Purchase and Sales Agreement for Real Estate
Podcast Episode by Greg George
Discuss the purchase and sale agreement for real estate, the things you have to have in the agreement, and important things you need to know before going into an agreement.
We do a lot of work on contracts. One of the contracts we see the most and that we work on the most often is the purchase and sale agreement for real property. Now, we all know that here in North Idaho and Eastern Washington, there has been just a super hot real estate market lately. In fact, I read something the other day that indicated Spokane had been the hottest real estate market in the country for the past six months or the past year or some some time period, according to Redfin. And so there’s a lot of purchases and sales of real property going on. We’re working on them frequently.
The point of this podcast today is for me to discuss the purchase and sale agreement for real estate. Things you have to have in there, some of the pitfalls that can occur, and then some of the ways that if you’re working with an attorney on a purchase and sale agreement, that you can save yourself time and money. Because, when people know certain things going on before they hire counsel to draft up the terms of a purchase or sale of property, then they can save themselves some frustration, some heartache, and certainly substantial amounts of money down the road if they know certain things going in.
So I’m going to discuss all that and try to keep it at a fairly high level, because there can be a lot of detail involved in a particular transaction. So, what I’m talking about here is going to be things that are more general in all transactions. And so the first thing is that you have to have a written agreement. You know, that’s pretty intuitive to most people. But the law actually says that every agreement for purchase or sale of real property or any interest in real property, like an easement, has to be in writing. That’s called the statute of frauds. And the point of the statute of frauds in the law is that there are certain transactions that are significant enough for people that, in order for them to be valid and enforceable, there has to be some written record of that transaction so that nobody can commit a fraud. That’s why it’s called statute of frauds. By representing that somehow there was an agreement to sell property, or to sell goods over $500, or to have a contract for marriage or, you know, different types of agreements that are monumental enough that we’re concerned as a society that if we didn’t require a written document that sets forth the transaction, then there might be fraudulent transfers, things of that nature that people might do.
So transactions in real property purchase and sale agreements are in that category. As a result, they have to be in writing. Certain other things have to be in any transaction. The price, you’ve got to have a price stated in the agreement means you have to agree on the price that can be, you know, fairly complicated between a buyer and the seller. And ideally, before anybody hires an attorney to start drafting an agreement, you will have agreed on the price. And there are different ways for people to try to determine what the price might be. Some people like to look at the county records, what does the county estimate the price to be for the tax assessed value? People will sometimes hire an appraiser, you know, if it’s a more complicated type of property. Maybe it’s mixed use, maybe it’s got weird boundaries, maybe there are some things that are kind of unusual or abnormal about a particular piece of property. It might make sense to hire an appraiser and have him or her generate a report as to what the value is, so that as a potential seller, you know what you might want to offer that property for.
Similar to an appraisal we often see realtors do what’s called a comparative market analysis, or CMA. And that’s where a realtor can look into the records in the multiple listing service that they have access to, look at what some similar sales are in the area, and generate a report recommending a particular price or price range for a piece of property based on that comparative market analysis.
Another thing that you need to have on top of the price is a description of the property being sold. Now there are different ways to describe real property. Some people like to just use a street address. We’ve seen that and that maybe can work. I’ve seen people do Do-It-Yourself agreements that include just the address. If there’s no dispute or question about what property is being referenced by an address, then, that might suffice. But I don’t recommend it. Because the law generally says that for any conveyance, you know, i.e. any purchase or sale of real property, the property needs to be described with sufficient detail, so that anybody reading the document by which the property is sold, can know exactly what property is being referenced in the agreement.
The safest way to do that, generally, is by getting what’s called a legal description of property. Even though it’s called a legal description, it’s usually not prepared by lawyers. Most often a legal description is prepared by professional land surveyors who have either plotted out a subdivision and can describe the property as, say, lot five of block one of Jackson acres, or who have actually gone out and taken their different land measuring instruments and technology and produce what’s called a metes and bounds description, which is a more complex way of describing property that isn’t part of a subdivision, where you’ll see different directions, you know, 89 degrees north 53 degrees west, you know, for 462.73 feet in that direction, and then moving now 38 degrees south. If you’ve dealt with real property before, you’ve maybe seen one of those more technical descriptions. If that’s what a property is described as, then it’s probably best to take that description, and put it right into your purchase and sale agreement so that there wouldn’t be any ambiguity about what property is being bought, what properties being sold, and so on. That same legal description will then generally go into the warranty deed.
Another aspect of many purchase and sale agreement agreements are contingencies. There are certain things that people want to make sure are in place before a sale of real property closes. And it’s best for them to put those expressly into the written agreement as contingencies so that if X or Y doesn’t happen before closing, then either the seller or the buyer isn’t obligated to go through with closing the sale. Some of the most common contingencies that you see in Purchase and Sale agreements are an inspection contingency. Often, the buyer will want the right to inspect the property, especially if it’s an existing house, and make sure that the property passes their expectations that there’s no issues with the house like issues with the roof leaking or something like that. And the buyer often wants to have their own inspector that they hire to do that. And so, a purchase and sale agreement will often give the buyer a time period in which they can do that.
And then say that, well, if the property doesn’t pass inspection, and if it can’t be fixed before closing, then the buyer is not going to be obligated to close that transaction. Financing is another major contingency that we often see. The buyer usually is getting a loan to buy the property. And so a purchase and sale agreement will sometimes say that if the buyer can’t get the loan by such-and -such date in the amount needed to close the purchase on the closing date, then the buyer won’t be obligated to go through with the purchase.
Title issues are another frequent contingency. a buyer who’s looking at investing a lot of money in a particular piece of land usually wants to be sure that there’s no issue with who owns the land, who has the right to use the land, and in general, the property rights to the property. The buyer wants to have at least some reasonable assurance that if they buy that property, they’re not getting themselves into an issue of ownership dispute, or boundary dispute, or easement dispute, or what have you. And so, purchase and sale agreements again will often provide a time period for the buyer to review any potential title issues that might be present in the public county records of that property. So that before closing the sale, the buyer can make sure that there’s no title objections, things that they want to clear from the title before they purchase and that will often be of five to 10 day period, some someplace in there.
Those are all buyer’s contingencies. There are sometimes seller contingencies as well. And one that I want to mention here is that you’ll sometimes have a seller who is trying to sell one property while simultaneously building a house on a different property. And in that circumstance, the seller is almost certainly always going to want to have a contingency in their sale agreement that says that I’m not obligated to close this sale as the seller until my other property is finished. In other words, until I have a certificate of occupancy from the city or the county on the house that I’m building elsewhere, I don’t have to close this sale. I’ve seen people who were in transactions where they fail to get that kind of language put into the purchase and sale agreement or their realtor neglected to have that language put into that agreement on their behalf. Then they end up in a situation where the agreement says they’re obligated to close by such and such date. Their other house is ready, but they don’t have the language in the purchase and sale agreement. So they have to close, and they don’t have a contingency that says they can postpone closing until their other house is finished.
I had clients a few years ago who were in that situation. I had to tell him, look, your agreement does not protect you. I wish I had drafted this agreement on your behalf because it would have been a better situation for you. But as it was, they ended up having to I think, stay in a hotel or an apartment for some period of time between the closing of their sale and the completion of their house.
Appraisal contingencies are another one that’s fairly common. Similar to the financing contingency, if the property does not appraise for the full amount of the purchase price then, if the contingency language is in the agreement, the buyer can be released from his or her obligation to close. That’s pretty easy to understand, because usually the bank won’t close the loan to the buyer for the property, if the property does not appraise for what the amount of that loan would be. So, it’s kind of related to the financing contingency. You’ll often see appraisal contingencies as well. So it’s just crucially important for any buyer or seller, if they have some type of situation that might come up that might cause them not to want to close the transaction, to have contingency language put into the agreement on their behalf, to protect them if that comes up. Because otherwise, if you don’t have contingency language in your agreement, once you’ve signed a purchase and sale agreement, you’re obligated, legally obligated to close that transaction on the terms that are set forth in the agreement. So you have to be really careful, you can’t be careful enough, on making sure that your contingencies are stated in the Express language of the agreement. And that’s something that legal counsel can certainly help with if they’re experienced and qualified in working in this area.
Finally, what I want to talk about is just some ways that people can try to save themselves time and money if they are working on a purchase and sale agreement with an attorney who usually bills on an hourly rate basis. If you’re in that scenario, then before you have an attorney start drafting an agreement, you really want to make sure that you and the other party are in agreement on as much of the detail of the transaction as possible. Sometimes people think that, while we agree on what property we’re selling, and we’re agreeing on a price, then we’re ready to have an attorney start drafting an agreement. Then one or the other parties hires an attorney. The attorney produces a draft agreement. And then they say, well, I want this contingency in there, I want that contingency in there, or I want to reserve the water right, or I want X, Y or Z that ends up producing a more complex agreement. But what happens is that you go from the first draft to the second draft to the third draft to the fourth draft, and so on. I’ve done transactions that required even more drafts than that. Then needless to say, the legal bill goes up and up each draft that you have to have produced.
What can often help people avoid that type of situation where it takes longer to produce a final purchase and sale agreement and it’s more expensive to produce than they may have expected is to talk with their attorney before the attorney even starts drafting any document. Just make sure you know what a purchase and sale agreement says for the type of transaction that I’m doing. And do I have an agreement with the other party on these terms? Do we agree on the price? Do we agree on what properties being conveyed? Do we agree on whether any personal property, such as appliances, are going with the house? Or is it only the house and the land? Do we agree on what the contingencies are? Do we agree on anything regarding shared well or road easement agreements? or anything else that might affect the transaction? You know, what are all the details that we can think of, that might affect this purchase and sale? And do we have an agreement as to what each party is doing with respect to all those details. Because if you can do that, and get a term sheet hammered out before the attorney starts drafting the purchase and sale contract, then you can stand a much better chance of preventing the scenario where you have to go through five or six revisions of the agreement. Because each time someone sees the draft, they come up with more details that they want to either change or add to the agreement. And by doing that, you can significantly reduce the legal bill that you would have for completing that agreement process.
So those are some of the aspects of drafting a purchase and sale agreement considering a purchase and sale agreement that people should always be mindful of. And those are really the things that legal counsel can assist people with in detail, if they decide that they’re not using a realtor and if they’re moving forward with legal representation in a transaction. So I think by keeping those things in mind, either a seller or a buyer can significantly reduce the risk of a transaction going sideways and also significantly reduce the risk of their transaction costing a lot more in terms of legal bills than they might have expected. So I look forward to helping anybody out with these issues, who might experience them, and I hope this podcast was helpful. Thank you.
At Timely Contract, our primary legal services include: real estate contract review, real estate contract drafting, legal opinions for title insurance exceptions, and research, due diligence, and legal opinions for properties.
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Disclaimer: Timely Contract podcasts are meant to be informative; however, Timely Contract podcasts are not legal advice. Legal advice is the result of the application of proper law to a particular set of circumstances. Whether or how the law applies to a particular factual situation is a legal question that cannot be answered by a Timely Contract podcast. In addition, Timely Contract podcasts sometimes differ from their written transcript. Listeners and readers should not rely on a Timely Contract podcast, or a transcript of a Timely Contract podcast, as legal advice. Listeners should seek legal counsel and get a true legal opinion before taking actions regarding real property.