Purchase Agreement - Part 1 - Chapters 51-53 Flashcards
Describe the multiple functions of a purchase agreement form
Different types of properties each require a different variety of purchase agreements. Various purchase agreements comprise Provisions necessary to negotiate the sale of a particular type of property. Within each category of purchase agreement, several variations exist. The variations cater to the specialized use of some properties, the diverse arrangements for payment of the price and to the specific conditions which affect a property, particularly within the one-to-four unit residential property category.
A buyer’s agent uses the purchase agreement to prepare and submit the buyers written offer to purchase a 124 unit residential property. The pricing and terms for performance are limited to conventional financing, a takeover of existing mortgages, a carry back note or a combination of some of these arrangements. This purchase agreement is also properly used by sellers when confronted with a counter-offer situation. The seller’s agent prepares an entirely new purchase agreement, then submits it as they’re fresh offer to sell on terms different from those of an unacceptable purchase offer received from the buyer.
On acceptance, the purchase agreement becomes a binding written contract between the buyer and seller. To be enforceable, the price and terms for performance need to be clear, concise and complete to prevent misunderstandings. A comprehensive purchase agreement includes as boilerplate all Provisions that might be needed in the likely transaction. They are designed to serve as a checklist of provisions an agent is to consider when preparing an offer. The various conventional financing arrangements and conditions a prudent buyer considers when making an offer to purchase a home are tightly worded for easy selection.
Identify various types of purchase agreements
For sales, the primary document used to negotiate the transaction between a buyer and seller is a purchase agreement form. The three categories of purchase Agreements are for:
- 124 unit residential property sales transactions
- other than one to four-unit residential property sales transactions such as for residential and non-residential income properties and owner-occupied business/farming properties and
- land acquisition transactions.
A buyer and seller who enter into escrow instructions without entering into a real estate purchase agreement are bound by the escrow instructions as though it was a purchase agreement. Attached to all the these various purchase Agreements are one or more addenda, regarding:
- disclosures about the property
- the financing of the price paid for the property
- agency relationship law
- special Provisions called for by the needs of the buyer or seller.
Understand the sections and provisions that make up a purchase agreement
A buyer’s agent uses the conventional purchase agreement, RPI form 150, to prepare and submit the buyers written offer to purchase a 124 unit residential property. Each section of form 150 has a separate purpose and need for enforcement the parts include:
- Identification
- Price and terms
- Acceptance and performance
- Property conditions
- closing conditions
- Notice of supplemental property tax
- Notice regarding gas and hazardous liquid pipelines
- Brokerage and agency
- Signatures
equity purchase (EP) agreement
An EQUITY PURCHASE (EP) AGREEMENT is the document used to negotiate the sale of an owner-occupied residence in foreclosure to an investor.
purchase agreement
A PURCHASE AGREEMENT is the primary marketing device used to negotiate a real estate sales transaction between a buyer and a seller. Different types of properties each require a different variety of purchase agreements. Various purchase agreements comprise provisions necessary to negotiate the sale of a particular type of property.
Identify an equity purchase (EP) transaction
An equity purchase (EP) transaction occurs when an owner-occupied, 124 unit residential property in foreclosure conveys the property to a buyer who acquires it for rental, investment or dealer purposes by an equity purchase investor.
Comply with the statutory procedures for equity purchase transactions
EP investors and their agents are subject to harsh penalties if they fail to adhere to all the regulations governing EP transactions. The EPA regulations extend to control the type of form used to document the EP sale. The EP agreement signed by an EP investor will be printed in bold type, ranging from at least 10 point to 14 font size, and be in the same language used during negotiations with the seller in foreclosure. The written agreement is to also contain the required statutory EP notices. Failure to use the correct forms subjects the EP investor and the Agents to liability for all losses incurred by the seller in foreclosure, plus further penalties.
A broker representing an EP investor is to deliver to all the parties to the EP transaction a written EP disclosure statement confirming they are a licensed real estate broker, along with proof that their license is current and valid in the state of California. If the broker agent themselves are the EP investor, use of the agency law disclosure and proof of license are eliminated.
Provide a seller-in-foreclosure with notice of their right to cancel an equity purchase transaction
A seller in foreclosure is granted a statutory 5 BUSINESS DAYS RIGHT TO CANCEL an equity purchase agreement, with or without reason. The seller also has a TWO YEAR RIGHT OF RESCISSION after closing the sale to recover their residence if they can demonstrate the EP investor took unconscionable advantage of them when negotiating the purchase of the property.
An unconscionable Advantage occurs if the EP investor:
- *exploits an element of OPPRESSION or SURPRISE AND AND AND
- *exacts an unreasonably low and favorable purchase price for terms of payment.
Recognize the disadvantages of accepting an exclusive listing on a property in foreclosure
Prudent Brokers and agents are inclined not to solicit or accept an exclusive right to sell listing from a seller in foreclosure. Property in foreclosure has to be sold and escrow closed before the date of the trustees foreclosure sale if the sellers goal of selling the property is to be achieved. Unless the delinquent mortgage is brought current prior to 5 business days before the trustee sale or paid in full before the trustee sale is completed, the home will be sold at the trustee sale. When sold by the Foreclosure, the objectives of the listing employment are lost. Thus, the agent is not entitled to a fee.
As a listing complication the agent for a seller in foreclosure may find themselves in market conditions which require more time to locate a buyer and close escrow. In a troubled markets, the frequency of foreclosures is inversely related to the frequency (volume) of negotiated sales; more distressed sellers than ready buyers.
Time constraints imposed on the seller’s agent by a trustee sale date place extra pressure on the broker employed under an exclusive listing agreement to locate a buyer. As always, the seller’s agent under an exclusive listing is to perform their agency duties by properly marketing the property with care and diligence.
Avoid circumstances which allow a seller-in-foreclosure to claim an investor created an unconscionable advantage in an equity purchase to rescind the sale
The legislature has not clearly defined what exactly constitutes an act of unconscionable advantage by an EP investor. Thus showing the existence of an unconscionable advantage in an EP investors conduct is problematic. It is difficult for the seller in foreclosure to prove, and for the EP investor to refute. When real estate values rise rapidly and significantly, the “greed factor” may set in. This dynamic transforms a formerly desperate seller in foreclosure to an astute rescinding seller.
However, the test of unconscionable advantage is not based on events occurring after the seller in foreclosure enters into the purchase agreement. Thus any increase in the value of the property after acceptance of the EP investors offer may not be considered. It is the fair market value (FMV) of the property at the time of the EP investors acquisition that is critical.
Market circumstances existing at the time of the negotiations, or when the party’s entered into the agreement, are the economic considerations which form one of the two elements for testing unconscionable advantage.
Unconscionability has two aspects:
* the lack of a MEANINGFUL CHOICE of action for the seller in foreclosure when negotiating to sell to the equity purchase investor, legally called PROCEDURAL unconscionability
AND AND AND
* the purchase price or method of payment is UNREASONABLY FAVORABLE to the EP investor, legally called SUBSTANTIVE unconscionability.
equitable indemnity
EQUITABLE INDEMNITY is when one party takes on the obligation to pay for a loss incurred by another party. The EP investor is liable to the seller in foreclosure for any losses arising out of the EP investor’s agent’s non-disclosure of licensing requirements. However, the EP investor is entitled to Equitable Indemnity from their agent. Equitable Indemnity is available to the EP investor who, without active fault, is forced by legal obligation to pay for losses created by their agents non-disclosure.
equity purchase (EP)
An EQUITY PURCHASE (EP) is the acquisition of an owner-occupied, 1 to 4 unit residential property in foreclosure for rental, investment for dealer purposes.
NOTE - Saturday is considered a business day under EP law, unless it falls on a enumerated holiday (the big ones). Many state holidays are not included as holidays, they are business days.
equity purchase (EP) investor
An EQUITY PURCHASE (EP) INVESTOR is a person who acquires title to a seller occupied, 1 to 4 unit residential property in foreclosure for dealer, investment or security purposes.
right of rescission
The RIGHT OF RESCISSION is the right to cancel a completed transaction such as a sale or letting of property, including restoration, after the transaction has been closed.
unconscionable advantage
An UNCONSCIONABLE ADVANTAGE is when an equity purchase investor or a mortgage holder exploits an element of Oppression, helplessness or surprise to exact unreasonably favorable terms from a property owner or tenant.
Unconscionability has two aspects:
- the lack of a MEANINGFUL CHOICE of action for the seller in foreclosure when negotiating to sell to the equity purchase investor, legally called PROCEDURAL unconscionability AND AND AND
- the purchase price or method of payment is UNREASONABLY FAVORABLE to the EP investor, legally called SUBSTANTIVE unconscionability.
To deprive the seller in foreclosure a meaningful choice between the EP investors offer and offers from other buyers, a misrepresentation or other fraudulent activity needs to exist to establish the lack of a meaningful choice or alternative to the EP investors offer.
The price paid, like any other provision in a purchase agreement, may be considered unconscionable. When determining the unconscionability of the purchase price, justification for the price of the time of the sale and the terms of payment of that price will be examined.
An unconscionable method of payment may include:
- carry back paper with a below-market applicable federal rate interest rate (AFR), long amortization or a due date on the note that bears no relationship to current payment schedules or
- an exchange of overpriced land, stock, gems, metals or zero coupon bond at face value with a 20-year maturity date.
A form of payment which is uncollectible, unredeemable and with no present value is also unconscionable. However, the existence of unreasonable pricing and payment alone is not enough to show the Unconscionable Advantage needed to rescind a closed transaction. Both the lack of a meaningful choice and unreasonably favorable terms needs to be present to show unconscionability existed.
An unconscionable Advantage occurs if the EP investor exploits an element of Oppression or surprised and exacts and unreasonably low and favorable purchase price or terms of payment. These are elements of fraud from threats, undue influence or deceit.
OPPRESSION by the EP investor exist when the inequality in bargaining power results in no real negotiations, a take-it-or-leave-it environment. The Foreclosure environment itself often presents a one-sided bargaining Advantage for an aggressive EP investor to exploit.
SURPRISE occurs due to the post-closing discovery of the terms which are hidden in the lengthy provisions of the agreement or escrow instructions.
The greater the marketplace oppression or post-closing surprise discovered in the transaction, the less an unreasonably favorable price paid by an EP investor will be tolerated.
