Real Estate Help Library Purchase Contract Line by Line Buying, Paperwork, Selling

Important Notes

The link below should take you to the most current form of the Residential Purchase Contract available through AAR. Information in this post should not be taken as legal advice and legal counsel should be sought if any questions arise over the content in this article.

Go here to download most current version

Click ->Residential Resale Real Estate Purchase Contract (RPC)<-

Print and read along

Section 1

Section 1a

Identifies the buyer and seller names. If the seller name is left blank when delivered it to you, the buyer’s agent may not have been sure according to the tax records who the seller was. You should be able to correct it in section 9c.

Section 1b and 1c

Outlines the property for which the purchase contract is for and the details of the offer. You will notice that all of the terms of the offer are contained here, including the full price, then broken into detail.

Earnest Money – deposited into the escrow company. If there is a dispute over a breach of contract, the escrow company will distribute the earnest money at their sole discretion to whomever they deem it goes to according to the terms of the contract. For this reason, it is important to learn who the escrow company is, which will be detailed in Section 3.

Down Payment- Is usually inserted in one of the blank lines if the offer is a funded offer. The earnest money will usually be added to the down payment, although occasionally earnest money can be applied to different things.

Funding amount- This will be the amount of the offer that the buyer is trying to finance. If they are financing the offer, a Pre-Qualification form must be attached with the offer in accordance with line 69.

Other lines- May contain other information about the terms of the offer that do not fit in the first two lines

line 18- earnest money should be deposited into an escrow company since they are a neutral party that determines the outcome of it and the broker should not be considered a neutral party. Earnest money will be deposited into the escrow account upon offer acceptance.

Section 1d and 1e

Close of Escrow

Close of escrow signals that all funds have been distributed and there is no money left in the escrow account, i.e. the transaction is over. The date indicates the date that the buyer is planning to close. If they do not close on this date, if not changed by addendum, they will be in breach of contract.

If COE is scheduled for a day they are not open, it is moved to the next business day.

lines 32-35

States that seller will deliver keys, including mailbox (and garage door openers) as well as all common area facilities, at Close of Escrow. (or the date here if something other than that). If you don’t have common area keys and need to order them from HOA, or mailbox keys from post office, do it now. you’ll need them at COE.

1f

Tells you what other documents are attached to this that are part of the contract. There may be other documents attached, but these are specifically addendum that are part of the contract. Any box that is checked, they must be included and signed by both parties in order to have a fully executable contract.

Section 1g

This section explains what is and is not automatically (unless otherwise specified) included in the sale. Generally speaking, if it is bolted on, it is included. This includes, but is not limited to: curtains, flush-mounted speakers, freestanding sheds, smart doorbells and access to them, wall-mounted TV brackets (but not the TV itself), free-standing oven, if there is a central vacuum, it includes all hoses and attachments.

Below that, anything that is included personal property that could be included in the sale is listed. Fridges, washers, and dryers are common. Important: check these boxes. If they are checked, they are asking for these to be included in the sale!

Section 2 – Financing

Before you start section 2 , take a look at line 68.

“If this is an all cash sale, section 2 does not apply”.

An all-cash sale, as stated on line 19-20, will provide a Letter of Credit or proof of funds, (maybe a picture of bank statement or 401k how ever they plan on paying for the home)

 

2a

Pre-Qualification form is attached with all financed offers. If someone sends you a purchase contract without a pre-qualification form, it is not a valid contract. We go over what a PQL is, and is not, in detail in this post.

 

2b

This section contains information on the loan contingency:

Buyer’s obligation to complete the contract is dependent on the lender funding the loan. In order for the to fund the loan, they have to deliver the Closing Disclosure 3 days prior to close of escrow. In order for the CD to go out, there have to be no PTD (prior to docs) conditions, i.e. all conditions for funding put on the buyer have been met.

LSU’s: This stands for Loan Status Update. Lenders are supposed to send these out weekly and they look like this. More or less they give you information on whether the loan status is progressing or not. Technically these are the responsibility of the buyer to deliver to the seller, but the lender needs to fill them out and they are not a party to the contract so it can become tricky if the lender is not delivering them.

 

2c

This section describes what happens if the bank will not fund the loan. If the buyer has put forward a “dilligent and good faith effort”, and the bank will not fund the loan, the buyers’ earnest money will be returned to them. This happens, more than it should, and sellers are on the hook for all repairs made during the BINSR period, and they have to put the house back on the market and sell it again, and they get nothing in return.

Important Note: This contingency lasts the whole length of the contract. Meaning, at the very end of the transaction, if the lender declines the loan after a “good faith effort” by the buyer, the buyer gets their earnest money back. For that reason, we only recommend doing  repairs of items that every buyer is likely to ask for. That way, if the funding falls through, and the seller has to put the home back on the market, you’ve only fixed things that every buyers is going to ask for and the pain is limited to having to pay the mortgage for another month.

 

Section 2d and 2e

Section 2d is a clarification that the buyer cannot claim that not having a down payment or failure to lock in rate does not qualify as unfulfilled loan contongency, i.e. they are not entitled to refund of earnest money for that reason.

Section 2e LSU’s: As mentioned above, these should be delivered to the seller every week. Good lenders send them every week because they are required for the buyer to send to the seller. Technically the seller could send a cure notice for breach of contract over this, but it rarely happens.

 

Section 2f, 2g, 2h, and 2i

2f: If the buyer has not already, they need to provide lender with some basic information. Since the contract is not valid unless accompanied by a Pre-Qualification letter, this should be completed before submitting the offer.

2g: The buyer will provide the lender with everything necessary to attempt to obtain the loan

2h: Describes what type of financing they will be obtaining. We go over the the different types of financing here.

2i: States that the buyer is responsible for any costs of obtaining financing, except as specified in the next section

 

Section 2J- Seller Concessions

This section is very important to the bottom line of the offer. What this section is saying is that the seller will contribute, out of the proceeds of the sale, to helping the buyer pay for some or all of their closing costs.

Some of these closing costs which cost money include loan origination fees (from lender), title policy required by lender, escrow charges normally split evenly between buyer and seller, and any other fee allowable by lender.

Important: Just 3K Approved Agents are prohibited from using this line to pay for their commissions above and beyond the $3,000 being offered, but other agents use this line for this purpose.

 

Section 2k

This section states that if the buyer makes any changes to their financing plan that may adversely affect the transaction, they can only do so with written agreement (addendum) of the seller. If they are making minor changes to their loan amounts, down payment, etc. that do not affect the outcome of the transaction or the seller’s closing costs, they will not need seller’s written consent or approval.

 

Sections 2i and 2m

Appraisal Contingency

The appraisal contingency is a simple one to understand, but causes a lot of grief to tons of people because they don’t understand it.

Basically it says: The lender will order an appraisal. If the appraisal comes in low (not acceptable to lender) the buyer has the right to cancel within 5 days of receiving the appraisal and receive earnest money back. In most cases, they ask the seller to come down to the appraised value.

 

Section 2m specifies who will be paying for the appraisal.

Section 3: Title and Escrow

 

Sections 3a, 3b, and 3c

3a Specifies who the title and escrow company shall be. In Arizona, these are usually the same company. We cover in another post what title and escrow companies do. The primary importance of the title and escrow company is:

1) Fees for escrow and title policies vary from one company to another

2) They decide where earnest money goes if there is a dispute

3b: Instructions for buyers about how they should take title and seek advice before doing so

3c: Instructions to the title company that also states that the buyer has 5 days to notify the seller of any disapproved items in the title commitment, CCR’s (HOA regulations), deed restrictions, or easements to the property, from when the buyer receives them.

Important: This section also clearly states that the seller is ALWAYS required to pay for the title policy, so it will be coming out of your proceeds at closing.

 

Sections 3d and 3e

3d: Title company is going to notify HOA of the pending sale. Both buyers and sellers are required to promptly provide documents requested by the title company. Title companies will file Affidavit of Disclosure if needed.

Important: (IV) section states that escrow fees are split evenly between buyer and seller unless otherwise specified.

Tax Prorations: The title company figures out how much each day of taxes costs, and then assigns to each side the amount they owe based upon the taxes were prepaid or not yet paid. Basically, if you paid taxes ahead of time, you will be refunded the amount you are not using. If not paid ahead, you will be charged for what you have used and not paid.

 

Section 3F- Earnest Money

The escrow company (usually the title and escrow are the same company) has the sole discretion over where earnest money goes in the event of a dispute over breach of contract. The title company will try to work out between buyer and seller, but ultimately they decide who has breached the contract and where the earnest money goes.

 

Section 3g and 3h

3g: All fees shall be prorated. I.e. if you’ve paid ahead, you are only charged for what you use. If you’ve used it and not paid yet, you will be charged.

3h: Special assessments are also prorated

Section 4- Disclosures

 

4a. Seller’s Property Disclosure Statement (SPDS)

States that the seller will provide a SPDS (disclosure statement) to buyer within 3 days of accepted purchase contract, and the buyer has 5 days to notify the seller of any items disapproved. We go over in detail in another post you can find here what the SPDS is, how to fill it out, and what the requirements are for what you should know.

 

4b Insurance Claims History

Seller is required to provide buyer, within 5 days of contract acceptance, insurance claims history, often called a “Loss History”, or CLUE report. Since this sometimes takes more than 5 days to get from your insurance broker, you should order it before you accept an offer.

 

4c Foreign Sellers

Foreign sellers are subject to FIRPTA rules.

 

4d Lead Based Paint

This sections only applies to houses built prior to 1978 since lead based paint was outlawed in 1976. The assumption is that most major companies sold out of lead-based paint stock and was used up by 1978. If the home was built prior to 1978, some additional forms must be filled out regarding the use of lead based paint. You have to initial this section if the home was built before or after 1978.

 

4e and 4f

4e: An extra affidavit is required for un-subdivided land in unincorporated (not in a city or town) areas.

4f: Seller must notify buyer of changes to property. These include but are not limited to: things that happen to the house during escrow like a flood or a tree falling over, any changes you make to the property like repainting (not BINSR requested), fixing broken items, or removing affixed items like curtains or changing out flush-mounted speakers for cheaper ones.

Section 5 – Warranties

5a Condition of Premises

You will see in bold highlighting the changes to this section. Buyer and Seller are agreeing that the home is being sold as-is. Also states that the seller is required to maintain the property in “substantially the same condition” as when the offer was made. All personal property not included in the sale will be removed. Buyer should conduct their own inspection during the inspection period.

 

5b What the Seller is Guaranteeing

The seller promises that they have disclosed all material (important) defects that they know that might be important to the buyer, not including opinions of value (appraials). Basically, if you would want to know it before buying a property, the buyer needs to know it as well.

Seller is also promising that payment has been made in full to all contractors that have worked on the homes, and that there are or will be no liens on the property to the best of their knowledge in the last 150 days (since contractors have 6 months to file a lien for work completed and not paid).

Sewer connections are addressed in another section as well but clarified here that the information regarding sewer connections (or septic) are true to the best of your knowledge.

 

5c Buyer Promises

Buyer is promising that they have told seller anything that might affect their ability to actually complete the sale. And that the seller has not told them anything verbally about the property except what is written on the lines (we usually write “none” here since everything important needs to be in writing).

Section 6 Inspections

This section covers all the things that the buyer should, or could investigate during the inspection period.

 

Section 6a

Inspection period is 10 days unless there is a number written in the blank. The buyer should use this time to do any inspections regarding the property. Buyer should verify that all information provided by the buyer is correct including the size of the property, zoning, and sewer connections. Anything that matters to the buyer should be investigated by them in this time. Buyer will not place a lien on the property during this time. Buyer should refer to the Buyer Advisory for information. More information on the Buyer Advisory can be found here.

Important: Buyer will provide the inspection report to the seller at no cost to the seller! If the inspector or inspections cause damage to the property, the buyer pays. You break it, you buy it!

6b, 6c, 6d

Buyer understand that square footage is approximate and is their responsibility to investigate. If termites are important, they should investigate. If flood hazard and zoning are important, they should investigate.

6e, 6f, 6g, 6h

6e: Buyer should figure out homeowner’s insurance is going to cost during inspection period.

Important! 6f: Sewer Connections: This is usually checked by the buyer based on information input into the MLS or a guess based on it being in a subdivided community. You need to check if it is accurate.

6g: Buyer should investigate swimming pool barriers are in compliance with city and other applicable codes

6h: Brokers are not qualified or able to help with any inspections or due dilligence for the property. They are able to provide guidance on where to find information, primarily found in the Buyer Advisory, but not do any of the research or discovery of the information.

6i- Inspection Notice

Buyer will deliver to seller an Inspection Notice (commonly called BINSR) prior to expiration of inspection period (usually 10 days). Once the notice is delivered inspection period is over regardless of whether or not there is more time in the inspection period.

 

6j: The Inspection Notice

The inspection notice has several options:

1) Cancel the contract- earnest money returned to buyer. Buyer needs to provide a reason for cancellation but almost anything is allowable.

2) Provide seller an opportunity to correct

They will normally make a list based off of the inspection report (which as noted above is required by section 6a lines 222-223 to be provided to the seller at no cost)

You can agree to the requests, or make a counter-offer of any or all repairs. As stated earlier, we recommenced only making repairs that are typical of what every buyer is going to ask for, not personal requests like changing paint colors or doing repairs that are unnecessary, just in case the deal falls through later.

Important! Seller agrees to all repairs in “workmanlike manner” to be completed 3 days prior to close of escrow. “Workmanlike manner” is a hard thing to know, but if they specifically ask for the use of licensed contractors on any or all work, be prepared to show receipts for any and all repairs completed.

Prior to closing, the buyer will conduct a final walkthrough to verify that the house is is substantially the same condition, and that are repairs have been done according to the contract and as agreed to on the BINSR.

Note: It is common for agents to ask for credit or price reduction instead of doing repairs. Although this is not an option on the form, the price reduction may be completed on a separate addendum prior to end of inspection period and the BINSR should be submitted accepting premises as is.

What happens if they do not submit the inspection notice?

lines 287-289 state that if the inspection period ends prior to submitting an inspection notice, the buyer is accepting the premises as-is.

 

6k Home Warranty

Is the buyer asking for a home warranty to be provided by the seller, and if so, who is ordering and paying for it. Note that like most things, this option is negotiable.

 

6l Walkthrough

Seller will provide access to the home prior to closing so that the buyer can conduct the Pre-Closing Walkthrough described earlier. The buyer should do one, and if they don’t, they are taking the property as-is.

 

6m Available for Inspections

Seller makes sure that the premises are available for inspections, and that all utilities are to be on all the way through closing. For convenience, seller’s usually carry the day of closing and utilities are scheduled in the buyer’s name the day following closing.

 

6n Reporting

Foreign persons may have additional reporting and tax obligations

Section 7- What to do if something goes wrong

 

This section provides the outline of what happens if someone breaches the contract.

 

7a Cure Period

In Arizona, we use what are called cure notices. If someone is in breach of contract (for instance, COE scheduled on a certain day and that day passes) then you deliver what is called a Cure Notice. This gives them 3 days (essentially a grace period) to cure the breach of contract, otherwise the injured party will be entitled to the earnest money.

 

7b. Breach

If the cure notice is served, and 3 days passes, then the non-breaching party has the right to close escrow and claim the earnest money, according to the terms in this section

 

7c Arbitration

This section lays out guidance for arbitration usually handled by the escrow company in case of a dispute. As mentioned above, the escrow company has sole discretion over what happens to the dispersal of earnest  in the case of a dispute, but they follow these guidelines and the ones set out in this section.

 

7d Arbitration Exclusions

This section details some of the exclusions to the arbitration. If you are needing to read this section, you will likely be needing to contact a real estate attorney for assistance.

 

7e

The prevailing party in a dispute that involves attorneys must pay the other parties “reasonable” attorney costs. In all my years I’ve never seen a reasonable attorney fee so you may end up paying the unreasonable fees as well.

Section 8- Additional Terms

This section starts with an entire blank page. The vast majority of the time this page is left blank but some agents use it to clarify something from another portion of the document, to add in additional terms for the protection of their client that are not addressed in other portions of the document, or almost anything that may need to be addressed that there is not room for in the rest of the document.

8b Risk of Loss

If there is any major damage to the property during escrow, the seller is responsible. However, if the damage exceeds 10% of the purchase price, either party may cancel the contract.

8c,d,e

Legal permission for the contract to be seen by the public. Contract is governed by Arizona laws. Time is of the essence?

8f Broker Compensation

Both parties acknowledge that brokers are being compensated according to separate agreements. Commissions are not set by any of our wonderful local Realtor Associations.

8g Copies

All documents can be delivered electronically except for the Lead-Based Paint disclosure.

8h,i Counting Days

Important: all days are calendar days and end at 11:59 PM. The day of the event is not counted:

Example: Contract is signed by both parties on a Tuesday, 3/3/2020. Inspection period is 10 days. When does it end?

Answer: Friday, 3/13/2020 at 11:59 PM.

Note: If COE is scheduled on a day they are not open, it moves to the next business day.

8j Entire Agreement

Signing means you agree to this whole contract

8k Subsequent Offers

Seller may accept backup offers. See this post about backup offers.

8l Cancellation

How to deliver notice of cancellation

8m Notices

All notices need to be written. They are deemed received when hand delivered, faxed, emailed if email addresses are on the contract, or sent by courier.

Note: As a professional courtesy, every time you receive a document in email from another agent, it is customary to acknowledge receipt. A simple reply “Received” is fine.

8n Brokers can do no wrong

It is essentially the buyer’s job to discover all facts and figures related to the property, financing, or any other aspect of their purchase and real estate agents are neither qualified nor able to handle any such inspections.

Both Parties Initial here!

8.o Terms of Acceptance

This section sets an expiration for an offer. Just 3K Approved Agents will give this in the Initial Offer Email, but non approved agents may not and you need to find it here.

If the offer expires, it is no longer a valid contract. Sometimes this happens accidentally and you can go ahead and sign the contract assuming the buyer still wants to proceed with it, and then address the expiration with an addendum rather than re-writing the entire purchase agreement.

If you plan on rejecting a contract, you can either check the box at the bottom of the form, or do nothing, and it will expire.

 

8p

Acknowledge you have received 10 pages of a contract. You need to initial every page so this should be a non-issue.

Last Page

This page is for signatures.

  • Buyer’s Agent
  • Check box for who the Agent is Representing
  • Buyer
  • Seller Agent
  • Who that agent is representing
  • CHECK BOX IF COUNTER OFFER IS ATTACHED!
  • Seller

Important: Check the box if attaching a Counter-Offer. Read this post about Counter-Offers.

REJECTING THE OFFER: Check this box if you are outright rejecting the offer. Remember, that doing nothing is also a way to let the offer expire, but giving the rejection right away allows the buyer to know definitively you’ve rejected it and they can move on and make an offer on another property.


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