Five Issues to Consider When Signing a Real Estate Purchase and Sale Agreement

The purchase and sale of real estate can be complicated, and as a transactional matter, it is ripe for legal conflict. Under California law, sellers are obligated to make extensive disclosures, must have title to the property, must ensure that all provisions of the contract are in writing, must ensure that the property is in compliance with applicable regulations, and more. Buyers, similarly, are entrusted with numerous related obligations.

Given the myriad rights and obligations at play, and the significant expense of real estate transactions, many such transactions can turn sour before or shortly after closing (due to the failure of the buyer and/or seller to meet their various requirements). Thus, when entering a real estate purchase and sale agreement, contracting parties should take care to consider issues that are commonly encountered to ensure that the transaction moves forward smoothly and without conflict.

The following list is non-exhaustive.

The Seller Should Have Legal Title and Authority

The purchase agreement should require that the seller prove that he or she has a clear and unencumbered title to the property at-issue. Too often, sellers will try to shift property to buyers without actually having legal title to said property. By providing for this in the contract, the buyer is able to further protect themselves by voiding the contract in the event that title is not held by the seller.

Similarly, the seller may actually have valid legal title, but this title may be encumbered in a number of ways. Creditors, for example, may be waiting to assert their claims over the property at-issue. Alternatively, the property may be affected by various easements that significantly alter the value and the buyer's prospective use of the property.

For example, a buyer may be sold a home with a large, wooded backyard. Suppose the buyer has small children, and was influenced to purchase the property because of the expansive backyard (so that his children could play outdoors). Unbeknownst to the buyer, however, there is an existing easement on the land to allow the neighbors to chase animals down - while hunting - into the buyer's backyard. The presence of guns and hunting near the buyer's children is unexpected and will seriously affect his use of the backyard. The title to this property is encumbered.

A buyer should not only ensure that the seller has valid legal title to the property, but that this title is unencumbered. If there is an encumbrance, the buyer should ensure that the details of the encumbrance are laid bare so that an informed decision can be made regarding the purchase of said property.

All Promises and Agreements Should Be Written

Under the California Statute of Frauds, all valid real estate purchase agreements must be in writing. Promises, provisions, and agreements must in writing or they will be rendered voidable, putting each side - both the buyer and the seller - in a difficult position should the other decide to void the contract. Oral promises are not enforceable unless both parties agree to enforce it later on, which requires that both parties stay true to their word. With real estate contracts, as with most contracts, you should never assume that the other party will stay true to an agreement that they are not legally required to, especially if it is financially advantageous for them to opt-out.

Suppose that your seller orally promises to fix some the piping on the property before you the sale closes. Rather than keeping this promise oral and therefore unenforceable, the buyer should ensure that the piping-fix promise is written into the existing contract or as an addendum to the contract.

The Zoning of the Property Should Match the Buyer's Needs

Zoning issues are unfortunately all too common. Buyers may have their own intentions for the property in terms of renovation, rebuilding, and repurposing, but this may seriously conflict with existing zoning regulations. For example, a buyer may purchase a house with the intention of turning the bottom floor into a retail outlet, but this may be barred based on local zoning regulations. The responsibility of ensuring that a property's zoning matches the buyer's needs falls on both the buyer and the seller. The seller should be aware of applicable zoning regulation, and should reveal these facts to the buyer, and the buyer should take it upon themselves to conduct an independent investigation into the property and the applicable zoning limitations.

Ensuring Buyer Financing Security

Most buyers enter into a purchase agreement on the basis that they will secure financing for the property. If the buyer is not able to secure financing, then the agreement will fall through. The details can make life much more difficult for a buyer, however.

Not all financing is equal. As a buyer, you may be interested in purchasing the property if you can secure a low-interest rate loan to pay for it - but what if you are unable to secure a low-interest rate loan? Unless there are certain limitations written into the purchase agreement, the seller may require that you apply for a loan with a higher-interest rate. This could easily force the buyer into an unwanted financial position. Generally, most purchasing agreements involving financing contingency provisions require that the buyer obtain a loan at a certain specified interest rate (or lower). If the buyer is unable to obtain a loan at this interest rate level, then they are not forced to secure a higher-interest rate loan.

Conduct An Independent Inspection and Due Diligence

It is generally recommended that a buyer conduct a thorough independent inspection of the property before closing. Further, the buyer should conduct independent due diligence (with the aid of a qualified attorney) to ensure that the property is compliant with local regulations. Though in the state of California, the seller is obligated to make extensive disclosures as to the condition of the property (and as to compliance with local regulations, among other things), it is good practice for the buyer to conduct an independent inspection to ensure that the property is consistent with expectations.

If inspection or other inquiries reveal significant property defects, the buyer may request fixes or may even back out of the purchase agreement altogether (depending on how significant the defects are). For the buyer's sake, the purchase agreement should include language allowing the buyer to escape the contract if the property is in defective condition - and if the seller will not fix the defective condition.

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Real estate transactions can be overwhelming for both sellers and buyers. To ensure that the transaction goes smoothly, it helps to consult with a qualified attorney who will help guide you through the process.

For a free consultation with a skilled Mountain View, CA attorney with experience in handling real estate transactions, call the Law Offices of Brian O' Grady at (650) 318-6131 to set up your appointment today.