Whether you are buying or selling real estate, a well-planned and well-written purchase contract is essential. In fact, you don’t have an enforceable agreement without one. In Arizona (and most other states), an agreement for the sale of real property must be in writing and signed. And if the terms aren’t clear, a court won’t enforce it.
The Arizona Association of Realtors has a pre-printed contract that is often used in purchases involving a Realtor. Although this form is an excellent resource, it may not cover every item that is important for your transaction. Regardless of whether you use this form, or a contract created specifically for your situation, it’s always a smart idea to have an attorney review it before you sign.
What needs to be in the contract? Every deal is different, but here are three key elements to consider for any purchase agreement.
1) Basic Terms
Who’s selling the property? Who’s buying? For how much? And when? I know these points seem obvious, but you might be surprised at how many people leave these details out. Your contract should include:
- The names and contact information for the Seller and Buyer.
- The description of the property, which includes the street address and may also include a tax ID (parcel number) and/or legal description as found in the deed.
- The purchase price, including the amount of any earnest money (deposit).
- The date for close of escrow. This could be a certain date (e.g., “on or before August 1, 2023”) or a fixed time period (e.g., “within 45 days of the last party’s signature on this Contract”).
- An explanation of who will pay closing costs such as escrow fees, title insurance, prorated taxes and HOA dues, etc. You probably won’t know the exact amount of all those costs at the time you sign the contract. But you can allocate percentages for each item (e.g., 100% by Buyer, split 50/50, etc.).
- A description of any personal property included in the sale, such as appliances, furniture, decorative items, and playground equipment. The general rule is that anything that is not a fixture is not included in the sale unless the parties specifically say otherwise. What is a fixture? Imagine that you could turn the property upside down and shake it. Anything that doesn’t fall out is a fixture. But don’t assume anything. Make sure every point that is important to you is put in writing!
2) Contingencies
If these events do not happen first, then the sale is canceled. The parties might decide that they don’t want any contingencies, other than the buyer handing over the money and the seller delivering the title. Or one of the parties may want the sale to be contingent on a specific condition; if the condition is not satisfied, then that party can cancel the contract. Examples include:
- A property inspection. Many buyers ask for the right to inspect the property, looking for anything that might make the property undesirable. This could be termites, mold, wiring issues, roof leaks, or any other defect that may not be obvious but could affect the property’s value. Typically, the parties agree to an inspection period in which the buyer, or a licensed home inspector hired by the buyer, conducts whatever inspections are desired. If defects are found, the buyer can ask the seller to make repairs or price concessions. If the parties can’t work it out, then the buyer can cancel the contract within the inspection period.
- Financing. Many buyers don’t have enough cash to buy a property outright. They must get a loan to pay the full purchase price. What if, after signing the contract, they can’t get a loan and aren’t able to buy the property? Are they in breach? Not if they have a financing contingency. Although a financing contingency protects the buyer, it may make their offer less appealing to the seller. If there is another buyer who can pay cash, the seller might accept that buyer’s offer instead—even if it’s for less money.
- Other contingencies. There’s really no limit to other types of contingencies that the parties can include in a purchase contract. They may want to make the deal dependent on the property appraising for a certain amount. One of the parties may need to buy or sell a different property first. A party may require that the city grant a zoning exception or special use permit. The question to ask yourself is: Is there anything that needs to happen before buying or selling this property is beneficial to me? If so, include it as a contingency in your contract.
3) Duties and Remedies
What are the parties required to do under the contract? What happens if they don’t? The contract should spell out what is required of both the seller and the buyer, and it should specify what each party can do if the other is not holding up their end of the bargain. Generally, the seller’s duty is to convey clear and marketable title to the property. In other words, the seller must deed the property to the buyer, free of any liens. The buyer’s duty, of course, is to pay for the property. But more specifically, your contract should address:
- A duty to cooperate. The contract should make it clear that neither party will cut off communication with the other, refuse to sign documents required by the escrow agent, or otherwise fail to cooperate with the close of escrow.
- A cure notice. Real estate purchase contracts often include a cure notice requirement. If one party thinks that the other is in breach of the contract, they must send a written notice specifying the breach and giving that party a certain number of days (the “cure period”) to fix the problem. This provision gives the parties a chance to work out their differences and complete the sale. It also prevents a party from trying to excuse their own non-performance by claiming that the other party has already breached the contract. Technically, there is no breach until the cure notice has been sent and the cure period has passed.
- Remedies. The contract should identify each party’s recourse in case there is a breach. If the buyer decides not to purchase the property, can the seller keep the earnest money? Is that the only thing the seller can do, or can they also sue the buyer for damages? If the seller backs out and refuses to sell the property, can the buyer pursue all available legal remedies, including specific performance (i.e., getting a court order forcing the seller to transfer title)? If there’s a lawsuit over the contract, does the losing party have to pay the winning party’s attorneys fees and court costs? A good contract will address these matters so everyone knows what the penalties are.
Buying and selling real estate doesn’t have to be a scary process. A solid contract helps. So does having an experienced real estate team, like the professionals at Fowler St. Clair, in your corner.