The purchase and sale of real estate is a critical part of the financial life of most people, whether as a personal home or portfolio of investment property. Whether measured by the thousands, millions, or billions of dollars, a real estate transaction is likely to have a powerful effect, for good or bad, on all parties involved in it. The first document in the transaction, which directly affects everything that comes afterward, is the purchase and sale agreement. To help ensure that a transaction goes as you intend, it is important that this agreement, often called a PSA, is drafted correctly and looks ahead to everything necessary as part of the deal.
For seven decades, the attorneys at the leading Idaho law firm of Racine Olson have helped clients of all types resolve their property matters. Our team of experienced attorneys works with our clients to understand their property and business issues, and craft solutions tailored to their individual needs. Real estate transactions are an integral part of this work, and we have seen how a PSA that points a transaction in the right direction helps everyone achieve their goals while avoiding pitfalls that may otherwise arise.
Purchase and Sale AgreementsA PSA is a written contract signed by the buyer and seller in a purchase and sale transaction for real estate. This document specifies key deal information, such as the party names and addresses, purchase price, closing date, earnest money, and identification information for the property being sold. It also specifies other critical items that are part of the deal, provides for remedies if a party breaches the agreement, and sets forth required timelines.
No part of the text of the PSA should be unnecessary: each provision of the PSA document is included to meet specific needs of either the buyer or seller as part of the transaction.
Key Deal TermsThe first and most important parts of the PSA address the fundamental terms of the transaction. The document should indicate who the actual buyer and seller are, and if they have the ability to assign the document. An assignment may, for example, need to be done later to a special purpose entity that will be created to hold the property. If the parties are not correctly listed, then it could be cause for revocation of the purchase agreement and potentially creates liability.
The PSA should list the purchase price in dollars for the real property, and the address, legal description, and tax identification number of the property that is being sold. If any part of the real estate (land, buildings, appurtenances, and any ancillary rights) is not being included as part of the deal, this should be carefully spelled out to avoid disputes.
Another key term is the name and contact information for each real estate agent involved in the transaction. If one or both parties are not using a real estate agent, this should be specified, and the party or parties not using an agent should accept responsibility for payment of any commissions that might be found to be owed if this is not accurate. Often, real estate agent commissions are paid by the seller, and they should be especially careful to avoid potential liability if the buyer claims to not be represented by an agent.
The PSA should also specify the effective date of the agreement. This can be a specific date, or it can be the date upon which both parties have signed, in which case the parties should list that date, usually next to their signatures. This is important because many terms of the agreement, such as inspection periods, financing periods, earnest money periods, and closing date, may be based on timelines measured from the effective date of the agreement. Those dates or time requirements, especially the closing date, should also be included.
In addition to the above, earnest money is a key part of a real estate transaction. Normally, the buyer will put down some cash up front, held by the escrow company or a real estate agent, to show they are serious about the deal. This earnest money may be refundable, nonrefundable, or refundable only for a certain time period. The PSA should specify when the earnest money must be deposited, how the earnest money is to be treated, and what the parties must do to get the earnest money. We often see disputes over earnest money when a buyer ultimately wants to back out of a deal but it is unclear in the PSA as to exactly what is required for the earnest money to be refunded.
Property InspectionsUnlike many small purchases of goods, a real estate purchase normally involves a large amount of money, but the buyer doesn’t initially know the exact condition of the property. Accordingly, a PSA often has a set time period for the buyer to inspect the condition of the property, during which the buyer can cancel the PSA, and get their earnest money back, if the property has problems that are unacceptable.
As part of the transaction, the seller usually has to disclose information about the property, especially with respect to any defects. The buyer’s actual inspection includes the physical condition of the property, which may require a professional inspector and/or contractor, and also the legal condition of the property’s title. A title insurance company is often retained to issue a “title commitment,” which indicates the nature of any problems or defects in the title to the property. The buyer should closely review the title commitment, as any defects it lists in the title of the property, or “exceptions,” will not be covered by a title insurance policy.
ContingenciesA PSA typically includes a number of contingencies, which if not satisfied can allow a party to cancel the contract. These are usually in favor of the buyer. In addition to inspection and title contingencies, as discussed above, these can include financing contingencies, appraisal contingencies, and other types of requirements. Sometimes, a buyer will have a period of time in which it can cancel the contract for any reason or no reason. In any event, the contingencies typically have a time period requirement. Before that period expires, the buyer can cancel the deal and get their earnest money back, but after that period, the earnest money is deemed to “go hard” and be nonrefundable to the buyer if they don’t close on the transaction.
Representations and Warranties; Remedies; Additional ItemsFinally, a PSA will include a number of “representations and warranties,” or promises, by each of the parties. These are included to ensure that what the parties are saying is clarified in the legal document and to create liability if that information is not true. If any of these items turns out to be false or inaccurate, it can be a default under the PSA, and create liability to the party making misleading statements. As part of the representations and warranties, or in a separate section, the PSA should specify certain remedies that the parties may have if the other party defaults.
Of course, the above listed parts of the PSA are only some of the more important parts of a document and deal. This article is not meant to cover every aspect of a potential transaction as, depending on the specifics of a proposed property purchase, a PSA may need other provisions to provide the required protection, information, and assurance for a deal.
Enlist an Idaho Attorney to Help YouOur team of Idaho lawyers can help you with any of your property and transaction resolution needs. We are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation, or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho property and business problems.