There is a real estate purchase contract form that has become fairly standard in California. It was prepared by the California Association of Realtors (CAR form RPA). A purchase agreement can be legally binding, even if it was written on a cocktail napkin, as long as it was signed both buyer and seller. But we wouldn’t recommend that. The reason a purchase agreement is now 10 plus pages is because every time there’s a new real estate lawsuit, attorneys have worked to clarify that item to avoid ambiguity.
So what are some of the things to look out for?
This will sound odd at first, but it’s not all about the best price. We’ve seen many occasions where the best offer was not the one with the highest price. There are many terms in a real estate agreement that can have a significant impact on the bottom line price that is exchanged at closing.
Inconsistent Appraisals
For example, in a rising price market, it may be a challenge for the appraisal come back at or above the offer price. That’s because the neighbor’s home just sold for X and now buyers are offering to pay X+ in the same area. That’s how rising price markets work. The problem is that appraisers must use recent closed sales in that area as a measuring tool to arrive at the value of the home they are appraising. If a market is rising rapidly, that appraisal may come in at a value less than the agreed upon price. Now here’s what to look out for. Preface note: a contingency is a term that means the buyer can walk away from the transaction or has the right to renegotiate without a penalty. If you are a seller and you are considering accepting an offer with an appraisal contingency in a rising market, there’s a chance the appraisal will not meet the offer price. That gives the buyer the right to back out of the agreement or renegotiate the price with you. On the other hand, if there’s no appraisal contingency and the appraisal comes in low, it’s the buyer’s problem. But think about this. If you’re the seller and the buyer cannot close the transaction, inherently it becomes your problem too. You might be able to keep deposits and such but let’s face it, almost no one wants to go through all that and then have to re-sell the home again. So as a seller, if a buyer is making an offer without an appraisal contingency, you might think about seeing proof of how much cash they have to cover any shortages that could be caused by a low appraisal. Have your Realtor do a mock appraisal to determine what the property is likely to appraise for so you have an expectation of how this will likely play out. Sometimes things happen outside of these boundaries but it’s a good idea to have a risk management plan before you accept and offer.
Inclusion of Personal Property
Another thing to look for is any personal property included in the sale. For the most part, that would include anything included in the sale that’s not bolted down to the house. If you expect the refrigerator to be included, make sure you write it in the agreement. It doesn’t matter what is in the brochure or what the Realtor says is included. You must write it in the agreement. Wall mounted TV’s, by the way, are an exception. If a TV is wall mounted (i.e. bolted to the wall with a bracket) it will not be included in the agreement unless it’s specifically spelled out. There are some other ways to protect your self as a buyer from things like holes in the walls being left behind if something is removed so peruse that area of the contract carefully.
“As-Is” Offers
Is the offer “As-Is” (no repairs will be made) or will repairs be made during the course of the closing? Is there an inspection contingency? Here’s a little-known fact: If you’re using a California Association of Realtors Residential Purchase Agreement (again CAR form RPA), the boiler plate language states that if there is an inspection contingency, the buyer may still have the right to ask for repairs even if it was written to be an “As-Is” agreement. So be sure you know what you are asking for and agreeing to.
Timeline for Closing
When will the closing be? Is the closing date realistic? Will the seller need more time to occupy the home after the closing? If so, you should spell out exactly the time frame that keys will eventually be exchanged, who pays for utilities, who takes care of the landscaping, how much security deposit will be held, who will hold it, how it will be released, and how much the seller might compensate the buyer (even if it’s $0) for occupying the home after the closing.
Deposit Needed
Review how much deposit will the buyer be putting into escrow after acceptance and when the buyer is expected to deliver it. If you’re buying a home and need three days to move money around in order to make a cash deposit, you wouldn’t want to commit to having your deposit be made in one day. If it’s a hot market and most buyers are submitting deposits in one day, you might want to be prepared for that by having the customary deposit cash available before your offer is made. Check with your Realtor because what’s customary can vary by area.
Closing Costs/Escrow Fees
Speaking of varying by area, closing costs and who pays for them vary throughout the state. In the San Francisco Bay Area alone, different counties have different closing costs splits. In Alameda County it’s customary for the buyer to pay for Title and Escrow fees but in neighboring Santa Clara County these costs are customarily paid by the seller. Make sure you know who is expected to pay for what before you write or accept an offer. Have your Realtor create an itemized closing cost estimate for you so there are no surprises once your offer is accepted. One side note, cost splits (ie. Escrow fee, title insurance, county and city transfer taxes, etc.) are negotiable between buyer and seller. You can make agreements outside of what is customary. A word of caution. If you are a seller, and a buyer offers cost splits that favor the buyer and are outside the norm in that area, you should expect to have some compensating factor (higher price, etc.) in order to agree to that term. But real estate negotiation is a whole different conversation.
In the San Francisco Bay Area, title companies are used to close real estate transactions. They are a neutral third party intermediary. On the East Coast, attorneys are used. The title company you expect to use should be spelled out in the agreement. In a county where the escrow fees are customarily paid by the buyer, often times the buyer will choose the title company. The opposite is true in a seller paid county. Another word of caution here. We’ve been involved in many transactions with complicated trust concerns. Cases where someone passed away with a trust, but there was a sub-trust with a Power of Attorney. All these documents must be vetted by the title company before the transaction can close. Sometimes the title company’s legal team will need to review the trust. Sometimes additional Powers of Attorney will need to be drawn by the title company and notarized. We even had one case where we had to send an attorney to a prison in order to get a signature from an inmate. What we’re trying to explain is that not all deed transfers are simple. If there’s a complicated path like we’ve described here, you might want to stick with the seller’s title company if they’ve already spent the time, effort, energy, and money to get this sorted out. Moving to a new title company sometimes can cause the process to start all over again. At the end of the day, if you’re the buyer you want to buy the house in the simplest possible manner.
Real estate transactions can be complicated. We recommend you always check with your qualified California real estate attorney before making important real estate decisions. Or of course you can give a call. We’ve perused thousands of real estate contracts and pride ourselves on being focused on the details.