A real estate purchase agreement is a critical step during the real estate process. A purchase agreement outlines the terms and prices of real estate transactions. The purpose of a real estate purchase agreement is to protect both the buyer and seller. The language contained in real estate purchase agreements is important, and it is critical that both buyers and sellers are aware of the terms to which they are agreeing. Below are just a few of the most important terms in real estate purchase agreements, and why they matter.
“As is”
Many sellers include “as is” language within their contracts, believing that protects them from all liability issues, when that is not necessarily the case. Even when a buyer agrees to purchase a property “as is,” sellers must still disclose certain defects under California’s Civil Code, Section 1102. Any time a purchaser agrees to buy a property “as is,” it means only that the buyer accepts the property in the condition that is reasonably observed by the purchaser. Regardless of whether a failure to disclose a defect was intentional or negligent by the seller, the seller is still liable when they do not inform the buyer of concealed defects.
Under California’s Civil Code, Section 1668, “as is” language also does not shield a seller from fraudulent practices during the sale. Even when language pertaining to fraud is included in a contract, this is considered unlawful and does not protect sellers from liability. This information is important to know, as many buyers simply accept that “as is” language means just that, and sometimes accept properties that cause them harm in the future and mistakenly believe they have no recourse.
Emotional Defects
Emotional defects typically refer to any murder, suicide, or violent crime that occurred on the property. Many people think that sellers need to disclose this information at all times, but that is not true. Under California’s Civil Code 1710.2, sellers only need to disclose this information if the violent act occurred within three years prior to the sale.
However, this law is still important for all buyers. The same statute also states that sellers must disclose this information in the event the purchaser asks about any violent act. When this is an important consideration for buyers, it is essential they know they can inquire about it. It is also important for sellers to understand the statute, so they ensure they comply with the law.
Earnest Money
Purchase prices are normal and expected in any real estate purchase agreement, but sometimes Californians also have to pay earnest money. Earnest money is any deposit purchasers make to show their commitment to completing the sale. On average, earnest money deposits are typically one to three percent the total purchase price. Earnest money is typically held by the seller’s title company or broker and is used toward the buyer’s closing costs and down payment.
It is critical that all buyers understand earnest money, and what it entails. The market in California is often aggressive, with sellers receiving multiple offers on their property. An offer that includes four to five percent in earnest money is more likely to catch the attention of the seller, but many buyers want to make the smallest earnest money deposit possible to mitigate their risk of loss. If a buyer backs out of the purchase agreement for any agreement outlined in the contract, they will typically receive their earnest money back. If a buyer backs out of the sale for any other reason not outlined in the contract, it is likely they will lose that deposit.
Language Regarding Repairs or Improvements
It is essential that any language regarding repairs or improvements to the property is clear and unambiguous. For example, a buyer may want to purchase a spec home and want the seller to install multiple televisions and closet organizers. The buyer may expect the seller to spend somewhere in the area of $15,000 for these improvements, but they do not include language that specifically states the quality of material to be used. The seller will want to spend as little as possible and, when clear language is not used, they are able to do that.
It is crucial that any language regarding repairs or improvements is as specific and clear as possible. This is the only way to ensure that sellers know what is expected of them, and that buyers receive what they thought they had agreed to.
Contingencies
Contingencies provide a way for both the buyer and seller to back out of the agreement if certain conditions are not met. For example, a buyer may include a contingency clause that states the sale will not go through until the property has passed an inspection. Or, a seller may include a contingency clause that the sale is not final until the buyer has sold their current home.
Language surrounding contingencies matters because it tells both the buyer and seller what is expected of them. Just like language for repairs and improvements, the language surrounding contingencies may be unclear, leaving either party unprotected. For example, if a contingency does not have a deadline, it could lead to a dispute in the future.
Escrow
Many buyers do not fully understand the concept of escrow, but it is a very important one that is involved with nearly every real estate transaction. In its simplest terms, escrow is a secure location that holds important items such as contracts and earnest money. When these items are in escrow, they are kept safe until the real estate transaction is complete. The holder of escrow is typically an attorney, a title company agent, or a closing company.
The language pertaining to escrow in real estate purchase agreement is of critical importance. The contract should state whether the seller or purchaser is responsible for paying escrow fees, which are typically about one to 2% of the total cost of the real estate price. Any time a buyer backs out of the sale without a valid reason, they will forfeit a percentage of the escrow money to the seller.
Our California Real Estate Lawyers Can Draft and Review Your Agreement
Due to the complex language that is included in real estate purchase agreements, or illegally excluded, it is always important to have a knowledgeable Santa Monica real estate lawyer review your agreement before signing. At Klein Law, our experienced attorneys can help ensure your agreement protects you so you do not suffer harm because of it in the future. Call us today at (310) 295-2261 to schedule a consultation.
