Earnest Money Provisions
Under the Statute of Frauds, all Purchase and Sale & Earnest Money agreements must be in writing.
Contract Elements - All Purchase and Sale agreements must meet all elements of a valid contract. There must be an offer and acceptance, consideration by all parties, the parties must be competent, and the contract must have legal purpose. In this section we will zero in on the offer and acceptance aspects.
Offer and Acceptance - The offer in real estate is made by the buyer. The buyer begins the formation of a contract by making an offer to buy the seller's/owner's property.
The Offer - The buyer in making an offer to the seller will be clarifying the ownership of the property, the condition of the title, and any encumbrances that have been placed on the property.
Consideration - The buyer promises to buy the property if certain conditions are met. It is important there is no controversy that is placed on the Purchase and Sale agreement. This will be a major document used to close the transaction. It is up to the licensee working with the seller and the firm to make sure that everything is done correctly.
Escrow Instructions - The Purchase and Sale agreement with Earnest Money provisions will give the escrow officer the instructions on how the escrow is to be handled.
Elements of a Purchase and Sale Agreement
Every offer (every Purchase and Sale agreement) should include the following information:
Names - The name of the buyer and the date the offer was made. It also must specify the expiration date of the offer.
Earnest Money Amount - The amount of capital put down on the property and the form of earnest money such as cash, demand note, securities, land, etc. is stated in the agreement. This deposit (earnest money) when given by a buyer and shows a good faith offer. However, a deposit is not required.
Earnest Money Checks - All checks received as earnest money from a buyer shall be made payable to the real estate firm as licensed and placed in the firm's trust account. However, if it is mutually agreeable to all involved principals, the check can be made out to the invovled escrow company named in the purchase and sale agreement. A copy of this mutual agreement must be retained/kept by the real estate firm.
Legal Description - There has to be a clear understanding as to what property is being sold.
Personal Property - If there is any personal property that is to be included in the sale, it should state that a Bill of Sale will be given at closing.
Price of Property - The purchase and sale must have the purchase price of real and personal property and the amount to be paid at the delivery of a deed (closing).
Down Payment - It must show the total down payment (earnest money) that was given by the buyer to the seller's broker on behalf of the seller.
Financing - The Purchase and Sale agreement must specify the amount and terms of financing the purchase. This will determine whether the financing method will be acceptable. The offer is usually subject to the buyer obtaining loan for the purchase. If the buyer cannot obtain financing, the buyer is off the hook and gets their earnest money back.
Liens - There has to be a statement that the buyer is advised of any liens to be assumed by the buyer after closing escrow.
Escrow Date - The agreement must state where and when the escrow closing will take place. This is important because this will determine the proration of costs, the closing procedures, and the possession date by the buyer.
Title - Finally, the purchase and sale agreement with earnest money provisions will determine how the title will be conveyed. The buyer could specify to convey as a fee simple estate, tenants in common, joint tenants, etc.
Buyer's Agent Writes the Offer/Agreement
The broker for the buyer will write up the offer with the buyer. This is why it is important for you to understand the Purchase and Sale Agreement. You must fill out the agreement clearly and in detail. The P & S Agreement is usually on a pre-printed form that allows you to fill in the property information.
Buyer's Offer taken to the Seller
Seller's Acceptance - The licensee for the seller does not accept the offer. The licensee cannot independently negotiate terms. If at all possible, all offers must be presented to the seller in person. All offers must be presented no matter how ridiculous.
In Writing - All acceptances must be in writing (Statute of Frauds) and presented back to the buyer.
Role of Licensee - The licensee is to protect the interests of their client. This would be the seller or the buyer depending on whom the broker is representing. Also, the licensee is to look after and protect their employing firm/Designated broker.
Writing a P & S Agreement - The licensee working with the buyer has the following responsibilities when writing up an offer for a buyer.
Large E/M Deposit - The licensee for the buyer should attempt to get as large an earnest money deposit as possible for the seller. If there is more than one offer coming forward, you want your client's (buyer's) offer to look the best. It is very important to show the value amount and in what form the deposit will be; cash, demand note, securities, check, etc.
Clear and Accurate - Your Designated broker will certainly appreciate it when you complete the forms clearly and accurately. It is important that you take your time and do a good job. If the offer is not clear and accurate, it is not a proper offer. Also, accuracy is important because the P & S form will specify how escrow is to be handled.
Write all Offers - It is required that a licensee write up every offer that is made by a buyer no matter how ridiculous. Make sure that the buyer understands that the offer must be in writing as required by law.
Exception - If a buyer wants to present an illegal offer (such as a discriminatory offer) the licensee does not have to write it up or present the offer. In fact, the licensee should not be part of such an offer.
A real estate broker receives an offer to purchase property from a cooperating broker. Earnest money in the form of a certified check made out to the firm. What should the broker do with the check?
A) deposit the check in the broker's client trust account
B) endorse the check and forward it to the cooperating broker
C) give the check to the firm
D) forward the check to the cooperating broker with the offer to purchase
Where do you find the liquidated damages clause?
A) listing contract
B) earnest money agreement
C) employment contract
D) closing documents
John Lewis signed a 90 day listing for his property with ABC Real Estate. One month later Mr. Lewis died. ABC Real Estate, unaware of Lewis's death, obtained an offer for the property from Thompson. Which of the following is correct concerning Thompson's offer?
A) Lewis' estate must sell the property to Thompson and pay a commission to ABC
B) Lewis' estate is not required to sell the property to Thompson, but must pay a commission
C) Lewis' estate must sell the property to Thompson only if Thompson pays the commission
D) Lewis' estate is not required to sell the property and the estate does not have to pay a commission to Ferguson
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