Form-of-the-Week: Purchase Agreements — Short Form and Principal to Principal — Forms 154 and 150-3

Selecting the correct purchase agreement

A new real estate agent’s entry into the vocation of soliciting and negotiating real estate transactions typically begins with the marketing and locating of single family residences (SFRs) as a seller’s agent or a buyer’s agent. [See RPI e-book Real Estate Practice Chapter 10]

Other properties an agent might work with include:

• one-to-four unit residential properties;
• apartments;
• commercial income-producing properties (such as office buildings, retail units and industrial space);
• agricultural property; or
• vacant parcels of land.

For real estate sales conveying ownership of a property, the primary document used to negotiate the transaction between a buyer and seller is a purchase agreement. [See RPI e-book Real Estate Principles Chapter 27]

Different types of properties require the use of a different type of purchase agreement containing provisions necessary to negotiate the sale of that particular type of property. [See RPI Form 150 — 159-1]

Three basic categories of purchase agreements exist for documenting real estate sales transactions. The categories are influenced by legislation and court decisions addressing the handling of the buyer protection disclosures and the different due diligence investigations which are to be taken to properly market a property.

The three categories of purchase agreements are for:

• one-to-four unit residential property sales transactions;
• other than one-to-four unit residential property sales transactions, such as for residential and commercial income properties and owner-occupied business/farming properties; and
• raw land acquisition transactions.

Within each category of purchase agreements, several variations exist. The variations cater to the specialized use of some properties, the diverse arrangements for payment of the price and to the ownership conditions which affect transactions, particularly within the one-to-four unit residential property category.

Related article:

Brokerage Reminder: RPI’s Purchase Agreement – fair and unbiased for all to use

Purchase agreement variations

Two purchase agreement variations for one-to-four unit residential sales transactions published by RPI (Realty Publications, Inc.) include purchase agreements for:

• negotiating highly specialized transactions using a “short-form” purchase agreement without boilerplate provisions stating the terms for payment of the price, allowing the agent to attach specialty addenda to set the terms for payment [See RPI Form 154, 155-1 and 155-2]; and
• directing negotiations between principals (buyers and sellers) when a real estate agent does not represent either party. [See RPI Form 150-3]

A buyer’s agent uses the Purchase Agreement (Short Form — One-to-Four Residential Units) published by RPI when preparing an offer to purchase one-to-four unit residential property for cash or with any financing arrangements separately stated in an addendum. [See RPI Form 154]

Addendums used in conjunction with this purchase agreement include:

• the Carryback ARM Addendum [See RPI Form 155-1]; or
• the Equity Sharing Addendum. [See RPI Form 155-2]

Related article:

MLO Mentor: Different types of ARMs

A buyer acting as a principal without an agent uses the Purchase Agreement (One-to-Four Residential Units — Principal to Principal) published by RPI when submitting an offer to purchase a one-to-four unit residential property directly to a seller acting as a principal without the representation of a licensed agent, often called a FSBO (for sale by owner). [See RPI Form 150-3]

In contrast with other purchase agreements, the principal to principal purchase agreement contains no provisions for broker representation or fees as none were involved in the transaction.

Editor’s note ­— A licensee acting solely as a principal in the purchase or sale of their own property uses this form when no broker fee will be paid. Thus, a broker selling or buying property for their own account acts solely as the seller or buyer — no agency relationship exists, and the licensee is not acting on behalf of another.

Components of the purchase agreement

Each of these purchase agreement variations includes as “boilerplate” all provisions that are likely to be needed in a transaction. By design, they serve as a checklist of provisions an agent and a prudent buyer considers when preparing an offer. [See RPI Form 154 and 150-3]

Each section of these purchase agreements has a separate purpose and need for enforcement. The parts include:

1. Identification: the date and place of preparation, the buyer’s name, the amount of the good-faith deposit, the description of the real estate, an inventory of personal property included in the transfer and the number of pages contained in the agreement and its addenda. [See RPI Form 154 §1 and §2; See RPI Form 150-3 §1 and §2]
2. Price and terms: variations for payment of the price and financing terms. [See RPI Form 154 §3; See RPI Form 150-3 §§3 through 10]
3. Acceptance and performance: aspects of the formation of a contract, excuses for non-performance and termination of the agreement, such as the time period for acceptance, financing of the price as a closing contingency, procedures for cancellation, a sale of other property as a closing contingency, cooperation to affect a §1031 transaction and limitations on monetary liability for breach of contract. [See RPI Form 154 §4; See RPI Form 150-3 §11]
4. Property conditions: the buyer’s confirmation of the physical condition of the property as disclosed prior to acceptance by the seller’s delivery of reports, warranty policies, certifications, disclosure statements, an environmental, lead-based paint and earthquake safety booklet, operating cost and income statements, and homeowners’ association (HOA) documents not handed to the buyer prior to entry into the purchase agreement, as well as by the buyer’s initial inspection, personally or by a home inspector, and final inspection at closing. [See RPI Form 154 §5; See RPI Form 150-3 §12]
5. Closing conditions: the escrow holder, escrow instruction arrangements, closing date, title conditions, title insurance, hazard insurance, prorates and mortgage adjustments. [See RPI Form 154 §6; See RPI Form 150-3 §13]
6. Notice of supplemental property tax: notifies the buyer they will receive supplemental property tax bills they are to pay when the county assessor revalues the property after a change in ownership. [See RPI Form 154 §7; See RPI Form 150-3 §14]
7. Notice regarding gas and hazardous liquid pipelines: notifies the buyer on the public availability of information regarding gas and hazardous liquid transmission pipelines via the National Pipeline Mapping System (NPMS) web site. [See RPI Form 154 §8; See RPI Form 150-3 §15]
8. Signatures: the seller and buyer bind each other to perform as agreed in the purchase agreement by signing and dating their signatures. [See RPI Form 154 and Form 150-3]

This article was originally published June 2016 and has been updated.

Want to learn more about purchase agreement variations for diverse real estate transactions? Click an image below to download the RPI books cited in this article.