This article covers the use and preparation by an agent of a written purchase agreement entered into by buyers and sellers of real estate to document the terms and conditions of their transaction.

Types and variations

A newcomer’s entry as a real estate agent into the vocation of soliciting and negotiating real estate transactions typically begins with the marketing and locating of single-family residences (SFRs) as listing and selling agents.

 However, an agent often branches out and begins handling other types of property and interests.

 Other properties the agent may begin handling include one-to-four unit residential properties, apartments and other nonresidential income properties like office buildings, commercial units, industrial space or unimproved parcels of land.

 Interests which might be negotiated by the agent include leasehold tenancies when acting as a property manager or leasing agent of the landlord or prospective tenant, or financing arranged as a loan broker for an owner, buyer or tenant.

 For sales, the primary document used to negotiate the transaction between a buyer and seller is a purchase agreement form. As different types of properties exist, so too do different types of purchase agreements exist, each with the provisions necessary to negotiate the sale of that particular type of property.

 Three basic categories of purchase agreements exist for the documentation of real estate sales. The categories are influenced primarily by legislation and court decisions addressing the handling of the disclosures and due diligence investigations in the marketing of properties. 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 nonresidential income properties and owner-occupied business/farming properties; and
  • land transactions.

Within each category of purchase agreements, several variations exist. The variations cater to the specialized use of some properties or to specific conditions which affect a property, particularly within the one-to-four unit residential property category.

 For example, purchase agreement variations for one-to-four unit residential sales transactions include purchase agreements for:

  • negotiating the conventional financing of the purchase price [See Form 150 accompanying this article];
  • negotiating the government insured financing (FHA/VA) of the purchase price [See first tuesday Forms 152 and 153];
  • negotiating the sale of an owner-occupied residence-in- foreclosure to an investor, called an equity purchase agreement [See first tuesday Form 156];
  • direct negotiations between principals (buyers and sellers) without either party being represented by a real estate agent;
  • negotiating highly specialized transactions using a “short- form” purchase agreement which does not contain boilerplate provisions setting forth the terms for payment of the price, which allows the agent to attach specialty addenda to set the terms for payment (a carryback ARM or equity sharing addenda) [See first tuesday Form 155]; and
  • offers to enter into a lease-option sale or a land sales contract. [See first tuesday Forms 164 and 167]

Variations among purchase agreements used in income property and owner-occupied business property sales transactions include purchase agreements for:

  • the conventional financing of the purchase price [See first tuesday Form 159];
  • the downpayment note financing of the purchase price [See first tuesday Form 154];
  • the reciprocal sale and purchase of different properties by their owners [See first tuesday Form 171]; and
  • an offer to grant an option to provide the buyer with an owner’s irrevocable offer to enter into a purchase agreement on the buyer’s exercise of the option. [See first tuesday Form 160]

Escrow instructions provide yet another variation on the purchase agreement. A buyer and seller who have entered into escrow instructions without first entering into a real estate purchase agreement are bound by the escrow instructions as though it was a purchase agreement. [See first tuesday Form 401]

 Attached to all these various purchase agreements are one or more addenda, regarding:

  • disclosures about the property;
  • the financing of the price paid for the property;
  • agency relationship law; and
  • special provisions called for by the needs of the buyer or seller.

However, the focus here is limited to the needs of the newly licensed agent who will be negotiating single-family real estate sales. Thus, this   discusses the purchase agreement used in SFR sales transactions structured for the conventional financing of the purchase price.

Analyzing the purchase agreement

The conventional purchase agreement, first tuesday Form 150, is used to prepare and submit the buyer’s written offer to purchase one-to-four unit residential property. Terms for payment of the price are limited to conventional financing, an assumption of existing loans and a carryback note. Form 150 is also properly used by sellers in a counteroffer situation to submit their fresh offer to sell the real estate.

 The purchase agreement offer, if accepted, becomes the binding written contract between the buyer and seller. Its terms must be complete and clear to prevent misunderstandings so the agreement can be judicially enforced. Thus, Form 150 is a comprehensive “boilerplate” purchase agreement which serves as a checklist, presenting the various conventional financing arrangements and conditions a prudent buyer would consider when making an offer to purchase.

 Each section in Form 150 has a separate purpose and need for enforcement. The sections include:

 1. Identification: The date of preparation for referencing the agreement, the name of the buyer, the amount of the good-faith deposit, the description of the real estate, an inventory of any personal property included in the transfer and the number of pages contained in the agreement and its addenda are set forth in sections 1 and 2 to establish the facts on which the agreement is negotiated.

2. Price and terms: All the typical variations for payment of the price by conventional purchase-assist financing or an assumption of existing financing are set forth in sections 3 through 9 as a checklist of provisions. On making an offer (or counteroffer), the terms for payment and financing of the price are selected by checking boxes and filling blanks in the desired provisions.

3. Acceptance and performance: Aspects of the formation of a contract, excuses for nonperformance and termination of the agreement are provided for in section 10, such as the time period for acceptance of the offer, the broker’s authorization to extend performance deadlines, the financing of the price as a closing contingency, procedures for cancellation of the agreement, a sale of other property as a closing contingency, cooperation to effect a §1031 transaction and limitations on monetary liability for breach of contract.

4. Property Conditions: The buyer’s confirmation of the physical condition of the property as disclosed prior to acceptance is confirmed as set forth in section 11 by the seller’s delivery of reports, warranty policies, certifications, disclosure statements, an environmental, lead-based paint and earthquake safety booklet, any operating cost and income statements, and any 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 to confirm the seller has eliminated defects known, but not disclosed, prior to acceptance.

5. Closing conditions: The escrow holder, escrow instruction arrangements and the date of closing are established in section 12, as are title conditions, title insurance, hazard insurance, prorates and loan adjustments.

6. Brokerage and agency: The release of sales data on the transaction to trade associations is authorized, the brokerage fee is set and the delivery of the agency law disclosure to both buyer and seller is provided for as set forth in sections 13 and 14, as well as the confirmation of the agency undertaken by the brokers and their agents on behalf of one or both parties to the agreement.

7. Signatures: The seller and buyer bind each other to perform as agreed in the purchase agreement by signing and dating their signatures to establish the date of offer and acceptance.

Preparing the purchase agreement

The following instructions are for the preparation and use of the Purchase Agreement, first tuesday Form 150. Form 150 is designed as a checklist of practical provisions so a broker or his agent can prepare an offer for a prospective buyer who seeks to purchase conventionally financed, one-to-four unit residential property located in California.

 Each instruction corresponds to the provision in the form bearing the same number.

 Editor’s note — Check and enter items throughout the agreement in each provision with boxes and blanks, unless the provision is not intended to be included as part of the final agreement, in which case it is left unchecked or blank.

 Document identification:

Enter the date and name of the city where the offer is prepared. This date is used when referring to this purchase agreement.

 Facts:

1. Buyer, deposit and property: Enter the name of each buyer who will sign the offer.

Enter the dollar amount of any good-faith, earnest money deposit. Check the appropriate box to indicate the form of the good-faith deposit. Enter the name of the payee (escrow, title company or broker).

Enter the name of the city and county in which the property is located.

Enter the legal description or common address of the property, or the assessor’s parcel number (APN).

Enter the description of any personal property included, or enter words of reference, such as “see attached inventory,” and attach an itemized list of the inventory. The seller’s trade fixtures to be purchased by the buyer must be listed as inventory if they are to be acquired by the buyer. [See first tuesday Form 250]

2. Entire agreement: Enter the number of pages comprising all of the addenda, disclosures, etc., which are attached to the purchase agreement.

Terms for payment of the purchase price:

3. Cash down payment: Enter the dollar amount of the buyer’s cash down payment toward the purchase price.

 3.1 Additional down payment: Enter the description of any other consideration to be paid as part of the price, such as trust deed notes, personal property or real estate equities (an exchange). Enter the dollar amount of its value.

4. First trust deed note: Check the appropriate box to indicate whether the transfer of title is to be “subject- to” an existing loan or by an “assumption” of the loan if the buyer is to take over an existing first trust deed loan. Enter the lender’s name. Enter the remaining balance, the monthly principal and interest (PI) payment and the interest rate on the loan. Check the box to indicate whether the interest is adjustable (ARM), and if so, enter the index name. Enter any monthly impound payment made in addition to the PI payment. Enter any due date or other terms unique to the loan.

 4.1 Loan balance adjustments: Check the appropriate box to indicate the financial adjustment desired for loan balance differences at the close of escrow.

4.2 Impound balances: Check the appropriate box to indicate whether the impound account transferred to the buyer will be with or without a charge to the buyer.

5. Second trust deed note: Check the appropriate box to indicate whether the transfer of title is to be “subject- to” an existing loan or by an “assumption” of the loan if the buyer is to take over an existing second trust deed loan. Enter the lender’s name. Enter the remaining balance, the monthly PI payment and the interest rate on the loan. Check the box to indicate whether the interest is adjustable (ARM), and if so, enter the index name. Enter the due date for payment of a final/balloon payment.

 6. New trust deed loan: Check the appropriate box to indicate whether any new financing will be a first or second trust deed loan. Enter the amount of the loan, the monthly PI payment, the term of the loan and the rate of interest. Check the box to indicate whether the interest will be adjustable (ARM), and if so, enter the index name. Enter any limitations on loan points.

6.1 Buyer’s loan qualification: Check the box to indicate the seller is authorized to cancel the agreement if the buyer is to obtain a new loan and fails to deliver documentation from a lender indicating he has been qualified for a loan. Enter the number of days the buyer has after acceptance to deliver written confirmation of his qualification for the loan.

7. Bond or assessment assumed: Enter the amount of the principal balance remaining unpaid on bonds and special assessment liens (such as Mello-Roos or 1915 improvement bonds) which will remain unpaid and become the responsibility of the buyer on closing.

Editor’s note — Improvement bonds are obligations of the seller which may be assumed by the buyer in lieu of their payoff by the seller. If assumed, the bonded indebtedness becomes part of the consideration paid for the property. Some purchase agreements erroneously place these bonds under “property tax” as though they were ad valorem taxes, and then fail to prorate and charge the unpaid amount to the seller.

 8. Seller carryback note: Enter the amount of the carryback note to be executed by the buyer as partial payment of the price. Enter the amount of the note’s monthly PI payment, the interest rate and the due date for the final/balloon payment.

 8.1 Special carryback provisions: Check the appropriate box to indicate any special provisions to be included in the carryback note or trust deed. Enter the name of any other special provision to be included in the carryback note or trust deed, such as impounds, discount options, extension provisions, guarantee arrangements or right of first refusal on the sale or hypothecation of the note.

8.2 Carryback disclosure: Fill out and attach a Seller Carryback Disclosure Statement as an addendum. [See first tuesday Form 300]

Editor’s note — Further approval of the disclosure statement in escrow creates by statute a buyer’s contingency allowing for cancellation until time of closing on any purchase of one-to-four unit residential property.

 8.3 Notice of Delinquency: Requires the buyer to execute a Request for Notice of Delinquency and pay the costs of recording and serving it on senior lenders since they will have priority on title to the trust deed securing the carryback note.

8.4 Buyer creditworthiness: Requires the buyer to provide the seller with a completed credit application.

8.5 Approval of creditworthiness: Enter the number of days within which the seller may cancel the transaction for reasonable disapproval of the buyer’s credit application and report.

8.6 Subordination: Provides for the seller to terminate this transaction if the parameters agreed to for financing by an assumption or origination of a trust deed loan with priority on title to the carryback note are exceeded.

8.7 Personal property as security: Requires the buyer on the transfer of any personal property in this transaction to execute a security agreement and UCC-1 financing statement to provide additional security for any carryback note.

9. Purchase price: Enter the total amount of the purchase price as the sum of lines 3, 3.1, 4, 5, 6, 7 and 8.

 10. Acceptance and performance periods:

10.1 Delivery of acceptance: Check the appropriate box to indicate the time period for acceptance of the offer. If applicable, enter the number of days in which the seller may accept this offer and form a binding contract.

Editor’s note — Acceptance occurs on the return delivery to the person making the offer (or counteroffer) or to his broker of a copy of the unaltered purchase agreement offer containing the signed acceptance.

 10.2 Extension of performance dates: Authorizes the brokers to extend the performance dates up to one month to meet the objectives of the agreement — time being of a reasonable duration and not the essence of this agreement as a matter of policy. This extension authority does not extend to the acceptance period.

10.3 Loan contingency: Authorizes the buyer to cancel the transaction at the time scheduled for closing if the financing for payment of the price is not obtainable or assumable.

10.4 Sale of other property: If the closing of this transaction is to be contingent on the buyer’s receipt of net proceeds from a sale of other property, enter the address of the property to be sold by the buyer.

10.5 Cancellation procedures: Provides the method of cancellation required to terminate the agreement when the right to cancel is triggered by other provisions in the agreement, such as contingency or performance provisions.

10.6 Exchange cooperation: Requires the parties to cooperate in an IRS §1031 transaction on further written notice by either party. Provides for the parties to assign their interests in this agreement.

10.7 Liability limitations Provides for a dollar limit on the buyer’s liability for the buyer’s breach of the agreement. Check the first box and enter the maximum dollar amount of money losses the seller may recover from the buyer or check the second box to indicate the buyer’s monetary liability is limited to the good-faith deposit tendered with the offer to buy.

Editor’s note — Liability limitation provisions avoid the misleading and unenforceable forfeiture called for under liquidated damage clauses included in most purchase agreement forms provided by other publishers of forms.

 11. Property Conditions:

 11.1 Seller to furnish: Check the appropriate box(es) within the following subsections to indicate the items the seller is to furnish prior to closing.

a. Pest control: Check the box to indicate the seller is to furnish a structural pest control report and clearance.

b. Home inspection report: Check the box to indicate the seller is to employ a home inspection company and furnish the buyer with the company’s home inspection report.

c. Home warranty: Check the box to indicate the seller is to furnish an insurance policy for home repairs. Enter the name of the insurer and the type of coverage, such as for the air conditioning unit, etc.

d. Local ordinance compliance: Check the box to indicate the seller is to furnish a certificate of occupancy or other clearance required by local ordinance.

e. Sewer or septic certificate: Check the box to indicate the seller is to furnish a certificate of the condition of the sewage disposal system stating it is functioning properly.

f. Potable well water: Check the box to indicate the seller is to furnish a certificate stating the well supply meets water standards.

g. Well water capacities: Check the box to indicate the seller is to furnish a certificate stating the amount of water the well supplies. Enter the number of gallons per minute the well is expected to produce.

h. Other terms: Check the box and enter any other report, certification or clearance the seller is to furnish.

i. Other terms: Check the box and enter any other report, certification or clearance the seller is to furnish.

11.2 Property condition(s): Check the appropriate box within the following subsections to indicate the status of the Transfer Disclosure Statement (TDS).

a. Attached TDS: Check the box to indicate the seller’s TDS has been prepared and handed to the buyer, and if so, attach it to this agreement. Thus, the property’s condition is accepted by the buyer upon entering into the purchase agreement offer.

Editor’s note — Use of the TDS form is mandated on one-to-four unit residential property. [See first tuesday Form 304]

 b. Later delivered TDS: Check the box to indicate the TDS is to be delivered later to the buyer to confirm the condition of the property is as disclosed prior to entry into the purchase agreement. On receipt of the TDS, the buyer may either cancel the transaction for failure of the seller or the listing agent to disclose known property defects prior to acceptance of the purchase agreement (or counteroffer), or give notice to the seller of the defects known and not disclosed prior to acceptance and make a demand on the seller to correct them prior to closing.

c. Repair of defects: Authorizes the buyer to either cancel the transaction or adjust the price should the seller fail to correct the defects noticed under sections 11.2b or 11.3a.

11.3 Buyer’s inspection: Authorizes the buyer to inspect the property twice during the escrow period to verify its condition is as disclosed by the seller prior to the time of acceptance.

a. Initial property inspection: Requires the buyer to inspect the property immediately after acceptance to put the seller on notice of material defects to be corrected by the seller prior to closing.  [See first tuesday Forms 269]

b. Final walk-through inspection: Requires the buyer to inspect the property again within five days before closing to confirm repairs and maintenance of the property have occurred. [See first tuesday Form 270]

11.4 Seller’s Natural Hazard Disclosure (NHD) Statement: Check the appropriate box to indicate whether the NHD statement disclosing the seller’s knowledge about the hazards listed on the form has been prepared and handed to the buyer. If it has been received by the buyer, attach a copy to the purchase agreement. If the NHD will be handed to the buyer after acceptance, the buyer has ten days after the buyer’s receipt of the NHD statement in which to approve it or cancel.

Editor’s note — Disclosure by the seller is mandated on one-to-four unit residential property. [Calif. Civil Code §1103]

 11.5 Hazard disclosure booklets Check the appropriate box(es) to indicate which hazard booklets have been received by the buyer, together with the seller’s prepared and signed disclosures accompanying each booklet.

11.6 Other property disclosures: Check the appropriate box(es) to indicate other disclosures made by the seller regarding the location of the property. Enter a reference to any local (option) ordinance disclosure statement attached as an addendum to the purchase agreement and attach it. [See first tuesday Form 307]

11.7 Operating costs and rents: Check the appropriate box(es) to indicate the information the seller is to disclose regarding the operating expenses of ownership and any rents.

a. Disclosure approval: Authorizes the buyer to cancel the purchase agreement and escrow if the operating expenses and income disclosures are unacceptable.

11.8 Homeowners’ association (HOA): Check the appropriate box to indicate whether the HOA documents have been or are to be delivered to the buyer.

a. Monthly payments: Enter the dollar amount of the monthly payments assessed by the HOA.

b. CC&Rs: Enter the nature of any violation of the CC&Rs by the seller.

c. HOA charges: Provides for the seller to pay all HOA charges on the transaction.

d. Condition of assessments: Provides for the buyer to approve the HOA’s condition of assessments statement prior to closing.

e. Disapproval of HOA documents: Authorizes the buyer to terminate this purchase agreement within ten days after his receipt of HOA documents when the disclosures are made after entering into the purchase agreement. Disclosure of HOA conditions in escrow trigger a statutory contingency allowing the buyer to cancel the purchase agreement.

11.9 Safety compliance: Requires smoke detectors and water heater bracing to exist or be installed by the seller.

11.10 Buyer’s possession: Check the appropriate box to indicate when possession of the property will be delivered to the buyer, whether at closing or under an attached buyer’s interim occupancy or seller’s holdover agreement. [See first tuesday Forms 271 and 272]

11.11 Property maintenance: Requires the seller to maintain the present condition of the property until the close of escrow.

Editor’s note — See section 11.3b for the buyer’s final inspection to confirm maintenance at closing.

 11.12 Fixtures and fittings: Confirms this agreement includes real estate fixtures and fittings as part of the property purchased.

Editor’s note — Trade fixtures are personal property to be listed as items on an attached inventory at section 1.

 11.13 Sex offender disclosure: Complies with requirements that the seller disclose the existence of a sex offender database on the sale (or lease) of one-to-four residential units.

Editor’s note — By the existence of the disclosure in the form, the seller and brokers are relieved of any duty to make further disclosures regarding registered sex offenders.

 12. Closing conditions:

 12.1 Escrow closing agent: Enter the name of the escrow company handling the closing.

a. Escrow instructions: Check the box to indicate the purchase agreement is to also serve as the mutual instructions to escrow from the parties. The escrow company will typically prepare supplemental instructions they will need to handle and close the transaction. [See first tuesday Form 401]

b. Escrow instructions: Check the box to indicate escrow instructions have been prepared and are attached to this purchase agreement. Prepare and attach the prepared escrow instructions to the purchase agreement and obtain the signatures of the parties. [See first tuesday Form 401]

12.2 Closing date: Check the appropriate box to indicate the method to be used to set the date on which escrow is scheduled to close. Following the checked box, enter the specific date for closing or the number of days anticipated as necessary for the parties to perform and close escrow. Also, prior to seven days before closing, the parties are to deliver all documents needed by third parties to perform their services by the date scheduled for closing.

a. Escrow charges: Requires each party to pay their customary escrow closing charges, amounts any competent escrow officer can provide on inquiry.

12.3 Title conditions: Enter wording for any further- approval contingency provision the buyer may need to confirm that title conditions set forth in the preliminary title report will not interfere with the buyer’s intended use of the property, such as “closing contingent on buyer’s approval of preliminary title report.”

12.4 Title insurance: Provides for title to be vested in the name of the buyer or his assignee. Enter the name of the title insurance company which is to provide a preliminary title report in anticipation of issuing title insurance. Check the appropriate box to indicate the type of title insurance policy to be issued on closing.

a. Policy endorsements: Enter any endorsements to be issued with the policy.

b. Payment of premium: Check the appropriate box to indicate whether the buyer or seller is to pay the title insurance premium.

12.5 Fire insurance: Requires the buyer to provide a new policy of hazard insurance.

12.6 Prorates and adjustments: Authorizes prorations and adjustments on the close of escrow for taxes, insurance premiums, rents, interest, loan balances, service contracts and other property operating expenses, prepaid or accrued.

12.7 Personal property: Requires the seller to execute a bill of sale for any personal property being transferred in this transaction as called for in section 1.

12.8 Property destruction: Provides for the seller to bear the risk of loss for any casualty losses suffered by the property prior to the close of escrow. Thus, the buyer may terminate the agreement if the seller is unable to provide a marketable title or should the property improvements suffer major damage.

13. Brokerage fee:

 13.1 Fee amount: Enter the total amount of the fee due all brokers to be paid by the seller. The amount may be stated as a fixed dollar amount or a percentage of the price.

Editor’s note — The defaulting party pays all brokerage fees and the brokerage fee can only be altered or cancelled by mutual instructions from the buyer and seller.

13.2 Fee sharing: Enter the percentage share of the fee each broker is to receive.

Editor’s note — The percentage share may be set based on an oral agreement between the brokers, by acceptance of the listing broker’s MLS offer to a selling office to share a fee, or unilaterally by an agent when preparing the buyer’s offer.

 13.3 Agency law disclosures: Attach a copy of the Agency Law Disclosure addendum for all parties to sign.

Editor’s note — The disclosure is mandated to be acknowledged by the buyer with the offer and acknowledged by the seller on acceptance as a prerequisite to the brokers enforcing collection of the fee when the property involved contains one-to-four residential units. [See first tuesday Form 305]

 13.4 Disclosure of sales data: Authorizes the brokers to report the transaction to trade associations or listing services.

14. Other terms: Enter any special provision to be included in the purchase agreement.

 Agency confirmation:

Buyer’s broker identification: Enter the name of the buyer’s broker. Obtain the signature of the buyer’s broker or the selling agent acting on behalf of the buyer’s broker. Check the appropriate box to indicate the agency which was created by the broker’s (and his agents’) conduct with the parties.

 Seller’s broker identification: Enter the name of the seller’s broker. Obtain the signature of the seller’s broker or the listing agent acting on behalf of the seller’s broker. Check the appropriate box to indicate the agency which was created by the broker’s (and his agents’) conduct with the parties.

 Signatures:

Buyer’s signature: Enter the date the buyer signs the purchase agreement and each buyer’s name. Obtain each buyer’s signature on the purchase agreement and on each attachment which requires his signature. Enter the buyer’s address, telephone and fax numbers, and email address.

 Seller’s signature: Enter the date the seller signs the purchase agreement and each seller’s name. Obtain each seller’s signature on the purchase agreement and on each attachment which requires his signature. Enter the seller’s address, telephone and fax numbers, and email address.

 Rejection of offer:

Should the offer contained in the purchase agreement be rejected instead of accepted, and the rejection will not result in a counteroffer, enter the date of the rejection and the names of the party rejecting the offer. Obtain the signatures of the party rejecting the offer.

Observations

As a policy of the publisher, this purchase agreement does not contain clauses which tend to increase the risk of litigation or are generally felt to work against the best interests of the buyer, seller and broker. Excluded provisions include:

  • an attorney fee provision, which tends to promote litigation and inhibit contracting;
  • an arbitration clause, which, if included and initialed, absolutely waives the buyer’s and seller’s right to a fair and correct decision by trial and appeal; and
  • a time-essence clause, since future performance (closing) dates are, at best, estimates by the broker and his agents of the time needed to close and are too often improperly used by sellers in rising markets to cancel the transaction before the buyer or broker can reasonably comply with the terms of the purchase agreement.