Standard Purchase and Sale Agreement
Unless you started with this form an official Purchase and Sale Agreement will be produced after initial negotiations. Like the Letter of Intent, the Purchase and Sale Agreement may be edited by both parties’ multiple times until both parties are satisfied with the offer. Below is a brief explanation of each section in the Purchase and Sale Agreement along with a sample agreement to review.
Sections 1 & 2 includes general information about the property and the purchase price.
Section 3 is the Due Diligence section that request for evidence for what the seller claims about the property. The seller must provide proof of the income and expenses.
Section 3.2 gives you 45 days to do physical inspections on the property. You must be able to go into the property at any time as long as you give a 48-hour notice and not disturb the tenants.
Section 3.3 gives you 45 days to accomplish your financial due diligence. It also gives you the choice to cancel the transaction and refund the deposit in escrow if the seller does not give you the requested information within 15 days of opening escrow.
Sections 3.4 and 3.5 are the disclosures for Lead Paint and Flood Hazard Zones. You should be informed if the property is situated in a 100-year flood zone or if there was possibly lead paint used in the past on the property. Section 3.5 gives you permission to do water testing on the property.
Section 3.6 is the Hazardous Waste section in which the seller guarantees there is no hazardous waste on, below, or near the property.
Section 3.7 states that all equipment such as appliances, heating, electrical, etc. are functional and working. No equipment currently on the property will be taken away without informing the buyer beforehand. All units should be ready for rent unless otherwise specified.
Section 3.8 goes over termite inspections and protocol.
Section 3.9 is the financing contingency section in which the buyer will apply for a loan within 15 days of the acceptance of the Purchase and Sale Agreement. If buyer fails to get a mortgage within 60 days he can choose to either cancel the agreement or ask for a time extension.
Section 3.10 states that if you are not satisfied with the property and you let the Seller know before the Due Diligence period is over the deposit shall be returned and the buyer and the seller part ways.
Section 4 states that the Seller is responsible to provide a good clean title to the buyer. Any title issues must be fixed before the closing and if it is not done the buyer can cancel escrow and get his deposit back.
Section 5 states that the Seller is a citizen of the U.S. and not a foreigner.
Section 6 states that the seller will continue to manage the property and will not neglect the property during the sales process. The seller must also ask for the buyer’s consent before getting into new third-party contracts. This prevents any “favor deals” or contracts from happening during the escrow period.
Section 6.5 should cover any “Risk of Loss” and their consequences from different sources like eminent domain, flood, and fire. This should also let the buyer walk out from the deal if a loss occurs and provide the buyer the right to state the capacity in which he will go on with the deal if he chooses to stay in the deal.
Section 7 includes adjustment for taxes, water, security deposits, utilities, etc. They must be prorated to the new buyer. The Seller must take care of all the outstanding rents. You should always close at the beginning of the month so that you will receive a credit of the rent for that month. This helps lower your closing costs.
Section 8 is a collection of clauses that are in place for the security of all parties.
Section 9 is a fill-in-the-blank for any special conditions the buyer may request that is connected to the purchase.
Section 10 clarifies the agency between the real estate agents, the buyer, and seller.
Section 11 states what needs to be accomplished in order for the contract to take effect. The contract must be signed by both parties before it will be binding and enforceable.
Section 12 states that if either party needs to contact each other for notices and other official messages it must be relayed by email, letter and sent by using personal delivery, U.S. mail, overnight mail, or FAX.
Section 13 explains the handling of the escrow by the broker. It also clarifies the broker(s) that are involved with the transaction.
Section 14 includes the total amount of the sales commission and who is to pay for it.
Section 15 states that the contract will be considered null and void if it is not accepted within 7 days from the date of presentation. This is done so that the Seller doesn’t take his time in accepting your offer as he goes around looking for a better deal.
Section 16 is about 1031 exchanges. It is a common clause that is present in the majority of commercial real estate Purchase and Sale Agreements. Many investors who buy and sell large properties trade through 1031 Tax Deferred Exchanges.
Section 17 is the Effective Date. This is the date on which the buyer and seller have agreed to the terms and conditions and have signed the agreement. The Effective Date is written when the document was fully signed by the last party.