Contract of Purchase and Sale
What Does An Offer to Purchase and Sale of Real Estate Mean in Simple English?
Remember the last time you sat down with your Realtor to write an offer on your dream home? You were so excited that you did not really pay much attention to the Realtor as he/she reviewed the details of your offer? You know what you offered to pay for the property and when you plan on taking possession but your eyes probably glazed over when your agent started reviewing all the legal jargon. Does this sound familiar? You said “uh-huh” and “Yes, I understand all of that perfectly.” The truth is you probably did understand everything at the time but then you got home and you thought. “So what did I really sign?”
Here is the answer to that question! This is a breakdown of the complete Contract of Purchase and Sale in layman terms. Now you can sit back and read what you signed up for when you were working with your agent.
Paraphrasing the Contract of Purchase and Sale:
We are going to pretend that we are still together while you read this, fair enough? I also am going to pick some arbitrary numbers and facts to put into this offer for the purpose of this explanation.
The language.... “Mr. and Mrs. Buyer, what we are doing is making an offer of $450,000 including a deposit of $10,000. You will pay $10,000 within 24 hours of removal of all subject to conditions.” This means that once you have removed all your conditions, including conditions about financing and home inspections, you will give us $10,000 as a deposit on the property.
Clause #2
If the deal does not go through and you do not remove the conditions, that money goes back to you as long as the seller signs off on it. There is very rarely a problem with that, but should the seller have a problem they could hold up the return of the funds. Do you understand this?
Clause #3 describes
TClauses #4, #5, #6
outlines the dates. Completion is the date that the title of the property actually transfers into your name. As you can see, the completion date is one day before the possession and the adjustment date. The reason for that is that Land Titles is in Kamloops and it takes an extra day to do the completion.
Possession date is the date that you actually receive your keys and can move into the property.
Adjustment date is the date the lawyers calculate that all of the taxes, levies, and any fees associated with the property due up to and including the adjustment date. Usually, 12:00 noon on the adjustment date is when you will actually start paying for any utilities or taxes and everything that’s involved with the ownership of the house.
Clause #7 (The Included Items:)The Included Items are basically the things you want included in the purchase of the house but are not nailed down or directly attached to the property. This includes things like the fridge and the stove, the washer and dryer, pool cues and the pool table, the built-in vacuum and all attachments. It is sometimes appropriate at this stage to put in things that actually are fixtures like the built-in dishwasher just to make it absolutely clear that they cannot be taken away.
Some sellers, when they’re not informed properly by their realtors, think that if it’s not in the contract they can take it whether it’s attached or not...then you get a nasty surprise on move in day.
Clause #8 is pretty self-explanatory: The property and all included items will be in substantially the same condition at the possession date as when previously viewed by the buyer on (insert date you saw the home).
Clause #9 and #14 are for the Seller. They mean that the Seller is going to give you title, free and clear from any writs or covenants or liens or caveats, or charges against the title. By signing this document, the Sellers are authorizing their lawyer to pay out anything that’s against their title and so that they can give you a clear title.
Clause #10 is for you, the Buyer. What it means is that about three or four days before closing, your lawyer or notary will call you and tell you right to the penny of the amount of money that you need bring in to close the deal. So it will be your entire purchase price, plus all your legal fees, and adjustments and taxes and things that we’ll discuss later minus your mortgage and down payment. You will have to bring that in as a certified cheque, bank draft, or lawyer/notary trust cheque. You cannot just bring in a regular cheque.
Clause #11 This clause is basically for the lawyers. It states that the lawyers will prepare the documents in a form that can be registered at land titles.
Clause #12 talks about time being of the essence. Basically, Mr. and Mrs. Buyer, this clause pertains to you. You must make your best effort to remove your conditions. In other words, the Seller is going to take their house off the market to give you time to do your due diligence, make sure you get your inspection done and you are happy with it. You also need to ensure you get your financing and you are happy with it. By signing this document in clause # 12, it means that you are going to do everything you can to remove all conditions as quickly as possible.
Clause #13 describes a situation where you have to trust your lawyer to take your money before you have registration of your new house. The Sellers have to trust their lawyer to give up registration before they receive their money. Basically, at some point somebody has to trust somebody, and it comes down to the lawyers acting under a trust arrangement in this situation.
Clause #14 has already been covered.
Clause #15 is for you. Clause #15 states that the costs of putting together the mortgage and conveyance of the title are your responsibility.
Clause #16 talks about risk. Simply put, if anything happens to the house or any of the included items like appliances or the furnace or the water heater up until 12:01 am on the Completion Date, it is the responsibility of the Seller. If anything happens anytime after that, it is your responsibility.
So, if the house burns down or the water heater packs it in, or something happens to the washer and/or dryer, if it’s included in the contract, it is the Sellers responsibility up until 12:01 am on the Completion Date. It is your responsibility after that! Caveat Emptor (buyer beware). This is probably the most important clause in the contract from a liability point of view.
Clause #17 Basically what Clause # 17 says is that anyone who signs the bottom of this document is responsible for whatever is written above it. If they pass away, their heirs become responsible for this contract.
Clause #18 basically underlines that the only details that both the Buyer and Seller can be held to is in this contract. We have to do our own due diligence to make sure that everything is verified. Here is an example-if the listing sheet says that there is a water softening system in the home and it isn’t there on Possession Date, you cannot sue the seller to buy you a water softener because it is not outlined in the Purchase Contract.
Clause #19 is about agency disclosure. There are three types real estate relationships.
Single agency means that both the Buyer and Seller have separate Realtors from different companies. When there is a Realtor for the Buyer and a Realtor for the Seller, Mr. and Mrs. Buyer, my responsibility is obvious. My job is to get that house for you at the best possible value possible. It is the other Realtor’s job to look after the sellers.
Dual agency happens two ways. One situation is when both Realtors work for the same company and the other situation is when there is only one Realtor working for both the Buyer and Seller.
In the last situation, the law says that I have to be fair to each person. In other words, if the sellers tell me that they will go to a certain price, I cannot tell you that and vice versa. I actually cannot disclose about price or personal characteristics or motivation. (Remember, you will already have reviewed and signed a limited dual agency agreement and the Working with a Realtor document, paying special attention to the dual agency portion.)
In this situation, there is only one Realtor representing the Buyer and the Seller. There is an obvious conflict of interest. What the law and both of these documents state is that, as a Realtor, I have to back off when it comes to three different pieces of information. They are price, personal characteristics and motivation. In other words, if you tell me that you’re going to make an offer of $440,000 on a $450,000 house but then you tell me that, if you have, to you will go to list price, I can’t tell the Seller that. If they tell me that they want you to come up to $445,000 but if they have to, they will accept your offer of $440,000, I can’t tell you that. I have to be fair to both parties. (“Are you O.K. with that?” I asked that question. You said, “Yes” (most people do). You had already signed the Limited Dual Agency Agreement, and Working with a Realtor before we even wrote the offer, of course. I am sure you understood what dual agency meant when we reviewed it together. This is a topic I would ensure you did understood.
Additional Costs: At some point we will have also reviewed an un-numbered page with a ton of little writing, which itemizes other ‘costs born by the Buyer/Seller’ in the centre of the page. There is an abundance of information on this page that is very redundant to what we just went over. However, I need to explain the costs for you.
First of all, keep in mind that these costs are all approximate. You are going to have legal expenses. The figure you should probably expect to pay is $800 - $1100 for legal expenses. That will cover your legal fees, your drafting documents, your land title registration fees, the conveyance of the title-basically everything your lawyer is going to do for you.
The big cash outlay that you need to be aware of is the Property Transfer Tax (PPT). There is a possibility that you will be exempted from Property Transfer Tax but you have to satisfy all of the following criteria:
1. You need to be a resident of British Columbia for at least a year.
2. You need to finance at least 70% of your purchase price, which means you can’t have a down payment larger than 30% of the cost of the house.
3. This has to be your first purchase. If it’s your first purchase for you and not your spouse, then you are eligible for 50% reduction of the Property Transfer Tax. This is something that you will have to discuss with your lawyer. Unless you are absolutely certain that you are exempt from the PPT, be prepared to pay the tax.
Property Transfer Tax is 1% of the first $200,000 and 2% of the balance. For instance, if you purchase a home for $450,000, you will be paying $7,000 in PPT. If the purchase price is $400,000, you will be paying $2000 on the first $200,000 and $4000 on the second $200,000. That makes your total PPT on a $400,000 purchase $6000.
Because mortgage rules are always changing, things may be a little different today then when this was written. REVIEW YOUR PERSONAL SITUATION WITH YOUR MORTGAGE BROKER/LAWYER.
The next important financial concern is the property tax adjustment. This is very difficult to calculate because #1, we don’t know what your taxes are going to be and #2, you have to decide whether or not you are going to pay your taxes with your mortgage payment or as lump sum at the end of the year. The amount that you pay the Seller or the amount that the Seller pays you in your Statement of Adjustment depends on the possession date that you choose.
The property inspection is another expense you will incur as a Buyer. An inspection will cost anywhere from $250 to $400. Depending on timing, it can take up to a week to book an inspection and have the completed report in your hands.
You may also need to have an appraisal done. If you are putting 25% or less down on your property, you may need to have a CMHC appraisal, which costs about $200. If your down payment is more than 25%, you may have to have a separate appraisal done and that is about $250.
Remember, the inspection and the appraisal costs will be plus HST.
Subjects/Conditions: The conditions (what you may have heard referred to as the 'subjects') are legally called the conditions precedent. What that means is that you have to be satisfied with the conditions you outlined in your offer before there is a firm deal. At this point in time, if the Seller signed this document, they cannot get out of this contract. The only person who can get out of it is you.
We have put a number of conditions on the contract for a couple of different reasons:
1. Our office has a policy that we insist on certain conditions.
2. We want to make sure that you are completely protected and are allowed to complete you due diligence to be certain the home is right for you.
Financing: The first condition is the condition of financing. We have made the offer subject to financing satisfactory to the buyers on or before (the date you agreed to).
Insurance: We also have a condition of obtaining satisfactory insurance. The reason we put that there is that there was a time period during the fires in 2004 that some people could not get fire insurance. So we want to make absolutely certain that you can get insurance. If the property is in town and you as the Buyer is certain that you have insurance, then you can put a waiver that says something along the lines of, “The Buyers have satisfied themselves with any insurance concerns associated with the property.”
Inspection: The next clause is the subject to satisfactory inspection. Again in our office, we either have to have an inspection clause on, or we have to have a waiver by you. If you are satisfied with the house without an inspection, we’ll put a clause in the contract that says the Buyers have waived their right to a home inspection.
Title: The next clause is for you to view and read and be satisfied with the title just to make certain that there is no unusual notes or what they call charges against the title that we are unaware of. You will likely be relying on your lawyer for this expertise.
Survey Certificate: The next clause is for the survey certificate. If there is an existing survey, we are going to ask for it and we are asking the Sellers to give it to us for free. Most often, they are willing to give it to you. It is your responsibility to get a survey if the Sellers do not have one, and make sure you are satisfied with the lot lines and where the house sits on the lot.
Property Disclosure Statement: The next is the property disclosure statement or PDS. The Sellers have filled out this form when they listed their house and it discloses everything they know about the property-the septic system, the wiring, the insulation, are there any roof leaks or basement leaks, and they have to sign that document confirming that what is on there is true. We want to view PDS and approve it before we remove conditions and make the deal firm.
(If it is a STRATA purchase)
Lastly, if this is an offer purchase on a strata property, there is a clause that is subject to a buyers viewing and approving the documents including a Form B. Form B BLAH BLAH BLAH…. Also, if this were an offer on strata property, we would not have put a condition of survey on the offer. The form B covers the condition of survey as well as…….
Terms:
We will also have a document that covers a few other items that are referred to as the 'terms' of the contract. Terms ensure that some other important facts have been brought to the attention of both you and the Sellers and that they are understood. For example, we want to make sure you understand Property Transfer Tax, pine beetles, HST, appliances along with any warranties that may be included, as well as your right to information and assignment, and any number of other concerns that you and/or I thought would be important to include in the contract.
That is pretty much it. I am sure after reading this you are well reminded of all the discussion we went over in detail when you signed your offer! You know the drill...if you have any questions, please don't hesitate to ask!
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