First Look At Real Estate Contracts

Getting Started With Real Estate Purchase Contracts

Although a real estate buyer is expected to exercise their own due diligence, a seller is obligated to disclose anything they know of which will materially affect the value of the real estate (and is not obvious). Real estate agents and brokers are also required to disclose both information about the property and information about their duties both to the buyer and to the seller.

Locally there are two main sets of contract forms: 1.) PRDS (Peninsula Regional Data Service), 2.) CAR (California Association of Realtors). Combining forms from the two sources into a single purchase offer can result in conflicts between the different forms.

A very simplified summary of the forms is that: CAR forms tend to use "AS IS" for their default while PRDS forms tend to require the property be in at least a minimal condition for their default (section 1 clearance). CAR forms tend to specify repairs be done in a workmanlike manner while PRDS forms tend to specify repairs be done by a licensed contractor. You can probably easily imagine how using forms from both sources to create a single offer can lead to contradictions in the offer. It is important to note that many of these repairs would be required to obtain a mortgage on the property.

Agency Disclosures

Agency disclosures are one of the first things a buyer or seller should understand. These disclosures provide the framework of what your agent will do for both the buyer and the seller. Locally most real estate firms represent both buyers and sellers. The managing brokers of the offices are legally the principal agent representing either buyers or sellers. The real estate agents working in the office are sub-agents to the managing broker.

If a real estate agent at an office helps a client make an offer to purchase a property which is listed for sale by a different real estate agent at the same office, the managing broker will be in the position of representing both the buyer and the seller. It is also quite possible that several agents from the same office will be making offers on the same property which means the managing broker will be representing competing buyers. These situations happen so often that essentially every purchase offer will include a signed dual/multiple agency disclosure.

You will also probably want to work with a real estate agent who is successful enough that they have more than one client at a time. The real estate agent working for you will also frequently simultaneously represent parties who compete with each other from time to time. Be sure to talk with your agent about how she handles these situations. An agent's success is affected by her ability to give competing parties an equal opportunity. Each agent has to find the best way for each situation. Experienced agents have worked out good ways.

Agent Visual Inspection Disclosure

Most likely your real estate agent will not have a lot of training in construction, pest control, environmental hazards, nor many other fields which affect the value of real estate. Your agent is required to perform a visual inspection of each property they represent a client to either purchase or sell. The results of this inspection are provided to both the potential buyers and the seller. The disclosures should be looked at and any issues considered. For instance a real estate agent is probably not trained to identify exactly what type of mold is present and will flag a potential mold problem by saying something like "dark stains were seen on the closet wall behind the bathroom".

Supplemental Sellers Checklist

Another important form to examine is the supplemental sellers checklist. This form provides a way for the seller to methodically disclose what they know about many issues which can affect the value of the real estate. Although the seller should disclose known issues, they are rarely experts nor should they guess.

Transfer Disclosure

The transfer disclosure is similar to the supplemental sellers checklist but also provides general information such as if there is electric service, what appliances are included with the property, etc.

Purchase Contract

The purchase contract is a lengthy document. Both buyers and sellers are urged to look at a blank contract before an actual purchase offer is made.

Locally purchase offers are often made with few or even no contingencies for the buyer. This can lead to legal battles. On the PRDS purchase contract, item 28 Liquidated Damages tries to specify ahead of time what can happen. You should seek the opinion of a licensed attorney to understand how this could affect you. Additionally an earnest deposit is normally put in escrow at a title company. Money will not be released unless both parties agree or an order from either a court or arbitrator is received (item 26).

County Advisories

The county advisories bring up many issues of a general nature. However the sections titled "Local San Mateo County Issues" and "Local Santa Clara County Issues" bring up points that you may not come across anywhere else. Some of the issues are possibly understated. Fixing a property which has been used as a "drug lab" can be very costly and require repeated inspections by city inspectors.

Combined Hazards

The state of California publishes several pamphlets discussing several different hazards which can affect you and your home. These pamphlets include: 1) residential environmental hazards, 2) lead, 3) home energy ratings, and 4) earthquakes. The seller is required to provide this information to you. The information is not specific to any one house and is seldom updated but you should review the copy provided by the seller each time you make a purchase offer.

Water Heater, Smoke Alarm, and Carbon Monoxide Device

California Heath and Safety Codes require water heater bracing, smoke detectors, and carbon monoxide detectors. Compliance is certified when the property is sold or at the beginning of a lease. Although you may ignore the risks to yourself, if you rent out your property your tenent will not ignore the risks. Normally the cost to meet the requirements will be less than $1,000, perhaps significantly less. Property inspections will normally flag if the property does not meet the codes. Lenders probably will not provide a mortgage if the property does not meet the codes.