09 Apr How To Read The 7-Page SF Purchase Agreement + Sample
The Purchase Agreement is at the core of a real estate transaction. Having done 400+ transactions, we are experts when it comes to the document and all of its nuances. The offer may seem daunting if you’re seeing it for the first time – or the 10th! – which is why I want to break down some key elements for you.
Below is a sample of the current (revise date: 4/2020) version of the standard San Francisco Association of Realtors Contract for the Purchase and Sale of Real Property. The contract is the foundation of the transaction between buyer and seller. How it is written – how the price and terms are delineated – is of critical importance. There are a number of decisions regarding conditions of sale, due diligence, arbitration, liquidated damages, close of escrow date and so on that will have to be made by the buyer in their offer and ultimately agreed upon by the seller. The final agreement may include changes made via counteroffers.
(The nature of posting these densely worded pages makes them a bit hard to read. You may click on each photo to zoom features on your computer and click on the page-back button to return to this post.)
Contingencies: There are a variety of ways a contract can include contingencies, depending on the nature of the transaction and its parties. There are also non-contingent offers. We highly recommend having a candid, in-depth discussion with your realtor on this topic before putting together a contract.
The three most common contingencies – and those that hold the most weight – are the inspection, finance, and appraisal contingencies. In a really hot market where multiple-offer situations are the norm, you will see far fewer contingencies being used. In fact, you’re likely out of the race if you need to rely on a contingency in these scenarios, since you are likely going up against several non-contingent offers. In slower markets, where competition is decreased, contingencies are used more freely.
That aside, we never recommend waiving inspections without knowing the full weight of that decision. Here’s a deeper dive on the contingencies and their implications:
Inspection: It is always safest to have an inspection contingency. In the event that there are multiple offers on a property and all disclosures are provided in advance, your chances of competing with several other buyers who have waived inspection contingencies are very high. It is unlikely buyers would be able to win with an inspection contingency in place in this instance. In the event that there is not a fully prepared disclosure package, it would be very unwise to waive this and we would not recommend it. However, if there is a fully prepared disclosure packet, which would include property inspections, clients may choose to waive this inspection in order to improve their chances of winning. In San Francisco, we are very fortunate to live in a market where the standards are high and disclosures packages are completed (with all inspections) prior to going on the market. In cases where all primary inspections and a fully prepared disclosure package is included upfront, our buyers are aware of the key material facts and defects and they can, therefore, make an offer accordingly.
Finance: Having a financing contingency in place allows you to terminate the contract within the contingency period should you not be able to successfully obtain a loan. We always ask our buyers to get pre-underwritten before they get into contract. We work with a handful of fantastic LOCAL lenders on a regular basis who, based on our relationships with them, are willing to do this work up front for our clients. We don’t receive kickbacks from these lenders – they are our unbiased, preferred partners. We like to work with these lenders because we know they are going to perform on time, keep things running smoothly, and take the time to underwrite our clients before they make an offer. They also have great reputations in the community so listing agents trust them as well. It’s actually a lot of work to pre-underwrite, so this service is not common, but because we do so many transactions with these lenders, they are willing to go above and beyond for our buyers. A lot of buyers say they have a great relationship with their bank and think their bank will “do anything for them,” but usually you’re just one transaction, versus the fact that we are sending our lenders 30-40 buyers a year. We also have deep expertise in understanding which lenders work best with the various types of wealth/asset portfolios. Lenders are not one-size-fits-all, and we can coach you through making the right choice. In much of the US, lenders don’t perform on time and this is “normal.” In SF, closing on time is expected. Keep in mind that if lenders can’t perform on time it could cost you the house. Sellers may not be flexible to extend the contract for a buyers’ financing delays, and legally you are bound to perform within the timeline of the contract.
If you waive a loan contingency, we recommend you are fully underwritten and have the confidence that you can perform under the terms of the contract. When you waive a loan contingency what you are effectively saying is that if the loan doesn’t go through you are willing to pay cash for the house. Given a cash option is not the case for most people, what you are instead agreeing to is giving up your deposit (3%) and walking away from the transaction. When you put a contract into place, one of the things you’re doing is putting down a deposit of 3% within (typically) 48 hours of the contract. If your lender cannot perform, you are potentially at risk to give up your full deposit. There are sometimes loopholes to this unfortunate circumstance, but not always. We will walk you through this when we write an offer. This is why we ask our lenders to underwrite our clients in advance so that they have a much higher certainty of the loan going through.
Appraisal: Having an appraisal contingency means that if the appraisal does not come in at the purchase price, the buyer can terminate the contract. In a market that’s escalating, houses are predominantly appraised at their sale price. However, there are certain outlier properties – typically ones on highly sought-after blocks of the city – that may not appraise. (These blocks vary by neighborhood, but trust me we know these “perfect” blocks. With these select properties, there is such a high level of desirability (e.g. Jersey Street in Noe Valley with close proximity to 24th street) that there are no benchmarks, or “comps,” in the area that have sold within a ¼ mine in the last 6 months. Our team is proactive with our buyers and can prepare them for these one-off situations based on our deep level of expertise. There is not a case where we would not be able to anticipate a lower appraisal and prepare our buyers in advance to have the additional funding and make up the difference in the down payment between the appraised price and the purchase price. If they do not have funding we can not advise waiving an appraisal contingency. Over the years, having done over 400 transactions, there were only 3-4 times where a property didn’t appraise. Should your property not appraise, here’s what you’re dealing with… If you have more than a 20% downpayment, the appraisal may not be as much of a concern. But a lender will only lend you 80% of the appraised value of the property. So if you write an offer for $1m and it only appraises for 900k, the lender is only going to give you 80% of $900k and you, as the buyer, would need to come up with the missing 10%. Buyers who don’t have that excess cash and would have to walk away and likely lose their deposit. If you were already planning on putting down 30%, it’s not as much of an issue. (It still may not feel great, because you’re not getting as much of a value on your property as you thought). At the end of the day, the appraiser’s goal is to try and appraise your property. The appraiser gets a copy of the contract and searches for comps in the area to justify the price. In most cases, that’s pretty easy to do. No matter the circumstance, buyers need to go in with eyes wide open and understand these potential scenarios. Our job is to prepare buyers for these pitfalls in advance so that there are no surprises.
There are other elements to the contract, below, but those are the major terms. When we write offers for our clients, we go line by line to ensure they understand what they are signing and the obligations of the contract. We’ve attached a contract here – feel free to look it over and drop us a line if you have any questions.
The Seller and Buyer’s legal name. Key word: Legal. When asking for your agent’s help in writing an offer, please make sure you’re providing the name on your legal documentation.
Purchase price = the price you offer. If the seller accepts the offer as is, you move forward with the purchase price. If there are negotiations and an exchange of counteroffer forms, the terms on the counteroffer override the terms on the original offer.
Initial deposit amount: (typically 3% of the purchase price). For example, if the purchase price is $1,000,000, the deposit is $30,000 – due to escrow (a third party that monitors funds before during the transaction period) either via check or electronic fund within (generally) the first 48 hours of offer acceptance.
New first loan: Loan amount
Non-contingent financing: Inserting the loan amount (if any) in this section versus section C means that you even if you do not get the loan, you
Escrow timeline: The number of days to complete the transaction (vacate or de-stage the home, conduct any additional inspections, get an appraisal, acquire loan/get funds to escrow and sign closing paperwork). Note that this counts actual days and not business days.
Agency relationship: This declares the Broker and Agent representing the Buyer and Seller in this transaction so they can be compensated properly upon close of escrow.
Physical possession: By default, the buyer is to receive keys upon recordation of the deed, which is also called the “close of escrow” or “COE,” unless otherwise stated.
Items included in sale: It’s crucial to clearly communicate what is included in the sale. In San Francisco, even though appliances are personal property, they are often included in the sale, however, this does need to be spelled out. Fixtures include anything attached to the walls or ceiling and these are included in the sale. I’ve seen cases where the seller wants to take their washer/dryer. Occasionally, a seller will want to take a light fixture, speakers, drapes or flat screen TV with them but this should be spelled out in the contract. Personal items and staging are almost never included in sale, however, EVERYTHING is negotiable 🙂
Arbitration of disputes: By initialling here, the buyer and seller agree that if any disputes arise, all claims should be settled by a neutral binding arbitration.
Liquidated Damages: By initialling here, the buyer and seller agree that liquid damages WILL NOT EXCEED 3% of the purchase price should the buyer fall out of contract. If both parties do not initial this line and the buyer does not perform under the terms of the contract, then the seller may seek unlimited “damages.” This could include any damages incurred from additional days on market and ultimately selling for a lower price, among others.
Note: Nothing in the way this sample contract is filled out is meant to be a recommendation for how a specific offer should be constructed. That must be decided by the principals involved according to the circumstances of the transaction. A good agent can help counsel you, though legal advice can only be given by an attorney at law.