General
In all respects, the
property checks out as being one that you want to own - what
next? Well, you need to write a purchase contract. This
documents is also sometimes called a purchase agreement or contract
to purchase, but what is in it is a lot more important than its
name.
There are a
number of elements to a legal contract to purchase real estate. Basically,
they are:
- Legal purpose
- Offer
- Written
- Consideration
- Parties must have capacity
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Although you will not usually sit
around a conference table negotiating various terms and conditions
of your purchase contract, you should be aware of negotiation principles
when you write your offer. You will almost certainly negotiate
after you have made your offer. Unless your purchase offer
is ridiculously out of line with value or other issue to the degree
that it makes the seller mad, you should expect a counter offer from
the seller. It is likely that you will get a counter offer
even if you offered full price because some of the contingencies
or other issues that you included will probably be objectionable
to the seller or his agent. Many of the same principles apply
whether you are sitting across the table from the seller or instead
are writing your original offer or writing a counter offer to his
counter offer.
Contract Forms
Most real estate agents who are representing
a buyer will utilize a purchase contract that is (1) their firm's
custom form, if a large company or a franchise such as REMAX or Century
21, or (2) their state's Association of Realtors form. If you
are working without an agent, you have the choice of obtaining a form
of the seller's agent if there is one (and there usually is), whichever
type that is, or obtaining an Association of Realtors form yourself. One
of the potential problems with using the custom form of a large company
is that it may contain a whole lot of references to the company name. Accordingly,
of the two choices, you usually be better off using the state Association
of Realtors' form.
An alternative is a form of a reputable independent
publisher such as California's first tuesday. Unless you
are capable of judging the adequacy of the independent publisher form, assuming
there is a good one available for your state, it is usually safest to use the
Association of Realtors' form because state associations tend to employ competent
attorneys for drafting forms and they are usually kept up to date regarding the
latest statutes and Court decisions.
One potential problem in getting a form from the
seller's agent is that the agent will likely want you to let him help you fill
out the form. Remember that the seller's agent wants badly to make the
deal because he will make a lot of money no matter what price the property sells
for and whether it's a good deal for either the buyer or the seller. Accordingly,
if you're not sure that you can hold your own against the agent and won't let
him influence your offer (probably almost impossible), don't let him work with
you on the contract. For the same reason, you need to hold your own in
filling out the form along with your own agent when you have one.
The form, from whatever source, will have various and
sundry boiler plate clauses regarding financing and other conditions and contingencies. There
is nothing wrong with using these clauses where they meet your own requirements. However,
do not be intimidated into using a clause that does not say exactly what you
want. Do not hesitate to add an addendum that contains the exact customized
clauses that you need. Be sure to line out the boiler plate clauses and
refer to the addendum for each of the clauses that you wish to replace or modify. Due
to limited space on the form and for clarity it is usually best to write a new
clause on the addendum rather than mark up an existing clause except for very
minute changes (e.g., changing the number of days from 7 to 10). Be
sure that both parties initial every single markup on the contract.
Price
When writing the offer, you need to decide what you are willing
to pay for it. As previously stated in Lesson 5, a good understanding
of valuation is required before applying the information of this
course and the subject is covered in detail by our Valuing
Income Property e-course.
Deposit
Cash deposits are
customary, but smart buyers don't have to operate according to
custom. The seller wants the buyer
to put up a cash deposit to keep him from backing out of the deal,
because when a contract for purchase has been negotiated and signed,
the seller is actually granting the buyer an exclusive option to
purchase the property, subject to the terms and conditions contained
in the agreement. So, the buyer is getting a lien on the
property subject to those conditions. The seller needs something
in return, right? Sure, but why should it have to be cash? How
about a promissory note with zero interest for earnest money. Or
you might execute a second mortgage or trust deed on another property
as deposit money. Use your imagination and keep your money
working for you where it is. There is other important reason
to avoid cash deposits, if possible. In the event of a deal
that falls apart with accusations of fault against each party,
it is harder for the seller to collect from you, and less likely
that he will try, compared to your money being in escrow. Keep
in mind, though, that a legitimate escrow company will not usually
release money to the seller (or the buyer) if there is a disagreement
regarding it's release that is not resolved to the satisfaction
of their attorney by reading the contract.
Personal Property
If there is any personal
property included in the sale or that you want included in the
sale, be sure that the contract includes it. It is sometimes
best to have a separate agreement in every offer that covers any
and all personal property, but make it an intrinsic part of the
real estate transaction, in order to prevent a lender from subtracting
the value from their loan commitment. There are several advantages
to a buyer. For example:
- Personal property has a much faster deprecation
schedule for tax purposes. If you have a seller-financed agreement,
allocate a large part of the purchase to personal property and
amenities.
- The personal property must be inventoried and
listed, thereby guaranteeing that you actually get what you have
agreed to pay for.
- Have a right to inspect all of the property just
prior to closing. Even minor damage to incidentals can be deducted
from the seller's proceeds.
Instruct the closing
agent that you want a bill of sale for all the personal property
listed in inventory. It will be very helpful in the event
of an IRS audit and will also assist you in making a case for a
lower property assessment with the local tax assessor or property
tax appeal board.
Contingencies
General
Contingencies are
very important and it is important that they be properly written. Be sure
that your purchase contract makes contingencies out of all inspections and allows
adequate time to get the results of the inspections, taking into account inspector
scheduling, holidays, weekends, weather; time to analyze the reports; and time
to exercise a contingency if necessary. There are a number of general
principles that you should follow when writing contingencies into your offer.
- Write all contingencies to require written approval of buyer
(as opposed to automatically approved if not disapproved in writing)
in order to eliminate possible loss of contingencies due to oversight
or running out of time. You can then ask for a contract amendment
to allow for a little more time.
- For those contingencies that have a cost (e.g., physical inspections
and Phase One Report) it is usually in the buyer's best interest
to bear the cost and reduce the offered price accordingly. The
reason for this is two-fold. First, it is usually better
that the vendors to be hired are the agents of the buyer rather
than of the seller for several reasons. Second, after the
offer has been accepted, you may, for one reason or another, decide
that there is no need to pay for a certain inspection or may be
able to get it done for much lower cost than expected. If
the seller is to pay for the inspections, he will have to keep
his price high enough to cover the costs and will likely use worst
case high amounts for all of the items.
- Make all time periods for contingencies requiring information
from the seller start with receipt of that information rather than
from date of the contract acceptance. That way your time
is not shortened due to his delay.
- Base the time period for each contingency on the total of time
required to schedule a vendor, time for the vendor to provide his
report, time to analysis report, and time to get a discrepancy
report to the seller or into escrow - then add 20 to 30 percent.
- To the degree possible, schedule period limits of inspections
in order of importance relative to decision making.
- State all time limits as number of calendar days rather than
business days in order to avoid any confusion over what is or is
not a business day. Specific dates may be used for items
that do not require action by the seller, but should not be used
if related to a relatively short time period because any delay
in execution of the contract itself can severely reduce the period
remaining.
