyer fails to make application for financing for the Property within the 14
agreed time or changes the type of loan or lender without Seller’s prior written consent after the agreed upon
15
time to apply for financing expires, then the Financing Contingency shall be deemed waived. For purposes of
16
this Addendum, “lender” means the party funding the loan.
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SELLER’S RIGHT TO TERMINATE.
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a. Right to Terminate Notice.
days (30 days if not filled in) after mutual acceptance, Seller
may give notice that Seller may terminate the Agreement any time 3 days after delivery of that notice (the “Right
to Terminate Notice”). NWMLS Form 22AR may be used for this notice.
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b. Termination Notice. If Buyer has not previously waived the Financing Contingency, Seller may give notice
of termination of this Agreement (the “Termination Notice”) any time following 3 days after delivery of the Right to
Terminate Notice. If Seller gives the Termination Notice before Buyer has waived the Financing Contingency, this
Agreement is terminated and the Earnest Money shall be refunded to Buyer. NWMLS Form 22AR shall be used
for this notice.
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3.
LOAN COST PROVISIONS. Seller agrees to pay up to
($0.00 if not filled in),
which shall be applied to Buyer’s Loan and settlement costs. If this sale is contingent on Buyer obtaining an
FHA, RD, or VA loan, Seller shall also pay up to $300.00 for that portion of Buyer’s Loan and settlement costs
that the lender is prohibited from collecting from Buyer under FHA/RD/VA regulations. If this sale is contingent
on Buyer obtaining a VA loan, Seller shall also pay the full escrow fee for the closing of this Agreement.
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4.
EARNEST MONEY. If Buyer has not waived the Financing Contingency, and is unable to obtain financing after
a good faith effort then, on Buyer’s notice, this Agreement shall terminate. The Earnest Money shall be
refunded to Buyer after Buyer delivers to Seller written confirmation from Buyer’s lender confirming (a) the date
Buyer’s loan application for the subject property was made; (b) that Buyer possessed sufficient funds to close;
and (c) the reasons Buyer’s application was denied. If Seller terminates this Agreement, the Earnest Money
shall be refunded without need for such confirmation from Buyer's lender.
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5.
INSPECTION. Seller agrees to permit inspections required by Buyer’s lender, including but not limited to
structural, pest, heating, plumbing, roof, electrical, septic, and well inspections. Seller is not obligated to pay for
such inspections unless otherwise agreed.
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6.
APPRAISAL LESS THAN SALE PRICE. If Buyer’s lender’s appraised value of the Property is less than the
Purchase Price, Buyer may, within 3 days after receipt of a copy of lender’s appraisal, give notice, which
includes copy of lender’s appraisal, of Buyer’s election to terminate this Agreement unless Seller, within 10 days
after receipt of such notice, delivers to Buyer either:
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2.
Initials: BUYER:
DATE:
SELLER:
DATE:
BUYER:
DATE:
SELLER:
DATE:
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46
Form 22A
Financing Addendum
Rev. 12/09
Page 2 of 2
FINANCING ADDENDUM
(continued)
©Copyright 2009
ALL RIGHTS RESERVED
(a)
A reappraisal or reconsideration of value, at the Seller’s expense, by the same appraiser or another
appraiser, acceptable to the lender, in an amount not less than the Purchase Price; or
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(b)
Seller’s written consent to reduce the Purchase Price to an amount not more than the amount specified in
the appraisal or reappraisal by the same appraiser, or an appraisal by another appraiser acceptable to
lender, whichever is higher. (This provision is not applicable if this Agreement is conditioned on FHA,
VA, or RD financing. FHA, VA, and RD financing does not permit the Buyer to be obligated to buy if the
Seller reduces the Purchase Price to the appraised value. Buyer, however, has the option to buy at the
reduced price.)
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If such appraisal, reappraisal or consent to reduction of the Purchase Price is not so delivered, this Agreement
shall terminate and the Earnest Money shall be refunded to Buyer. The Closing Date shall be extended as
necessary to accommodate the foregoing times for notices. Buyer’s waiver of the Financing Contingency
constitutes waiver of this Paragraph 6.
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7.
FHA/VA/RD — Appraisal Certificate. If this Agreement is contingent on Buyer obtaining FHA,VA, or RD
financing, notwithstanding any other provisions of this Agreement, Buyer is not obligated to complete the
purchase of the Property unless Buyer has been given in accordance with HUD/FHA, VA, or RD requirements a
written statement by FHA, VA, RD or a Direct Endorsement lender, setting forth the appraised value of the
Property (excluding closing costs). Buyer shall pay the costs of any appraisal. If the appraised value of the
Property is less than the Purchase Price, Paragraph 6 above shall apply. If Seller does not reduce the Purchase
Price to the appraised or reappraised value, or deliver a reappraisal at or exceeding the Purchase Price, Buyer
may close this Agreement without regard to the appraised value, provided the difference in excess of the
appraised value is paid in cash.
Purpose of Appraisal. The appraised valuation is arrived at only to determine the maximum mortgage FHA,
VA, or RD will insure. FHA, VA, or RD do not warrant the value or the condition of the Property. Buyer agrees to
satisfy himself/herself that the price and condition of the Property are acceptable.
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8.
EXTENSION OF CLOSING TO ACCOMMODATE REQUIREMENTS OF REGULATION Z OF THE TRUTH IN
LENDING ACT. In the event the Annual Percentage Rate (“APR”) of Buyer’s Loan(s) varies from the APR
initially disclosed to Buyer in the Good Faith Estimate provided by Buyer’s lender(s) by .125% or more in the
case of a fixed rate loan or .250% in an adjustable rate loan, the Closing Date shall be extended for up to four
(4) days to accommodate the requirements of Regulation Z of the Truth in Lending Act. This paragraph shall
survive Buyer’s waiver of the Financing Contingency.
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Initials: BUYER:
DATE:
SELLER:
DATE:
BUYER:
DATE:
SELLER:
DATE:
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OPTIONAL CLAUSES ADDENDUM An optional clause addendum addresses such items as: • Square footage, lot size and encroachments • Title insurance • Grounds maintenance • Item left by the seller • Utilities • Insulation for new construction • Leased property • Homeowner’s association review board • Other TIP: Paragraph #10 (See NWMLS form #22D Optional Clauses Addendum below) is a convenient place to list items which will be included or excluded in the sale. Another important item that might be placed in this paragraph would address e‐mail transmission. On NWMLS form 21 PSA, paragraph #m, it states that “e‐mail transmission of any document or notice shall not be effective unless the parties to this Agreement otherwise agree in writing.” This might be a great place to have all parties agree to e‐mail transmission, in writing, if that is the preferred method of transmission by your clients. See Insert Optional Clauses Addendum Form 22D (Two Pages) COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
191 Form 22A
Financing Addendum
Rev. 12/09
Page 1 of 2
©Copyright 2009
ALL RIGHTS RESERVED
FINANCING ADDENDUM
1
between
("Buyer")
2
and
("Seller")
3
("the Property").
4
concerning
1.
5
DOWN PAYMENT/LOAN APPLICATION.
a. Loan Application. This Agreement is contingent on Buyer obtaining the following loan or loans to purchase the 6
Property (the “Loan(s)”):
Conventional First;
Development ("RD");
Home Equity Line of Credit;
"Financing Contingency"). Buyer agrees to pay
Conventional Second;
Bridge;
VA;
Other
FHA;
Rural 7
(the 8
down, 9
in addition to the Loans and to make written application for the Loans to pay the balance of the Purchase Price
10
and pay the application fee, if required, for the subject Property within
days (5 days if not filled 11
in) after mutual acceptance of this Agreement. If not waived, the Financing Contingency shall survive the Closing 12
13
Date.
b. Waiver of Financing Contingency. If Buyer fails to make application for financing for the Property within the 14
agreed time or changes the type of loan or lender without Seller’s prior written consent after the agreed upon
15
time to apply for financing expires, then the Financing Contingency shall be deemed waived. For purposes of
16
this Addendum, “lender” means the party funding the loan.
17
SELLER’S RIGHT TO TERMINATE.
18
a. Right to Terminate Notice.
days (30 days if not filled in) after mutual acceptance, Seller
may give notice that Seller may terminate the Agreement any time 3 days after delivery of that notice (the “Right
to Terminate Notice”). NWMLS Form 22AR may be used for this notice.
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20
21
b. Termination Notice. If Buyer has not previously waived the Financing Contingency, Seller may give notice
of termination of this Agreement (the “Termination Notice”) any time following 3 days after delivery of the Right to
Terminate Notice. If Seller gives the Termination Notice before Buyer has waived the Financing Contingency, this
Agreement is terminated and the Earnest Money shall be refunded to Buyer. NWMLS Form 22AR shall be used
for this notice.
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23
24
25
26
3.
LOAN COST PROVISIONS. Seller agrees to pay up to
($0.00 if not filled in),
which shall be applied to Buyer’s Loan and settlement costs. If this sale is contingent on Buyer obtaining an
FHA, RD, or VA loan, Seller shall also pay up to $300.00 for that portion of Buyer’s Loan and settlement costs
that the lender is prohibited from collecting from Buyer under FHA/RD/VA regulations. If this sale is contingent
on Buyer obtaining a VA loan, Seller shall also pay the full escrow fee for the closing of this Agreement.
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28
29
30
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4.
EARNEST MONEY. If Buyer has not waived the Financing Contingency, and is unable to obtain financing after
a good faith effort then, on Buyer’s notice, this Agreement shall terminate. The Earnest Money shall be
refunded to Buyer after Buyer delivers to Seller written confirmation from Buyer’s lender confirming (a) the date
Buyer’s loan application for the subject property was made; (b) that Buyer possessed sufficient funds to close;
and (c) the reasons Buyer’s application was denied. If Seller terminates this Agreement, the Earnest Money
shall be refunded without need for such confirmation from Buyer's lender.
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34
35
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5.
INSPECTION. Seller agrees to permit inspections required by Buyer’s lender, including but not limited to
structural, pest, heating, plumbing, roof, electrical, septic, and well inspections. Seller is not obligated to pay for
such inspections unless otherwise agreed.
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6.
APPRAISAL LESS THAN SALE PRICE. If Buyer’s lender’s appraised value of the Property is less than the
Purchase Price, Buyer may, within 3 days after receipt of a copy of lender’s appraisal, give notice, which
includes copy of lender’s appraisal, of Buyer’s election to terminate this Agreement unless Seller, within 10 days
after receipt of such notice, delivers to Buyer either:
41
42
43
44
2.
Initials: BUYER:
DATE:
SELLER:
DATE:
BUYER:
DATE:
SELLER:
DATE:
45
46
Form 22A
Financing Addendum
Rev. 12/09
Page 2 of 2
FINANCING ADDENDUM
(continued)
©Copyright 2009
ALL RIGHTS RESERVED
(a)
A reappraisal or reconsideration of value, at the Seller’s expense, by the same appraiser or another
appraiser, acceptable to the lender, in an amount not less than the Purchase Price; or
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(b)
Seller’s written consent to reduce the Purchase Price to an amount not more than the amount specified in
the appraisal or reappraisal by the same appraiser, or an appraisal by another appraiser acceptable to
lender, whichever is higher. (This provision is not applicable if this Agreement is conditioned on FHA,
VA, or RD financing. FHA, VA, and RD financing does not permit the Buyer to be obligated to buy if the
Seller reduces the Purchase Price to the appraised value. Buyer, however, has the option to buy at the
reduced price.)
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If such appraisal, reappraisal or consent to reduction of the Purchase Price is not so delivered, this Agreement
shall terminate and the Earnest Money shall be refunded to Buyer. The Closing Date shall be extended as
necessary to accommodate the foregoing times for notices. Buyer’s waiver of the Financing Contingency
constitutes waiver of this Paragraph 6.
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7.
FHA/VA/RD — Appraisal Certificate. If this Agreement is contingent on Buyer obtaining FHA,VA, or RD
financing, notwithstanding any other provisions of this Agreement, Buyer is not obligated to complete the
purchase of the Property unless Buyer has been given in accordance with HUD/FHA, VA, or RD requirements a
written statement by FHA, VA, RD or a Direct Endorsement lender, setting forth the appraised value of the
Property (excluding closing costs). Buyer shall pay the costs of any appraisal. If the appraised value of the
Property is less than the Purchase Price, Paragraph 6 above shall apply. If Seller does not reduce the Purchase
Price to the appraised or reappraised value, or deliver a reappraisal at or exceeding the Purchase Price, Buyer
may close this Agreement without regard to the appraised value, provided the difference in excess of the
appraised value is paid in cash.
Purpose of Appraisal. The appraised valuation is arrived at only to determine the maximum mortgage FHA,
VA, or RD will insure. FHA, VA, or RD do not warrant the value or the condition of the Property. Buyer agrees to
satisfy himself/herself that the price and condition of the Property are acceptable.
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8.
EXTENSION OF CLOSING TO ACCOMMODATE REQUIREMENTS OF REGULATION Z OF THE TRUTH IN
LENDING ACT. In the event the Annual Percentage Rate (“APR”) of Buyer’s Loan(s) varies from the APR
initially disclosed to Buyer in the Good Faith Estimate provided by Buyer’s lender(s) by .125% or more in the
case of a fixed rate loan or .250% in an adjustable rate loan, the Closing Date shall be extended for up to four
(4) days to accommodate the requirements of Regulation Z of the Truth in Lending Act. This paragraph shall
survive Buyer’s waiver of the Financing Contingency.
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Initials: BUYER:
DATE:
SELLER:
DATE:
BUYER:
DATE:
SELLER:
DATE:
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FEASIBILITY CONTINGENCY ADDENDUM A feasibility addendum will often accompany an offer to purchase vacant land or commercial property. The buyer will be given a certain amount of days to perform an independent study of the property which might include: • Building or development moratoria • Flood Zones • Wetlands and shore lands • Roads • Water • Sewer • Other utilities • Capacity Charges • Assessments See Insert Feasibility Contingency Addendum Form 35F (one page) 194 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
© Copyright 2006
ALL RIGHTS RESERVED
Form 35F
Feasibility Contingency Addendum
Rev. 6/06
Page 1 of 1
FEASIBILITY CONTINGENCY ADDENDUM
between
("Buyer")
and
("Seller")
concerning
("the Property")
Feasibility Contingency. Buyer shall verify within
days (10 days, if not filled in) after mutual acceptance
(the "Feasibility Contingency Expiration Date") the suitability of the Property for Buyer's intended purpose including, but
not limited to, whether the Property can be platted, developed and/or built on (now or in the future) and what it will cost to
do this. This Feasibility Contingency SHALL CONCLUSIVELY BE DEEMED WAIVED unless Buyer gives notice of
disapproval on or before the Feasibility Contingency Expiration Date. If Buyer gives a timely notice of disapproval, then
this Agreement shall terminate and the Earnest Money shall be refunded to Buyer. Buyer should not rely on any oral
statements concerning feasibility made by the Seller, Listing Agent or Selling Licensee. Buyer should inquire at the city
or county, and water, sewer or other special districts in which the Property is located. Buyer's inquiry shall include, but
not be limited to: building or development moratoria applicable to or being considered for the Property; any special
building requirements, including setbacks, height limits or restrictions on where buildings may be constructed on the
Property; whether the Property is affected by a flood zone, wetlands, shorelands or other environmentally sensitive area;
road, school, fire and any other growth mitigation or impact fees that must be paid; the procedure and length of time
necessary to obtain plat approval and/or a building permit; sufficient water, sewer and utility and any services connection
charges; and all other charges that must be paid.
Buyer and Buyer's agents, representatives, consultants, architects and engineers shall have the right, from time to time
during the feasibility contingency, to enter onto the Property and to conduct any tests or studies that Buyer may need to
ascertain the condition and suitability of the Property for Buyer's intended purpose. Buyer shall restore the Property and
all improvements on the Property to the same condition they were in prior to the inspection. Buyer shall be responsible
for all damages resulting from any inspection of the Property performed on Buyer's behalf.
AGREEMENT TERMINATED IF NOTICE OF SATISFACTION NOT TIMELY PROVIDED. If checked, this Agreement
shall terminate and Buyer shall receive a refund of the Earnest Money unless Buyer gives notice to Seller on or before
the Feasibility Contingency Expiration Date that the Property is suitable for Buyer's intended purpose.
Initials: BUYER:
DATE:
SELLER:
DATE:
BUYER:
DATE:
SELLER:
DATE:
HOMEOWNER (HAZARD) INSURANCE ADDENDUM Homeowner’s (hazard) insurance is important for almost all residential properties. Not only is it good risk management for the homeowner, but most lenders require it as a means of reducing their own risk. There can be times when a buyer may be refused insurance on a particular property. This may be due to an unsatisfactory CLUE report. CLUE is an acronym for Comprehensive Loss Underwriting Exchange. It is a compilation of all insurance claims. The CLUE may be a report on a particular person or on a property. Incorporating an insurance contingency into a PSA can protect your buyer. This can be done through such forms as we saw with NWMLS Form 22A, paragraph #10 or on an addendum specifically designed solely for this purpose (see NWMLS Form 22 VV below). See Insert Homeowner Insurance Addendum Form 22 VV (one page) 196 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
© Copyright 2003
ALL RIGHTS RESERVED
Form 22 V V
Homeowner Insurance Addendum
Rev. 09/03
Page 1 of 1
HOMEOWNER INSURANCE ADDENDUM
TO PURCHASE AND SALE AGREEMENT
between
("Buyer")
and
("Seller")
concerning
("the Property")
Notice to Buyer Concerning Insurance. The availability and cost of homeowners or property insurance on the
Property depends on a number of factors, including your personal insurance, financial and credit history, materials
and conditions present in or on the Property, and the claims history for the Property. Some insurance companies
base part of their underwriting decision on loss history reports that show the history of insurance claims or property
losses concerning the Property or made by you concerning other properties. At the time you apply for homeowners
insurance, most insurance companies will only issue a binder to you, which is a temporary commitment to provide
insurance coverage and not a promise that a policy will issue. Insurance companies have additional time after
issuing the binder to make a final decision about insurability and the amount of the insurance premium. Therefore, it
is important for you to submit an insurance application as early as possible.
Insurance Contingency/Application. This Agreement is conditioned upon Buyer obtaining a binder for a standard
policy of homeowners or property insurance on the Property at an annual premium not to exceed ½ of 1% of the
purchase price Buyer is paying for the Property with a deductible not to exceed $1000, exclusive of all additional
endorsements, declarations and riders (e.g., art, jewelry, earthquake, etc.). Buyer agrees to make application for
insurance within
days (5 days, if not filled in) after mutual acceptance of this Agreement. If Buyer
fails to make application within the agreed time, then this insurance contingency shall be deemed waived. This
insurance contingency shall be deemed satisfied, unless within
days (15 days, if not filled in)
after mutual acceptance of this Agreement Buyer gives notice of inability to obtain a binder on the terms set forth
above. If Buyer is unable to obtain a binder after making a good faith effort and timely gives notice of such
inability, then this Agreement shall terminate and the Earnest Money shall be refunded to Buyer.
Initials: BUYER:
DATE:
SELLER:
DATE:
BUYER:
DATE:
SELLER:
DATE:
An addendum which would address what personal property or fixtures are included in the sale. All personal property and trade fixtures which are included in the sale should be clearly specified in the purchase and sale agreement. There are a number of ways to do this: • Some appliances are addressed on NWMLS Form 21, paragraph #5 • Use of a separate addendum can be used • NWMLS form 22D paragraph #10 (Other) has space to itemize personal property POSSESSION ADDENDUM (IF NOT AT THE TIME OF CLOSING) In many circumstances, the date of possession is not the closing date. Usually this is because the seller will need to close their current home and receive the net proceeds from this home before they can purchase their next home. Even in an ideal situation where both homes close concurrently, the homeowner will need time to move to the next home. There are also circumstances where the seller will need extra time to move for various other reasons. An addendum should be drawn up and attach to the PSA which addresses all of the following: • Length of the passion period by the seller • Which party will insure the home during the “possession” period (this is usually the buyer through their homeowner’s insurance) • What charge, if any, will be paid by the seller for this “possession” period TIP: Insurance liability is important. All parties should make sure that the property is insured during this time. Another situation may arise where a buyer may want to take possession prior to closing, especially on a vacant home. This situation should be avoided if at all possible for the following reasons: • There’s always a chance that a buyer may move into a property, discover some unknown undesirable fact, and not want to proceed with the transaction • The insurance liability is extremely high. Example: should one of the buyer’s movers injure themselves, the seller may have to bear the liability. 198 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
•
Should the transaction fail to close, the buyer already has possession of the property. Should the buyer refuse to leave, the seller may be forced to proceed with an eviction process. TIP: Before writing an addendum for early possession consult with your manger first. There is also risk of liability for you as a licensee and for your brokerage SELLER’S REPRESENTATION ADDENDUM A seller’s property disclosure statement is usually the form used by the sellers to relate any information and disclosures about the property to the buyer. An example would be NWMLS Form 17. Any material fact or defect must be disclosed to the potential buyers. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
199 THE ESSENTIAL ELEMENTS OF A VALID CONTRACT For a legal contract to be binding, the following elements must exist: 1. Mutual agreement: Each and every party involved in the contract must agree to and accept the contract and its components. All parties must recognize and acknowledge that an agreement has been made and duly accepted. 2. Consideration: A contract must be mutually beneficial and all parties must recognize and accept the benefits from the contract. These benefits can include money, transfer of ownership, transfer of rights, exchange of services, or anything of value. 3. Legally competent parties: In the United States, a person or entity (such as a business, trust or corporation) must be competent and at least 18 years old to enter into a contract. If the party is a business, the person representing the business must also be legally competent and have the authority to act for the business. 4. Lawful Objective: A legal contract cannot require any party to knowingly break the law. If so, the contract is usually void. 5. Written Contract: The Statute of Frauds is a Washington State law which requires that all real estate contracts be in writing. Usually an addendum written after mutual acceptance and added to a contract will supersede any conflicting language with the contract. THE MAIN TYPES OF CONTRACTS MOST USED IN USED BY RESIDENTIAL SALES TRANSACTIONS PURCHASE AND SALE AGREEMENT (PSA) ‐ SEE SECTION ONE FOR VIEWING THE FORM A Purchase and Sale Agreement is used when a buyer (the offeror) intends to make an offer to the seller (the offeree). Since the Statute of Frauds in Washington State requires all real estate offers to be in writing, the PSA is used for this purpose. Included in the PSA are all of the terms and conditions of the purchase and the time frames in which certain actions must be performed. 200 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
The PSA will typically specify the following: • Purchase Price • Closing Date • Date of the contract • The multiple listing number if it has one • The full names of all the purchasers • The common address and county where the property is located • A legal description • Included items, such as appliances, wood stoves, security systems • Earnest money and default • Information about disclosures • Contingencies • Information about the title company • Information about the closing or escrow agent • Closing date and date of possession • Offer expiration date • Service of closing agent for payment of utilities • Charges and assessments due after closing • Agency disclosure • What addenda are attached to the contract • Buyer’s address, phone, fax and e‐mail address and signature • Seller’s address, phone, fax and e‐mail address and signature Please take note from the above list that the legal description is in bold type. Without a legal description a PSA is voidable. The type of Purchase and Sale Agreement (PSA) that will be used will depend on the property. The various types most commonly used by residential agents are: • PSA for Single Family Homes • PSA for Multi‐Family Homes • PSA for Vacant Land (Unimproved property) • PSA for Condominiums The PSA is usually completed by the broker working with the buyers, then signed by the buyers and presented to the sellers LISTING AGREEMENTS When a licensee lists a property for sale, a listing agreement acts as a contract between the seller and the licensee (in actuality between the seller the brokerage). It is like an employment contract in some ways, but it is between a seller and an independent contractor (the licensee). COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
201 The listing agreement will normally specify the following items: • The common address for the property • The legal description • The length of time of the listing • The licensee and the brokerage company • The rate of commission • What will happen in the event that the seller sells the property • Disclaimer on Distressed Homes • Authorization to install a key box • Seller’s warranties and representations regard the right to sell and encroachments • Seller’s indemnification to hold agent harmless if his/her representations are incorrect • Brief information on closing costs • Permission from the seller to be listed in NWMLS and that their agent can cooperate with other member of the MLS • Disclaimer regarding insurance • Broker’s right to market the property • Brief information on the seller’s disclosure statement • Consequence and damages in the event of a buyers breach • Attorney’s fees From the above list, please note that the legal description is in bold type. It is one of the most important components of the listing. Without the legal description, the listing agreement is voidable. This means that either party can cancel the contract. Please make note that the legal description of the property, which can be obtained from the last deed and supplied by the title company, is not the same as the street address. There are two distinct types of listing agreements: Exclusive Sale and Listing Agreement and Exclusive Agency Sale and Listing Agreement. Let’s take a closer look at each: Exclusive Sale and Listing Agreement ‐ allows the broker to earn the listing portion of the commission, no matter who sells the property. Shown below. Please refer to the chapter on listing agreements to view a listing form. Exclusive Agency Sale and Listing Agreement ‐ the broker does not earn the listing portion of the commission if the seller produces a sale. Please note that while a licensee may take the listing, that licensee is an agent for the broker and the broker or brokerage owns the listing. Conditional Release of Listing ‐ The Conditional Release of Listing is another common contract that residential brokers use. In essence, it rescinds the listing agreement with the condition that the seller will still pay the broker a commission if a future buyer purchases the property and has identified the property through the means of the brokers advertising or showing within six months. 202 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
Please refer the chapter on listings to view this form. Buyer’s agreement ‐ Commonly used by residential brokers is the Buyer’s Agreement. There are two types: Buyer’s Agency Agreement and Buyer’s Agreement No Agency: Buyer’s Agency Agreement ‐ states where a licensee represents the buyer and that the buyer has an obligation to that licensee for commission during term of the agreement. This agreement is unilaterally cancelable by either party and must be done in writing. If two brokers are ever is a dispute over commission, a buyer agency agreement can be the proof that a particular licensee would be entitled to earn a commission. Please refer to the chapter on agency to view this form. Buyer’s Agreement No Agency ‐ this contract states the licensee does not represent the buyer, even though they may be performing brokerage services for the buyer. APPROPRIATE CIRCUMSTANCES TO SEEK THE ASSISTANCE OF YOUR BROKER WHEN WRITING A PURCHASE AND SALE AGREEMENT You should seek the advice or assistance from your broker anytime you feel that you or the brokerage may be at risk. If you are at risk, then most likely your brokerage will be at risk as well. Designated brokers and managing brokers are responsible for the supervision and actions of their licensees. The term is referred to as vicarious liability which means that a party (the brokerage) is responsible for the actions of another party (the licensee). While this list is certainly not exhaustive, the following are some key circumstances when you should consider seeking assistance: • Unfamiliarity with a specific form • Not knowing which form to use in which circumstance • Unfamiliarity with new or existing real estate laws or legislation • Problems revolving around communications with the purchaser • If you are a new licensee • If the purchaser is requesting contingencies which are unique or ambiguous • If there is not a preprinted form available to cover a particular circumstance (we will be covering this in greater detail further in this chapter) • If there is confusion with agency and who you should represent. • Unique circumstances and unique properties • Not knowing which addenda should be used in conjunction with a particular offer and particular circumstances • If you have questions about the handling of the earnest money • If you are unsure about the computation of time as it relates to the contingencies in the contact COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
203 •
If the potential purchasers have questions about the Purchase and Sale Agreement (PSA) that you cannot answer Hint: When discussing the details or issues of a transaction with your broker, always let your broker know early in the conversation if you are representing the buyer, seller or both. This will assist your broker in understanding the role of each party and the inherent liabilities to you, the licensee, and to the brokerage. WHEN TO SEEK LEGAL ADVICE WHEN WRITING A PURCHASE AND SALE AGREEMENT It is very important for real estate licensees and brokers to practice real estate within the limits of their licensure. Giving legal or tax advice without being an attorney or an accountant is forbidden. When writing a Purchase and Sale Agreement, here are some guidelines for deciding when to seek the advice of a competent real estate attorney. Firstly, consult with your designated broker or managing broker regarding the issue and find out if he or she feels that legal advice is necessary. Here are some instances where outside legal assistance may be necessary either for you or your client: Issues that reach beyond the competence of the licensee and designated/managing broker When the offer requires additional written language which is beyond the framework of preprinted forms Title issues such as judgments or clouds on the title When there are complicated land use restrictions or environmental issues When there are boundary disputes or issues with adjoining properties A pending divorce action, where there is a contest between the parties Note: It is very important to seek the advice of an attorney, who specializes in real estate matters, and not an attorney who practices in any other specialty of law. Tip: Ask the attorney to do a “Conflict of Interest” check as soon as possible to determine if there is any conflict with this attorney being able to represent you. A conflict of interest can arise when the attorney has had any dealings with the opposing party or may have even represented the opposing party. 204 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
PROBLEMS WITH MODIFYING A SIGNED CONTRACT A contract is said to be fully acknowledged once it has been signed by both parties (the purchaser and the seller). This constitutes a legally binding contact and is also known as mutual acceptance. Changes to the contact after mutual acceptance can only be made if both the buyer and the seller agree to the changes. Both parties must either sign or initial and date the changes. When changes are made, it is important to notify and re‐copy those parties who may already have a copy of the contract. These parties may include: • The buyer • The seller • The listing broker’s transaction file and their brokerage’s transaction file • The buyer's broker’s transaction file and their brokerage’s transaction file • The closing agent (escrow) • The lender CASE STUDY Buyer and seller have mutual acceptance on a contract. Buyer realizes that they have plans to be out of town for a wedding during the closing and possession time. Buyer wishes to extend the closing date for one week. Seller, on the other hand, has purchased another home and intends to close the new home concurrently with their existing home. Seller refuses to extend the closing date. The seller has the legal right to do so. ISSUES WITH CANCELING A CONTRACT As stated earlier, a contract is legally binding. If the buyer or the seller chooses to cancel a contact, they could be found guilty of a breach of contract which is also known as a default. If a buyer defaults, they could lose their earnest money or be sued by the seller for non‐
performance or damages. This remedy that it available is clearly defined on page one of the Purchase and Sale Agreement. If the seller defaults, there is a possibility that the buyer could sue for damages. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
205 ATTACHING ADDITIONAL PAGES AND ADDENDA TO THE CONTRACT There are circumstances that arise where something changes during a transaction. The need for additional paperwork may be desired. Again, it must be remembered, that any additions to the contact after mutual acceptance can only be made if both parties agree. If changes, additions or deletions are made, both parties must initial or sign and date the item or clause that has been changed, added or deleted. It is illegal to make any change to a contract without the agreement and initials of both parties NECESSITY OF OBTAINING A LEGAL DESCRIPTION When taking a listing, it is of extreme importance to obtain a full legal description from the last deed and have it initialed by the seller(s). A street or common address is not sufficient and the listing agreement could be voidable. For a Purchase and Sale Agreement the same holds true and the legal description must be initialed by both the buyer and the seller. SALES WHICH HAVE SPECIAL CIRCUMSTANCES Some real estate transactions will have special circumstances. Let’s explore some of these special cases and discuss how to handle them. A PENDING DIVORCE ACTION There may be a situation when a buyer will want to purchase real property prior to a pending divorce becoming final. If a buyer is involved in a divorce action, the party in the divorce who is not purchasing the property should supply a quit claim deed for the property to be purchased. This allows the purchasing party to purchase the property as his or her sole property and not have to be concerned that the former spouse to be will claim to an interest in the newly purchased property. This is usually a requirement of the lender as well. If the former spouse to be is unwilling to sign a quit claim deed, then the purchasing party should consult with an attorney prior to signing any purchase and sale agreement. There are also times when a couple may want to sell a property prior to a pending divorce becoming final. Both spouses must sign the purchase and sale agreement. 206 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
PARTNERSHIP OR CORPORATION AS A PURCHASER OR SELLER A partnership or corporation may have one or more persons within the organization that is authorized to sign legal documents. As the broker for the buyer or the seller, you should always ask for proof of authorization to sign legal documents. This proof may be in the form of a partnership agreement, articles of incorporation, or an attorney drafted document acknowledged by all the parties or officers of the organization. BUILDER OR SELLERS GUARANTEES There are many circumstances where a builder or a seller may provide a guarantee or home warranty for the property that is being sold. A home warranty is a type of insurance policy which covers limited items in the home (usually major appliances), for a specific period of time (usually one year). The policy may be purchased by the seller, buyer or even their agent. Since 60%‐65% all real estate lawsuits in Washington State involved disclosure issues (and a huge percentage of these involve many of the items covered under these polices), this is a very wise purchase for a seller. It also is an extra incentive for the purchaser and may make the property easier to sell. Guarantees usually come in the form of a promise to do something for the purchaser such as replace a roof or fix a hand rail. For any of the above issues, it is important to make sure that all agreements are in writing. PENDING FORECLOSURE ACTION The following is a direct quote from NWMLS regarding the Amended Distressed Homes Law: Effective March 25th, the Washington legislature has amended Distressed Homes Law (RCW 61.34). The 2009 amendments to the Distressed Homes Law generally exempt a real estate licensee from the definition of a "Distressed Home Consultant" when the licensee provides routine real estate brokerage services. Please carefully review Legal Bulletin 181, which explains the amendments to the Distressed Homes Law and the resulting revisions to NWMLS forms. In addition, please review the revised forms and the manual instructions, now available on Xpress Forms. An instructional video that explains the amendments to the Distressed Homes Law is also available on Discover. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
207 A SALE PENDING PERSONAL BANKRUPTCY For more than a century, Washington homeowners have had some protection from losing their home in the case of personal bankruptcy. Specifically there is an act called the Homestead Act that exempts a limited amount of equity in a home against foreclosures and judgment liens. The purpose of the homestead exemption is to protect the family members from having to evict their home. The amount was raised from $40,000 of equity to $125,000 equity in 2007 via House Bill 1805. In some cases, the bankruptcy court may need to approve of the sale. Real Estate brokers should take extra precautions to ensure that the court has given permission to the homeowner to sell. SALES INVOLVING ESTATES If a deceased person dies without leaving a legal will, this person is said to have died intestate. At this point, the courts will appoint an heir to act as the personal representative (PR) for the estate. If there are no known heirs, then the estate will be transferred to the state. This is known an escheat. If the deceased died having a legal will, known as testate, then contained in the will are the specifics about the appointed personal representative (PR) of the estate and disposition of the personal and real property of the decedent. If the estate is solvent (its assets exceed its liabilities) then the personal representative (PR) usually is awarded “non‐intervention powers” which gives the personal representative the power to negotiate, sign and dispose or real and personal property of the estate without direct court intervention or supervision. In the case where the estate is not solvent (its liabilities exceed its assets) then the PR most likely will most likely not be entitled to a non‐intervention order and the PR must seek prior court approval for the disposition of the estate. When dealing with an estate sale, make sure that proof of an authorized signature for the PR is furnished and that the estate is solvent. Documents produced by the attorney for the estate are the best method of obtaining this information. 208 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
CASE STUDY: Aunt Sue died testate and her will specified that her niece Marla would be the PR for the estate. Her other niece, Betty, thought that she was sure of Aunt Sue’s wishes and agreed to sell Sue’s home to some nice neighbors down the street. Betty signed a purchase and sale agreement with the prospective purchasers. It did not contain Marla’s signature. The contact was void because Betty did not have the authority to sell the home or sign the contact. Both the listing agent and the buyer’s agent should have required proof of authorization to sign. IMPORTANCE OF NOTIFICATIONS A notification can consist of: • An offer • A counter offer • A rejection of an offer • An acceptance of an offer • A removal of a contingency in the contract • Addenda to the contact • Resale or public offering statements • Home owners association documents • Disclosures • Title reports • Forms which were agreed to be supplied by the buyer, seller or third parties, etc. All notices must be in writing. At least one of the buyers must sign a notice given to a seller. At least one seller must sign a notice given to the buyer. Exceptions to this may be certain notices obtained through third parties and original offers. Notices delivered to the broker of either party are deemed as notices accepted by their client. Notices are important because throughout the statewide form for the Purchase and Sale Agreement, many time limits are specified for when notices must be delivered. “Time is of the Essence”. You, as the real estate professional, are responsible for making sure that these time deadlines are met by both of the parties to the transaction and also that of third party providers. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
209 ORIGINAL COPIES AND FACSIMILES Presenting Offers and Counter Offers ‐ There are three basic methods where offers and counter offers are presented: in person, by fax or by e‐mail. It is important to note that permission to fax or e‐mail must be stated in the contract and agreed to by all of the parties. Northwest Multiple Listing Service (NWMLS) has the following verbiage contained within their Purchase and Sale Agreement contract: “Facsimile and E‐mail Transmission. Facsimile transmission of any signed original document, and retransmission of and signed facsimile transmission, shall be the same as delivery of an original. At the request of either party, or the Closing Agent, the parties will confirm facsimile transmitted signatures by signing an original document. E‐mail transmission of any document or notice shall not be effective unless the parties to this Agreement otherwise agree in writing.” Please note that additional verbiage is required if the parties wish to transmit via e‐mail. A clause, such as the following could be added to the contract before the parties sign to allow for e‐mail transmission: “E‐mail transmission of any signed document and retransmission of any e‐mailed document shall be the same as delivery of the original.” So, it is important to make sure that this verbiage is included in the contract if the parties wish to transmit via e‐mail or fax. Let’s look at some advantages of each method: PRESENTING OFFERS AND COUNTER‐OFFERS IN PERSON WITH ORIGINAL COPIES Presenting offers in person has some major advantages. Firstly, a broker can get a feel for the reaction of the other party to whom they are presenting through the observation of body language. Secondly, a broker will also have the opportunity to provide any clarifications or answer any questions that the other party may have. Thirdly, a broker will have the opportunity to show their enthusiasm and sincerity and communicate the strengths of their clients. Fourthly, a broker will have the advantage of working with clean original documents. The disadvantage is that all parties (buyer’s broker, listing broker and sellers) will have to schedule a common time to meet. With busy schedules, out of town sellers or seller who travel for business, this can be quite challenging. Also, the cost of fuel can be a disadvantage for a meeting, especially if any of the brokers or the sellers must travel a long distance to meet. 210 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
PRESENTING OFFERS AND COUNTER‐OFFERS VIA FACSIMILE (FAX) Presenting offers via fax has some advantages since are in almost every office and in most homes. Transmission is fast and an offer can be received by the listing broker within minutes. The disadvantage of fax transmittal is that after a few generation of faxing, the document can be of very poor quality and difficult to read. Most fax machines can be programmed so that a fax journal is produced after each transmittal. This journal will show the time, the number of pages that have been successfully transmitted and the receiving fax number. It will not serve as proof as to the contents of the transmittal. If your fax machine is not set up for individual journals after each transmittal, look into the possibility of programming it to do so. This journal should be kept with each transmittal in the real estate transaction file. PRESENTING OFFERS AND COUNTER‐OFFERS VIA E‐MAIL Presenting offers via e‐mail has a major advantage: Each e‐mail shows the date and contents of entire transmittal. It does not show, however if the e‐mail was received. Disadvantages of e‐mail transmission involve signatures. Until electronic signatures are more commonly used, a contact that has been e‐mailed must first be printed out, then signed and then scanned to allow for the re‐transmittal. As with faxes, multiple generations of this type of transmittal may lessen the quality of the document and cause it to be illegible. As discussed earlier, e‐mails do not show proof of receipt. IMPORTANCE OF THE STATUTE OF FRAUDS REGARDING REAL ESTATE CONTRACTS WHAT IS THE STATUTE OF FRAUDS A “statute of frauds” requires that certain types of contacts be in writing and that they must be signed (acknowledged) by all of the parties that will be bound to the contract. Contracts involving the sale or transfer of real property in Washington State fall under the statute of frauds law and all contracts must be in writing. Contracts not in writing are not enforceable. Its origins come from the English Parliament in the 1600s. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
211 THE PURPOSE OF THE STATUTE OF FRAUDS The purpose of the statute of frauds is as the name suggests, preventing parties from fraudulent conduct. WHY THIS IMPORTANT FOR REAL ESTATE CONTRACTS Historically, especially when real estate was conducted with a handshake, the opportunities to commit acts of fraud were abundant. There are some basic reasons why all real estate contracts should fall under this statute: The purchase or transfer of real property often involves many terms and conditions as well as pricing. Because of this, the need for having these agreements in writing is essential. Also, there may be many contingencies in the contract which have deadlines for completion. If these deadlines are not met, there can be serious consequences for either party. Again, having these agreements is writing provides clarification for all the parties. Should there be any dispute between the parties in a contract the issue may require arbitration or intervention through the courts. Should this arise, an arbitrator or judge could obtain a clearer understanding of the intentions and promises between the parties by reviewing a written document stating the specific agreements in the contract. CONTINGENCY AND SUBJECT TO CLAUSES IN A PURCHASE AND SALE AGREEMENT In Washington State, the terms “contingent” and “subject to” are often used interchangeably in a Purchase and Sale Agreement. The more precise definitions are explained below: DEFINITION OF “SUBJECT TO” “Subject to” can also refer to something that goes along with or “runs with” a property when it is purchased. Examples of this would be a purchase of a property subject to as existing easement or subject to an encroachment. It usually refers to a pre‐existing condition. 212 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
DEFINITION OF CONTINGENCY A contingency or subject to clause in a contact states that an event must occur for the contract to continue. If the event does not happen, then the contact is not continued and the buyer’s earnest money is usually refunded. EXAMPLE OF A WRITTEN CLAUSE USING “SUBJECT TO” “Buyer agrees to purchase this property subject to the existing easement in favor of the property to the north”. EXAMPLE OF A WRITTEN CLAUSE WITH A CONTINGENCY “This offer is contingent upon Aunt Sue’s approval of this contract, within three business days after mutual acceptance of this offer. If purchaser does not give notice to the seller or the seller’s agent of approval with three business days after mutual acceptance, then this offer shall become void.” EXAMPLES OF COMMON CONTINGENCIES FOUND IS A PURCHASE AND SALE AGREEMENT • Structural Inspection Contingency • Financing Contingency • Clear Title contingency • Contingency for Selling an Existing Home • Contingency for Approving of the Home Owner’s Association • Contingency for Approval of the Resale Certificate (usually condominiums) • Contingency for Approval of a Public Offering Statement (usually Condominiums) • Attorney Review and Approval Contingency • Feasibility Study Contingency (most commonly used for Vacant Land, Commercial or Industrial purchases) • Zoning Contingency COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
213 ELEMENTS FOR A STRONG, WELL WRITTEN CONTINGENCY Time ‐ The contingency must have a time limit. In our example (above) Aunt Sue had three days in which approve of the contract. Consequences ‐ Consequences of non‐performance should be stated. In our example (above) the offer became void it Aunt Sue did not approve. Clear and Unambiguous ‐ contingencies should be clearly stated, with language that is easily understood, so that each party’s intentions are known. This is not the time for advance grammar or wording that is unclear or could easily be misinterpreted. Concise ‐ in this case, short is more desirable. Longer contingencies have a greater chance of being misinterpreted. ADVANTAGES OF USING CONTINGENCIES IN A CONTRACT Time ‐ A contingency can give either party time to accomplish the actions needed to investigate certain aspects of the property. In our example (above) the buyers were given three days to get out of the contract if Aunt Sue did not approve. Third party approvals ‐ Examples of this would be important information that would be needed from third parties, such as a title report, a re‐sale certificate or information on a home owner’s association. Investigation‐ A contingency may give either party the opportunity to perform important investigations. Examples of this would be a structural inspection, feasibility study and zoning. ELEMENTS NECESSARY FOR A CONTRACT TO BE ENFORCEABLE ENFORCEABLE DEFINED Enforceable is defined as to compel observance or obedience to the law. In terms of a real estate Purchase and Sale Agreement (PSA) it means that each party is compelled to perform according to the contract. If this is not accomplished, such as in a breach of contract, either party may have the right to have the courts enforce the agreement. 214 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
ELEMENTS OF AN ENFORCEABLE CONTACT There are certain elements necessary to make a Purchase and Sale agreement enforceable: Must be in writing ‐ as we discussed in earlier chapters under the Statute of Frauds in Washington State. Legally Competent Parties ‐ the parties entering into the contract be mentally competent, over legal age and not under duress. If the party is a business, the person representing the business must also be legally competent and have the authority to act and sign for the business. Lawful ‐ a legal contract cannot require any party to knowingly break the law. If so, the contract is void. Consideration ‐ something of value must be exchanged between the parties. A contract must be beneficial to all parties and they must accept the benefits from the contract. These benefits can include money, transfer or ownership, transfer of rights, exchange of services, or anything of value. Mutual agreement ‐ Each party in the contract must agree and accept all of the terms of the contract. All parties recognize and acknowledge (sign) the contact. EARNEST MONEY AND PROPER HANDLING When a buyer extends are offer to purchase property, the buyer will make a good faith deposit, called an earnest money deposit. This demonstrates that they are serious about the purchase of the home and that their offer is bona fide. Also, some buyers will make larger earnest money deposits in order to make their offer more attractive and desirable to the seller. After the offer is accepted, the earnest money deposit becomes part of the contract and is deposited into an escrow account at the selling licensee’s brokerage or into a trust account held by the closing agent (escrow). If the buyer defaults on any portion of the Purchase and Sale Agreement, the buyer may have to forfeit the deposit to pay for damages incurred by the seller, (such as having the property off the market and the fact that the seller may have had other potential buyers that are no longer interested). COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
215 DUTIES OF A LICENSEE According to the Revised Code of Washington RCW 18.86.030 (1) (a) “Regardless of whether the licensee is an agent, a licensee owes to all parties to whom the licensee renders real estate brokerage services the following duties, which may not be waived,” (a) To exercise reasonable skill and care (b) To deal honestly and in good faith It is also the duty of a licensee “To account in a timely manner for all money and property received from or on behalf of the other party.” RCW 18.86.030(1)(e) FORMS OF EARNEST MONEY Earnest money may be in many different forms, but let take a look at three which are acceptable: Personal Checks ‐ this is usually the most common form of earnest money deposit since most people carry check books with them and there is no need to make a visit to a financial institution to obtain a money order of cashier’s check. Cashier’s Check or Money Order ‐ again the disadvantage is that a financial institution must be open when the earnest money is being remitted. Most financial institutions have limits on the amount allowed for money orders. Promissory Note ‐ this is a note signed by the buyer guaranteeing that they will deposit an earnest money at some specified future date. This form of earnest money might be used when a buyer expects to receive some net proceeds from the sale of a property soon, but doesn’t have the cash on hand at the moment. Note: Cash is an acceptable form of earnest money, but most brokerages discourage this because the funds are more difficult to document. 216 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
PROPER HANDLING OF EARNEST MONEY Both the listing broker and the selling broker are required to adhere to strict policies and procedures surrounding the handling of funds held for others. Violations and mishandling of these funds may result in civil suits, criminal proceeding and disciplinary action by the Washington State Department of Licensing Real Estate Division. The result could be a monetary fine and/or suspension or revocation of the brokerage or broker’s real estate license. Usually, the selling broker representing the buyer will be responsible for collecting the earnest money. This deposit must be collected and deposited according to the terms of the Purchase and Sale Agreement. The funds must be deposited in the selling broker’s trust account or in a trust account at held by the closing agent (escrow). A receipt for the deposit is required by Washington State law and should be placed in the transaction folder. There are many procedures which must be strictly adhered to in the handling of these trust accounts as prescribed by the State of Washington. These deposits must be kept in a separate trust account and are not allowed to be commingled with any other funds. Let’s look at some examples of earnest money being handled improperly and the adverse or detrimental impact that it could have on a buyer or a seller in a real estate transaction: The buyer’s broker does not collect the earnest money or does not collect the full amount ‐ in this scenario, the seller may not have all or any compensation should the buyer default. And the buyer may be in default if the Purchase and Sale Agreement contract stated that a specified amount was to be deposited to a trust account on a certain date. Buyer’s broker collected the funds but did not deposit them ‐ The same holds true as in the above scenario. In addition, when a broker “holds” earnest money, the chances of the check becoming lost or stolen increase exponentially. COMMUNICATION REGARDING THE STATUS OF EARNEST MONEY AND SUMMARY As we stated earlier, a licensee has the duty according Washington State law to properly handle all earnest monies. Many sellers might assume that the earnest money has been collected and deposited as specified in the contract. Care should be taken by the buyer’s broker to collect and deposit the monies as agreed upon. Proper documentation to prove that the funds have been handled properly is essential. Communicating the status of funds to the seller’s broker is a sound practice. The seller’s broker should also require documentation as to the status of these funds. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
217 FAIR HOUSING LAWS AS THEY PERTAIN TO THE SHOWING OF PROPERTY AND PRESENTING OF OFFERS It is important for real estate professionals at all times, and especially when showing property and presenting offers, to be aware of the Fair Housing Laws. Awareness of the law can aid in preventing illegal acts of discrimination. A real estate broker should understand and be cognizant of a term called steering. This is an illegal act of discrimination where a real estate broker will show properties in certain neighborhoods with a certain ethnic mix to buyers of the same ethnicity. Let’s look at an example of discriminatory behavior in showing homes: John is a buyer’s broker for Susan. Susan is Caucasian. John planned out a tour of homes for Susan based on all Caucasian neighborhoods. He did not take into consideration what Susan would afford or did not take into consideration the locations that Susan had said that she was interested in. Further, he informed Susan before the tour that he was sure that she would not want to see any homes in neighborhoods that were not predominantly white. This is a prime example of steering. Let’s look at an example of discriminatory behavior when presenting an offer: The buyer’s broker, Janet, made an appointment with the seller and the seller’s broker to present an offer that she had written for her buyer earlier that day. During the presentation of the offer Janet told the sellers that she thought that both they and their neighbors would be impressed with the buyer since she was also Jewish. This is a prime example of discrimination. BACKGROUND FOR THE FAIR HOUSING ACT OF 1968 In 1968, Congress passed the Fair Housing Act. This law, which is administered by the Department of Housing and Urban Development (HUD), protects consumers from discrimination related to almost all housing arrangements within the United States. In the sale or rental of any housing, the law prohibits discrimination based on the following protected groups: • Race • Color • National origin • Religion • Gender • Familial status • Disability 218 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
Fair Housing also includes the discrimination in the obtaining or access to real estate finance (mortgage lending): • The refusal to offer mortgage loans to persons in a protected group. • The refusal to provide information regarding loans to persons in a protected group. • The setting of different loan terms or conditions for persons in a protected group, such as different interest rates, points, or fees, or additional documentation. • The use of different criteria in the appraisal of a property owned by persons in a protected group or properties being sold to persons in a protected group. • The refusal to grant a loan where the borrower is a protected group or the setting of different terms or conditions for purchasing a loan where the borrower is in a protected group. In Addition it is illegal for anyone to: • Threaten, coerce, intimidate or interfere with anyone exercising a fair housing right or assisting others who exercise that right. • Advertise or make any statement that indicates a limitation or preference based on race, color, national origin, religion, sex, familial status, or handicap. This prohibition against discriminatory advertising applies to single‐family and owner‐occupied housing that is otherwise exempt from the Fair Housing Act. Even though many licensees are not Realtors in Washington State, the Realtors Article 10 of the Code of Ethics sums it up well. Article 10 of the Code of Ethics and Stands of Practice of the National Association of Realtors® states: Realtors® shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, or national origin. Realtors® shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, or national origin. (Amended 1/90) Realtors®, in their real estate employment practices, shall not discriminate against any person or persons on the basis of race, color, religion, sex, handicap, familial status, or national origin. (Amended 1/00) COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
219 IMPORTANCE OF COMMUNICATION WITH ALL PARTIES IN A TRANSACTION In a typical transaction there may be many professionals involved. Let’s take a look at some of the most common: • Seller and their broker • Buyer and their broker • The closing company (escrow) • The lender • The appraiser • The title insurance company • A structural or pest inspector • The management company of a home owner’s association As a real estate professional, your role is to play “ring leader” to all of the professionals involved and ensure that there is clear communication among all. This communication may be in the form of phone calls, facsimile, e‐mail, mail or in person. As we mentioned earlier, there are usually many terms and conditions in a contract and many of them have very specific time lines in which they must be accomplished. Because of the many terms, events and the number of professionals that are involved, clear communicate is essential. Very often, certain events must happen in a sequential manner, so that one event must happen before another can take place. This is where communication is of key importance. Often times a party must be notified that a prior event has taken place, so that they can then perform their role in the transaction. Because of the amount of communication and time involved in a transaction, many licensees hire transaction coordinators. A transaction coordinator’s main role is to communicate with all of the various professionals associated with a transaction, ensure that actions are being completed in a timely manner and that everything is running smoothly. The transaction coordinator may also have the role of communicating the status to the co‐op agent, the closing agent, the lender or to the clients. Let’s take a look at a few examples: 220 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
EXAMPLE #1 The lender Jane, feels that it is wise to hold off on ordering the appraisal until after the buyer has performed a structural inspection and a pest inspection (even though there is a substantial lead time for ordering the appraisal). Her reasoning is that, if the property fails the structural inspection, and the buyers choose not to purchase, that they will not have to pay for an appraisal which was ordered. In this situation, it would be crucial for the buyer’s broker to inform the lender, in a very timely manner, that the structural inspection was completed and that there were no issues so that the lender could order an appraisal. EXAMPLE #2 A wind storm causes a tree to fall on a property that is under contract and in escrow. The tree caused major damage to the house, the detached garage, the roof, the fence and the cement retaining wall. The sellers are insured against the damage. The fallen tree damage requires workmanship from the following persons: a carpenter, an electrician, and a dry wall contractor and retaining wall specialist. Because of the coordination with all of the different contractors, the process will take a lot of time and closing of the transaction will be delayed. The sellers tell their broker about the accident. Their broker, the listing broker, fails to inform the buyer’s broker of this incident. In this circumstance it was crucial for the listing broker to communicate the status of the repairs with the buyer’s broker in a timely manner. MULTIPLE CONTRACT ADDENDA AND THE UNAUTHORIZED PRACTICE OF LAW A licensee should avoid drafting contracts, contract provisions, or legal documents that could be construed as the product of an unlicensed practice of law. As a real estate broker, your job is to assist your clients in completing the standard contract forms which have been reviewed and approved by an attorney. Use extreme caution in adding anything to these standard forms. In Cultum v. Heritage House Realtors, the court ruled that licensees need to take great care in using the standardized forms and must ensure that all additions are in line with the terms and conditions of the contract, or the licensee can be held liable to for damages and losses. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
221 According to the ruling: “[An agent] is permitted to complete simple printed standardized real estate forms, which forms must be approved by a lawyer, it being understood that these forms shall not be used for other than simple real estate transactions which arise in the usual course of the [agent’s] business and that such forms will be used only in connection with real estate transactions actually handled by such [agent] as [an agent] and then without charge for the simple service of completing the form.” There are times, however, where there may be a circumstance for which there is not a statewide standard form. In this case, consult your manager or broker. Many brokerages have policies which strictly prohibit licensees from writing in any additional clauses in the contract without management or legal counsel approval. As a licensee, it is imperative that you understand your brokerage’s policies regarding this. CHECK FOR UNDERSTANDING OF THE MATERIAL You are writing up a Purchase and Sale Agreement for your buyer client. Your client may be exposed to a pay cut or lay off due to some union negotiations. Conversely, he may be eligible for a promotion and a pay increase depending on the union settlement. Your client has written three very detailed paragraphs on this situation and would like it to be a contingency in the contract so that he may not be bound to complete the purchase if certain circumstances should arise. He would like this verbiage to be added to the standard form as an addendum. As the buyer’s broker, what is the best course of action that you can take? Answer: Encourage the buyer to have a real estate attorney review the Purchase and Sale Agreement and the verbiage written by the buyer. And again, be sure to tell your buyer that they should choose an attorney that specializes in the field of real estate. 222 COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
IMPORTANCE OF REVIEWING FORMS The standard statewide forms for real estate in Washington State change frequently. Many of these forms are under constant revision to reflect new legislation. Because of this, it is important that you review the content of these forms on a regular basis and are cognizant of recent changes and new revisions. It is important that you use the current revision on all forms. How to avoid using old revisions of the forms: • Attempt to utilize and obtain the current forms on‐line such as NWMLS X‐Press Forms site • Ask your brokerage is they are still using up their supply of old revisions of forms. If they are, ask them to discard the old revisions • Discard your personal supply of hardcopy old revision forms Tip: The revision date on all NWMLS statewide forms can be found in the upper left corner on each form. For both listing forms and purchase forms always check the revision date. However, please note that all forms will not have the same revision date and that a revision date is only changed when there are actual changes to that particular form. The danger of mixing different revisions of a form together (for instance using the old revision of pages 1 and 2 of the Seller’s Property Disclosure Form and using the new revision for pages 3, 4 and 5) is worth noting. This mixing of revisions could yield to conflicting terms in the document rendering the contract voidable. COPYRIGHT © TAPE ED – REALESTATESCHOOL.ORG REAL ESTATE PRACTICES
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