How Does a Real Estate Purchase Agreement Work?
A real estate purchase agreement is a legally binding contract between a seller and a buyer setting forth the terms and conditions of the sale and purchase of real estate. It contains key terms and conditions of the transaction, such as the purchase price, conditions, and disclosure obligations in a format to be used in the State of Washington. In Washington, there are seven elements that must exist before a valid contract to sell real property is created: competent parties , legality, consideration, capacity, mutuality, agreement, and in writing. A real estate purchase agreement is a way of memorializing an agreement reached between a buyer and seller. Once signed by the buyer and seller, the contract is binding on both parties, subject to the terms and conditions of the contract. When these elements all exist, a purchase agreement is a binding contract.
Essential Components of Purchase Agreements in Washington State
For any Washington State real estate purchase agreement, there are key elements that both buyers and sellers need to look for. These elements MUST be present; any missing item is a significant risk to the overall transaction.
The legal description of the property is the starting point for attorneys during a real estate transaction. The legal description tells everyone exactly what property is included in the purchase – and what is excluded from being purchased. Proper legal descriptions tell potential buyers, sellers, and real estate agents exactly the piece of property that is involved in the transaction.
Proper legal descriptions are found in specialty reports called Title Reports, which are prepared by Title Companies. These reports tell the reader everything that is known about the property, including the legal description of the property, a list of owners, what circumstances (if any) could disrupt the owners’ title, what easements, CC&Rs, and restrictions apply to the property, and whether there are liens on the property.
In addition, the purchase price should be specified in the contract, along with the method of payment. Typically, that includes a downpayment and a "financed" portion, usually in the form of a mortgage. Of course, cash is always an option instead of financing.
The basic idea behind a contingency is to allow the buyer an "out" if certain things are not completed – they can walk away from the deal and keep their deposit. For example, the buyer may be concerned that their existing home won’t sell in time, and they cannot or will not carry two mortgages. The seller will want to set a deadline by which the buyer has to get an offer on their existing home and accept it, or the buyer has to cancel the contract so that they can put the home back on the market.
Other contingencies include the successful completion of an inspection, getting a loan commitment from the lender, and transfer of the existing homeowners insurance (it goes to the new owner).
Requirements and Responsibilities Under the Law
In Washington State, the purchase agreement serves as a legally binding contract that outlines the rights and responsibilities of both the buyer and the seller. Compliance with the state’s laws and regulations is essential for enforceability and to protect the interests of all parties involved.
Under Washington State law, a real estate purchase agreement must be in writing and signed by both the buyer and seller. Laying out the terms and conditions of the sale, the agreement should include a description of the property being sold, the purchase price, financing contingencies, and the closing date, among other details. The Uniform Commercial Code (UCC) requires the agreement to be sufficiently detailed to allow a third party to determine which property is the subject of the sale.
In recognition of the complexity of real estate transactions, Washington law also imposes a duty of good faith and fair dealing on both buyers and sellers. This means that each party must act honestly and fairly toward the other during the negotiation and execution of the purchase agreement. Failure to uphold this duty can expose the breaching party to legal action and may result in the termination of the sale.
Local and county regulations may impose additional requirements, such as zoning restrictions or permitting concerns depending on the property’s current use. Buyers should ensure that their purchase agreement incorporates any necessary considerations specific to the property.
In Washington, a buyer has the right to conduct a home inspection before the closing of a sale. Should the inspection reveal issues that were not disclosed, the buyer has the right to negotiate repairs or price adjustments with the seller.
Another common law obligation is the duty to disclose material facts about the property. In Washington State, the seller must provide the buyer with a Real Property Disclosure Statement, commonly referred to as a Form 17. This document details known problems ranging from water damage to roof issues, and gives the buyer insight into the condition of the property.
Ultimately, both parties must adhere to the terms of the agreement, and there are designated remedies available when those terms are not met. Understanding one’s legal requirements and obligations, as well as the remedies for non-compliance, is crucial to entering into a real estate purchase agreement that is fair and beneficial for both the buyer and seller.
Commonly Used Contingencies Found In Agreements
Most real estate purchase agreements signed in Washington State include contingencies for a number of common situations, which serve to protect the interests of both the buyer and the seller. To shed some light on how these contingencies operate, let’s look at a few of the types of common contingencies that you’re likely to find in real estate transactions.
The first is the Financing Contingency. This contingency benefits the buyer, as it provides the necessary time for the buyer to secure financing for the purchase of the property. It protects the buyer because it allows them to back out of the deal if they are unable to obtain financing from any lender. However, the Financing Contingency also provides sellers with some assurance that the buyer has a definite source of financing to cover the purchase, which can help prevent them from accepting a sale offer from a buyer who might not be able to finance. In most cases, a seller will not sign a purchase agreement without first qualifying the buyer who is making the offer, but this clause provides additional protection.
The Second is the Inspection Contingency. This gives the buyer the ability to have a professional inspection of the property conducted, to assess the condition of the building, including the roof, the plumbing, and the electrical system. Again, this may be done whether it’s a residential or a commercial transaction, as this contingency applies to both types of real estate purchases-although in a commercial deal, it may also include a contingency for reviewing the lease, among other things. This contingency allows the buyer to back out of the deal if the inspection reveals that the property has defects which may not be remedied by the seller, such as whether or not the necessary repairs have been done on the property.
Next is the Appraisal Contingency. This contingency is very similar to the Financing Contingency, in that it protects both the buyer and the seller. This clause gives the seller the confidence of knowing that the appraisal will lend against the property. For the buyer, it allows them to learn the fair market value of the property they are looking to buy, as this is a part of the seller’s obligations as mandated by the Real Property Appraisal Reform Amendments of 1989. A buyer will likely want to hire an outside appraiser to ensure that the appraisal was not done unfairly or improperly.
Finally, we have the Common Insurance Contingency. This allows the buyer to terminate the purchase agreement if, for some reason, the property is deemed by the insurance company to be uninsurable, or if the insurance company deems the current insurance coverage on the property to be inadequate. The insurance company might do this for a number of reasons, which could include the roof not being in a good position, or if the home is not up to code.
Purchase Agreement Negotiations
In Washington State, while the purchase and sale forms are being improved every year by our local real estate associations and the Washington State Bar Association, the off-the-shelf forms are still just starting points for negotiations. Real estate agents will often use them in a very perfunctory manner and fail to highlight important issues for their clients to consider regarding the terms of their transaction. It is absolutely crucial that all parties have competent legal representation throughout the negotiation phase, generally as a realtor/attorney who solely represents the interests of one party or another or as has become more common , consulting an attorney prior to entering into a standard form transaction.
While improving and protecting our clients’ interests and advising them prior to entering into a legal commitment is our first goal as lawyers, for our real estate clients, it is also more important in many cases than the negotiations themselves that we have deep familiarity with these forms, how they have been used in the past and to be able to find creative ways to use them to our clients’ best advantage. Many of our clients are more than willing to let us play our role as counselors in counsel, so to speak, by leaving negotiations with their opponents directly to us and being available for consultation over the phone or via email.
When negotiating terms for a Washington State real estate purchase, there are several things to keep in mind:
Completing the Transaction: Preparing to Close
Once both parties have agreed to, and signed a real estate purchase agreement, the deal is not quite finished. A few more steps are necessary for the property transfer to become official. The next step is the opening of escrow. A neutral third party, known as the escrow agent, selects a mutually agreeable location and time and notifies each party. If both parties agree, the details are confirmed and the deal is on its way to completion.
The escrow agent manages the funds and documents provided by each party throughout the transaction. Once all documents are signed, the escrow agent adds his or her documents to the collection. At this point, he or she transmits all documents and funds to the title company. The title company provides a preliminary title report. This report identifies any easements or conditions attached to the property. It also notifies the parties if there are any outstanding liens, encroachments and other issues that could affect the sale.
After the parties receive the preliminary title report, they have an opportunity to review it and, if necessary, raise any questions or concerns with the real estate agent. The parties negotiate the necessary adjustments with the other party and the escrow agent. If liens must be paid at closing, the escrow agent uses the buyers’ money to do so. After all outstanding fees and charges have been paid, the escrow agent disburses the remaining funds to the seller and grants the deed to the new owner. This new transfer of title gives the buyer complete ownership of the property. This process is known as closing, and is why the entire process is often referred to as a closing transaction.
The buyer is usually permitted to make a final inspection of the property prior to closing. However, it is important to evaluate property for defects that may need to be addressed in the agreement before the closing transaction. It is usually too late to address expectations and issues once the closing has occurred.
Once both parties are satisfied that closing is on track, the transaction proceeds. Once all obligations have been fulfilled, the transaction is officially closed. The buyer receives the keys, and the seller no longer has an interest in the property.
Possible Issues and Their Corrections
Among the common pitfalls in a Washington State real estate purchase agreement are leaving important details to assumption, such as assuming certain disclosures need not be made unless and until requested. Enforceable disclosure statutes require certain disclosures, and the statute is the be-all of what has to be disclosed. The duty to disclose is not based on request. For instance, the seller of a condominium as a result of a foreclosure need not provide the buyer with a resale certificate because the condominium no longer has a management company. However, if the seller has a management company handling certain aspects of the condominium and the seller is collecting dues but the management company will not be providing the resale certificate, the seller must complete what is in effect a resale certificate. In other words, the seller cannot simply say, "We don’t have to provide anything to you because we don’t have a management company." This is an easy mistake to avoid and is one of the primary reasons it is so important to use an experienced Washington State real estate attorney in the greater Seattle area to review your purchase agreement before it even gets presented to the seller .
Another potential pitfall is assuming the lender will make its decision on a buyer’s financing based on the dates and conditions contained in the purchase agreement. Many lenders will provide for credit approval but will not complete the rest of the loan until the buyer is under contract to purchase the property. If the buyer has asked the seller to pay for certain closing costs, obviously the seller will not want to pay those costs until the buyer has completed his or her financial review. Therefore, the parties should agree on a practical timetable for the buyer to obtain financing, such as 15 days after the seller has provided all information needed to allow the lender to complete its loan process.
Buyers should also not assume that they do not have to give notice to the seller that they have completed their loan process. Most sellers will not want to start the process toward closing on a transaction if it has not already been established in writing that the buyer’s loan has been completed. Otherwise, the buyer may be allowed to terminate without forfeiting his earnest money.