30+ Provisions for Effective Purchase & Sale Contracts – Including 4 That Will Save Or Make You Money

1. Full and Correct Legal Name of the Seller

 

2. Full and Correct Legal Name of the Buyer

The foundation of any contract lies in accurately representing the parties involved. Therefore, merely including a name without considering the legal entity can lead to complications. Obtaining the full and correct legal name of the party you are dealing with is crucial. Don’t just put John Smith if it’s owned by John Smith, LLC. You can find this information quite easily by looking up the property at the county records. Yes, this information will be confirmed later by the title company, but initially getting it right in your LOI and in your contract ensures clarity from the outset.

3. Buyer’s Right to Assign Contract – Have Good Assignment Language

Assigning a contract can be a strategic move, granting you the option to transfer the rights to another party. By using a parent company or a special purpose entity, such as an LLC, and including “and/or assigns” in the contract, you create flexibility for future assignment opportunities.

4. Include the Legal Description of the Property and the Address of the Property in the Contract

A contract should include a thorough and accurate legal description of the property. Don’t just put 123 main street, pull the records from the county. However, typically the county’s not going to have a guarantee that the information is accurate. So, in your Exhibit A where you have the legal description, put in parentheses “to be verified by a licensed surveyor in X state.” Also be sure to include the address of the property.

5. List Any Personal Property Included

Ensure to list any personal property associated with the transaction in an Exhibit as well. In a legal context, personal property is described as anything besides land that may be subject to ownership. Avoid surprises by verifying the items you intend to purchase.

6. Include the Purchase Price

Naturally, a purchase and sales contract should specify the purchase price of the property. While this provision is typically straightforward, it is still important to confirm accuracy.

7. Include the Earnest Money Deposit Amount, and the Date it’s Due

Clearly state the amount of the earnest money deposit and the date it’s due to ensure compliance and avoid potential defaults. You want to make sure that you don’t have to turn over the earnest money at contract signing because you could quickly be in default if you’re going to mail the money in or wire the money. Generally, you get two days or five days to wire the money; always wire the money to a title company, never give it to the seller directly.

8. Include the Right of Entry in the Contract

You want to have the right of entry, meaning the right of possession to do your due diligence. This provision ensures that the buyer has sufficient time and access to evaluate the property’s condition and address any concerns before finalizing the transaction.

9. Title Commitment

The title commitment provision in a real estate contract ensures that the title is free from defects, and provides measures to resolve any issues that may arise, ultimately protecting both parties in the transaction. Future discussions will cover zoning-related matters. The key considerations in this provision include:

Policy Type: The contract should specify the type of policy required, such as the standard current Alta form. Alta refers to the American Land Title Association, which standardizes the forms for title insurance policies in the U.S.

Defects: The contract should address the course of action if defects are discovered in the title. Defects may include liens, easements, or other issues that could affect the title.

Objections and Rights to Cure: It is necessary to have a clause in the contract allowing objections to certain defects and the right to correct (or “cure”) these defects. If problems with the title are discovered, the party may want to object and require them to be resolved before proceeding.

Title Objection Letter: An attorney should provide a letter of objection, listing any issues or concerns with the title and requesting remedies. This letter may also include requests for endorsements.

Endorsements: These are add-ons to the title insurance policy, providing extra layers of coverage. The provision suggests adding a survey endorsement (confirms property boundaries), access endorsement (guarantees legal access to the property), and zoning endorsement (ensures the property’s zoning allows its current use).

Proof: To obtain endorsements, the buyer may need to provide additional evidence, such as a zoning letter or a property survey. This information reduces the risk to the title company and helps ensure that the endorsements will be granted.

10. Reference the Condition of the Property

Typically, a lot of property sold as-is, where-is and how-is. However, the contract may stipulate different terms. For instance, the contract might guarantee that the property value won’t depreciate or that its condition won’t materially change before the closing date. These provisions can be subject to negotiation between the buyer and the seller.

Regardless of the specifics, the contract should clearly reference the agreed-upon condition of the property. This representation serves to establish mutual understanding and avoid disputes later on. It ensures transparency about the property’s condition and communicates what the buyer can expect upon purchase.

11. Risk of Loss Clause

An essential part of real estate contracts is the risk of loss clause, which determines who benefits from an insurance claim or other compensatory provisions if an adverse event occurs during the contract period.

This could include other provisions like condemnation or eminent domain. For instance, if a buyer is purchasing a property for a million dollars, and during the due diligence period, the state decides to take a portion of the property along the property line, it’s crucial to consider who receives the compensation. If the government’s compensation for the land taken is significant, the buyer, not the seller, may want to receive these funds, since they’ll be the property’s future owner.

Therefore, the contract should clearly stipulate that the buyer retains the right to any proceeds from condemnation or eminent domain proceedings occurring during the contract period. By including this in the contract, it ensures fair practice and mitigates potential financial discrepancies.

12. The Due Diligence Period – Your Due Diligence Clock Shouldn’t Start Until You Have Everything from the Seller

The due diligence period is a crucial provision in a real estate contract. Beyond the mere number of days allocated for due diligence, it is essential to establish a fair starting point for the clock. Waiting until you receive all the necessary information before commencing the due diligence period ensures that you have the complete picture to evaluate the property. Requesting documents such as the due diligence list, title commitment, and survey in a timely manner allows for a comprehensive assessment. This approach prevents wasting valuable time and maximizes the efficiency of your due diligence efforts.

13. Extension Period

This clause offers the buyer extra time to finalize the purchase if needed, for a fee. Typically, the buyer might request an additional 30-day extension, offering to pay a sum, say $5,000, as an extension fee. It’s important that this fee is not zero to ensure that the contract remains legally binding. This concept, known as “consideration,” requires that both parties give and receive something of value for a contract to be valid.

The purpose of an extension clause is to reassure the seller that the buyer is committed to the property purchase and actively working toward finalizing it. In exchange for granting the buyer more time to secure funding, perform due diligence, get loan approvals, or handle other preparatory tasks, the seller receives financial compensation.

While this may seem like an extra cost, the value of buying more time can far outweigh the fee, especially when dealing with large-scale investments or complex transactions.

Typically, the extension fee is nonrefundable, but it can sometimes be credited against the purchase price at closing. This means the buyer can deduct it from the amount they ultimately owe the seller. Occasionally, the fee is strictly a penalty and does not apply to the purchase price. Regardless, the specific terms of this provision should be clear in the contract to prevent any misunderstanding or disputes.

14. Seller Required Actions

An essential element in real estate Purchase and Sale Contracts is the provision concerning seller required actions. This segment of the contract outlines specific obligations and tasks that the seller must fulfill before the transaction concludes.

Vendor contracts/ personnel agreements: One common seller required action is the termination of existing vendor contracts or personnel agreements. For instance, the seller might need to sever ties with property managers or other employees associated with the property. This offers the buyer freedom to evaluate and select their own staff without inheriting obligations from the seller. It’s important to note, however, that this isn’t about eliminating employment opportunities; rather, it’s about the buyer having the autonomy to decide which personnel they wish to retain post-purchase.

An instance from my own experience: In one instance, this provision became crucial when acquiring a property with a significantly overpaid manager. Despite the property yielding no profit, the manager received an $80,000 salary. This situation compelled me to insist the seller release all managers before closing. This approach allowed me to independently decide if I wanted to rehire them or not, ensuring that I had full control over my property’s management. The significance of this provision became evident when, post-closure, the previous manager, who I hadn’t rehired, filed an unemployment claim against me. The claim could have escalated my unemployment rates and potentially burdened me with paying her unemployment benefits. However, thanks to the contract, which had required the seller to terminate all personnel, I successfully argued against her claim, underscoring the necessity of including explicit ‘seller required actions’ in real estate contracts. This provision saved me from potential complications, further emphasizing its value in property acquisition agreements.

Tenant Correspondence: Another action often expected of the seller is to dispatch tenant correspondence on the buyer’s behalf. This is especially pertinent when considering rent increments, a subject that may be governed by statutory deadlines. Having the seller initiate this process can be advantageous, ensuring the necessary timeline is respected before the property’s ownership is transferred.

However, the buyer retains the control and discretion in drafting these correspondences, allowing them to navigate the complexities of state-specific regulations and circumstance-dependent variables. For example, some buyers, including myself, might refrain from dispatching a rent increase letter if they anticipate significant capital investments that will considerably increase the rent.

In such cases, it can be more beneficial to implement the increase after demonstrating to the tenants the improvements and added value brought to their community. Despite the temptation to pin a substantial rent increase on the previous owner, it’s not always a straightforward tactic due to the potential for rumors that the new owner had a hand in drafting the rent increment letter.

Service Contracts: Another seller required action that cannot be overlooked is terminating existing service contracts. For example, one of the properties I bought came with an expensive and long-term security contract. Despite the seller’s insistence that I assume the agreement, I refused, as it was unnecessary for my plans. The seller was obligated to terminate the contract and pay any penalties associated with it, saving me from a burdensome financial commitment.

15. Prorations at Closing

Prorations at closing are common in real estate transactions and involve dividing expenses or revenues between the buyer and seller. Primarily, taxes and rent are prorated based on the closing date. While local customs may dictate standard practices, it is always wise to include explicit proration provisions in the contract. By doing so, you establish clarity and ensure fair financial arrangements between both parties.

16. Seller Reps and Warranties

Seller representations and warranties are crucial aspects of a real estate contract. They serve as assurances provided by the seller regarding the property’s condition and status. Including provisions that state the seller has the legal right to sell the property, does not have additional options to purchase or long-term leases other than disclosed ones, and has no knowledge of adverse facts or conditions ensures transparency and accountability. These provisions protect the buyer in case the seller intentionally misrepresents key aspects of the property.

17. Buyer Reps and Warranties

While seller representations and warranties are essential, buyer representations and termination rights also deserve attention. Buyer representations typically focus on confirming the buyer’s legal capacity to enter into the contract. Termination rights empower the buyer to unilaterally terminate the contract, triggering the return of the earnest money deposit. Establishing a crystal-clear provision that authorizes the return of earnest money upon unilateral termination ensures that the buyer can exit the contract without unnecessary complications or delays.

18. Buyer’s Right to Terminate

Essentially, this provision affords the buyer the option to withdraw from the contract within the designated due diligence period, with legitimate reasons typically associated with unmet conditions or discoveries during this period. The consequence of exercising this right often hinges on the treatment of the earnest money deposit, which is a sum of money given to demonstrate the buyer’s serious intent to purchase.

Regrettably, situations can arise where a seller is resistant to returning the earnest money, despite the contractual obligation to do so. Title companies, in some instances, may be reluctant to enforce such clauses in the contract, possibly due to cost considerations or the fear of potential litigation. Such reluctance can be even more pronounced when the sums involved are relatively small, creating an unwanted delay and complication.

Therefore, it’s critical to integrate a precise clause in your contract that explicitly enables the buyer to unilaterally terminate the contract. This clause should also state that this act in itself serves as the sole authorization required for the return of the earnest money deposit. This specification serves to limit the seller’s capacity to obstruct the process and communicates a clear directive to the title company to expedite the return of the deposit.

19. Default and Damages for Breach Provisions

These clauses provide protective measures for both parties involved and stipulate the course of action when a party fails to meet its contractual obligations. As a buyer, it is crucial to secure a specific performance clause, which legally obligates the seller to complete the sale in the event of a breach on their part. It affords you the legal power to enforce the contract and go through with the purchase as initially agreed.

However, such provisions should go beyond merely securing the return of your earnest money deposit if the seller commits a breach by, for instance, selling the property to a third party. This is where damage clauses come into play.

While earnest money deposits can act as compensation in certain breach scenarios, they are inadequate in addressing the full scope of potential damages you might suffer. It is, therefore, important to stipulate that the seller is liable for all damages, including, but not limited to, the return and reimbursement of due diligence costs.

Lastly, contracts often include a cure provision. This provision allows the party that has breached the contract a specified period to rectify their mistake. It’s a fair measure to include, as it provides an opportunity for the party in breach to correct their error before any further legal remedies are pursued. Such an arrangement should be reciprocal, granting both the buyer and seller the chance to cure any potential breaches.

20. Closing Date / Timeline

One of the crucial aspects in a real estate Purchase and Sale Contract is setting a clear and practical closing date or timeline. Conventionally, the closing occurs about 10 days following the completion of the inspection period. This ensures that all due diligence activities are concluded before the transaction is finalized.

However, the use of a “floating” due diligence period, which is not confined to a specific timeframe, naturally lends itself to a floating closing period. This means that the closing would take place 10 days after the end of the inspection period, regardless of when that may be.

Some individuals prefer to set a rigid closing date, like noon on a specific day. However, this approach can sometimes result in impractical scenarios. For example, if the inspection period ends just moments before the set closing time, it would be nearly impossible to coordinate with all necessary parties, such as the title company and the bank, to facilitate the closing.

Therefore, implementing a floating closing date can be more advantageous. It provides the flexibility required to ensure that all parties are prepared, helping the transaction to conclude smoothly and efficiently.

21. Contact Information

Including complete contact information for all involved parties, including buyer, seller, attorneys, and title companies, is a fundamental provision in any real estate contract. It is important to specify preferred modes of communication, such as email notification, to ensure efficient and effective correspondence. Clear contact information helps streamline communication and minimizes the risk of misunderstandings or delays.

22. Closing Contingencies

The concept of closing contingencies is an integral part of real estate contracts and is one that I’ve increasingly emphasized due to past experiences. These contingencies are factors beyond the buyer’s control that might impact the successful closing of the transaction. Essentially, they offer protection to the buyer in situations where third-party reports are delayed or yield unfavorable outcomes, even after the due diligence period. They provide the buyer with an opportunity to either exit the contract or request an extension without facing penalties.

Examples of such contingencies include the return of environmental surveys, title confirmations, and appraisals within the stipulated timeframe. Let’s consider a situation where an appraiser promises to deliver their report by a certain date within the due diligence period, but fails to do so. In such cases, a closing contingency in the contract would protect the buyer from losing their earnest money deposit or having it become non-refundable due to circumstances beyond their control.

However, it’s worth noting that negotiating this provision with the seller can be challenging, as it introduces the possibility of delaying the closing. Hence, this clause may not always be feasible to include. Regardless, it is a protective measure worth considering and strategically introducing in your negotiations to secure your interests as a buyer.

23. Buyer-Seller Cost Responsibility / Cost Breakdown

This provision covers various expenses, such as closing costs, which should be clearly outlined to avoid any confusion or disputes. Typically, both the buyer and seller are responsible for paying their respective attorneys’ fees. The seller typically covers the cost of the owner’s and title insurance premium. On the other hand, the buyer is usually responsible for expenses related to lender requirements, insurance, as well as any additional supplements or endorsements to the title policy.

The specific allocation of survey costs can vary and is often negotiable. However, regardless of the agreement reached, it is imperative to explicitly state the arrangement in the contract. Clarity is key to avoid any ambiguity or potential disagreements. Additionally, the issue of home ownership should be addressed separately through a bill of sale and a closing document. Breaking down the costs and clearly defining the buyer-seller cost responsibilities is vital. This ensures transparency and prevents any confusion or misunderstandings regarding financial obligations throughout the real estate transaction.

24. Broker Representations or Waivers

When engaging in a real estate transaction, it is essential to address the involvement of brokers. If no broker is involved, it is crucial to explicitly waive their representation in the contract. Conversely, if a broker is representing either party, their role should be clearly stated in the contract. Including such provisions not only protects the broker’s interests but also safeguards against potential disputes regarding commissions and compensation.

25. Survival

Survival provisions in a real estate contract pertain to the ongoing validity of representations and warranties made by the parties involved. Without survival provisions, such warranties would typically expire upon closing the deal, potentially leaving the buyer vulnerable to misrepresentations. Including survival provisions for a reasonable duration, such as one year post-closing or perpetuity, ensures that the buyer retains the right to seek redress if any misrepresented information comes to light after the transaction is complete.

26. 1031 Exchange

A 1031 exchange refers to a strategy in which a property owner sells a property and reinvests the proceeds into a like-kind property, deferring capital gains taxes. To facilitate this process, it is good to include a provision in the contract that allows either party to conduct a 1031 exchange. This provision ensures cooperation between the parties involved and simplifies the execution of necessary paperwork, protecting against adversarial parties and potential complications.

27. FIRPTA Provision

The Foreign Investment in Real Property Tax Act (FIRPTA) is a U.S. government regulation aimed at monitoring foreign investments in real estate. To comply with FIRPTA requirements, it is essential to include a provision in the contract that covers the necessary reporting and documentation associated with foreign buyers or sellers. This provision helps ensure transparency and legal compliance in cross-border real estate transactions.

28. Boilerplate Provisions

Boilerplate provisions are standardized contractual clauses that address common legal considerations. These provisions serve to define the scope and terms of the agreement. They include clauses such as entire agreement, counterpart signatures, governing law, severability, time of the essence, confidentiality, notice requirements, and offer duration. While seemingly routine, these provisions play a crucial role in establishing the framework of the contract and should not be overlooked.

29. Signature Block

This one is pretty obvious. The signature block is the section where the parties involved in the contract affix their signatures, indicating their agreement to the terms outlined. This section may also include spaces for printed names, titles, and dates. The signature block serves as a formal acknowledgment of the parties’ consent and is vital for validating the contract. Include it in your contracts.

30. Exhibits

Exhibits are supplementary documents that are attached to the contract and provide additional information or evidence. One essential exhibit is the legal description of the property, which can be enhanced by adding a map or an aerial view. To improve clarity, it is advisable to use hash lines instead of a simple red square to delineate the property boundaries. This approach ensures visibility, especially when documents are scanned or photocopied in black and white.

In addition to the legal description, exhibits can include a range of supporting documents, such as a bill of sale, assignment of leases, or tenant estoppels. In certain instances, it may be beneficial to include the due diligence list and seller deliverable list as exhibits. However, caution must be exercised, as overwhelming the seller with extensive documentation could have unintended consequences. It is advisable to use discretion and consider including these lists during the due diligence phase, once the property is already under contract.

31. Allocation of Purchase Price

This provision holds great significance for two key reasons: income tax implications and property tax valuations.

Firstly, having a detailed breakdown of the purchase price is invaluable for income tax purposes, particularly when it comes to depreciation and amortization. This becomes even more essential if you plan to do a cost segregation study. By clearly outlining the allocation of the purchase price in the contract, you have a documented record that can prove highly useful in the event of an audit.

Secondly, the allocation of the purchase price can significantly impact future property tax valuations. For example, suppose you are purchasing a property for one million dollars, but its current assessed value is only $200,000. In such cases, there is a likelihood that the valuation may increase. However, by allocating a portion of the value, say $300,000, to intangible assets, which is classified separately by the IRS, you can potentially prevent the tax assessor from considering it as part of the property’s value for tax assessment purposes. This strategic allocation can help manage and optimize property tax valuations.

It’s important to note that the concepts of cost segregation, tax evaluations, and appeals delve deeper into complex territory. We will explore these topics further in future discussions.

Conclusion

A well-crafted Purchase and Sale Contract is a pivotal instrument in a real estate transaction that ensures the protection of the parties’ interests and the smooth execution of the deal. In essence, every contract should be tailored to the unique needs of your transaction, focusing on risk reduction and facilitating a seamless process. We trust that this article has provided valuable insights into the crafting of your real estate contract and look forward to delving into more complex matters in future discussions.