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Todd Beardsley, of MenloAtherton Realty, gives us a bit of insight:
UNDERSTANDING THE PRDS REAL ESTATE PURCHASE CONTRACT
by Todd Beardsley
The seven-page Peninsula Regional Data Service (PRDS) contract is the standard contract used to purchase real estate throughout most of Silicon Valley. Understanding this contract and its many nuances ahead of your purchase will give you greater confidence when the time comes to make an actual offer. It is important that you review this article and the sample contract I provide, I will personally go through the contract with you to further clarify any questions you may have once you have read through this. To aid your understanding, please print out and view the sample contract provided so you can compare the sample contract with my notes.
Page 1
Page 1 is the most important page of the contract as it contains the purchase price and terms of the purchase. 1a The "good faith" deposit is the amount the buyers are willing to deposit in an escrow account to evidence their interest in the property and willingness to complete the transaction. The standard deposit is 3% of the purchase price and the check is made payable to the escrow company (For example: First American Title Company). On rare occasions the good faith deposit can be more or less than 3%. Less if the buyers do not have that money readily available and more if the buyers want to show their strong desire to purchase the property. A photocopy of this check is all that is required to be shown at the offer presentation. Buyers typically have 3 business days from offer acceptance before the check needs to be deposited with the escrow company. This gives the buyers time to make those funds available. This deposit is refundable if the buyers choose not to proceed with the contract within their contingency period provided they have valid reasons related to their contingencies. For example, if a buyers' property inspector finds issues with the foundation then the buyer can exercise their property inspection contingency and demand their deposit be refunded. To release the funds both the buyers and sellers must sign a written release to the escrow company. This release requires the seller’s consent but is usually given if the buyers' properly exercised their contingencies. A Sellers' unreasonable refusal to release the Buyers' deposit exposes the Sellers to possible monetary sanctions and attorney's fees. As discussed in section 5, this 3% deposit is the maximum amount the buyer can be liable for if they back out of the contract AFTER their contingencies
1b- There is typically no additional deposit. An instance where an additional deposit may occur is when the buyers do not have a full 3% deposit readily available or if there are reasons to believe that the buyers will exercise their contingencies and request a release from the contract. If a buyer is unsure of their ability or willingness to complete the transaction they should want to tie up as little money as possible and thus break the deposit down into two pieces; initial and additional deposits.
1c- Buyers typically put down a 20% down payment. Assuming a 3% initial deposit, the addition funds required to complete the down payment would be 17% as the 3% "good faith" deposit is counted towards the down payment. Note that obtaining this down payment is NOT a contingency, even if you have a financing contingency for the loan portion.
1d -The loan amount can vary, but having this amount be around 70% to 90% of the purchase price is very common. This is one of two areas where you must select whether you want a financing contingency or not. If you choose to have a financing contingency and should you not be able to get financing during your financing contingency period, you can get your 3% deposit back should you elect not to proceed. A financing contingency generally protects against 3 main items:
1. Appraisal-If the home does not appraise at the full purchase price, a buyer can exercise their financing contingency and get out of the contract. If there is no financing contingency and the property does not appraise at the purchase price, you must come up with the difference between the appraised value and the purchase price. For example, if you intend to finance 80% of your $1,000,000 purchase, but the property only appraises at $960,000, the lender will only provide a loan for 80% of the $960,000 appraised value. Thus, the buyer's down payment now must be increased to make up for the smaller loan amount. Note that during my several years in real estate I have never had a property appraise below my client's purchase price, but many appraise above. Before you make an offer I will prepare a comparative market analysis of what other comparable properties have sold for (the same data the appraiser will use), so you will know what a fair value for the property is and whether there are any risks of it not appraising for the full purchase price.
2. Inability to Get the Loan -Should your financial situation change during the period of the financing contingency, most likely from the loss of your job or a plunge in your stock portfolio, and you can no longer qualify for the loan, then the financing contingency allows you to not purchase the home without jeopardizing your deposit.
3. Spikes in Interest Rates -Note that section D has blanks where I write in the terms of your loan, such as the interest rate, term of your loan, lifetime cap on the interest rate, and the maximum number of points that will be paid for the loan. If during the financing contingency period rates spike up above what is written in these blanks, then you can get out of purchasing the property. The protection against rising interest rates this clause affords is actually very limited unless there is a long escrow period planned. Lenders allow buyers to "lock in" a rate for 30 to 60ays (with a slight surcharge on the rate for the 60 day lock) once the lender has a purchase contract. Thus, if the escrow is less than 60 days, the lender's lock in protects you from interest rate spikes without the need for this clause. The protection offered is really only for long escrow periods where a lender lock-in is unlikely or too costly. Note that for all of the protections mentioned above, they are good only for the term of your financing contingency (such as 7 days) as specified in section 20a. If after you remove your financing contingency you are fired from your job, this contingency will not protect you. The bottom of the paragraph has a box that is checked when a pre-approval letter is provided with the offer. A Pre-Approval letter from a lender or mortgage broker is essential to your offer being seriously considered. The pre-approval letter is shown during the offer presentation to illustrate that you have the financial means to complete the purchase. Start now if you have not yet begun the pre-approval process. Perhaps there will not be enough time to properly act once you have identified the right home.
1e-Seller financing is rare but not impossible. The likelihood of seller financing is increased if the sellers are elderly and desire interest income.
1f -The total purchase price should be the sum of your 3% "good faith" deposit, your additional down payment, your loan, and any seller financing.
3 -If you plan on living in the property as your primary residence, then you intend to “occupy the property”. If the property is being purchased as an investment, then you do not intend to occupy the property. This is important because lenders charge a higher interest rates if you do not intend to occupy the property because investment properties have a higher rate of default.
4 -Fixtures, defined as those items that are affixed (attached) to the property, are part of the home and are transferred upon sale. If the item is not affixed but is merely plugged in, then it is considered the seller's personal property and may or may not be transferred with the sale. For example, if a microwave oven is built-in to the kitchen cabinets it is considered a fixture. Conversely, if it merely rests on the countertops and is plugged in, it is the seller's personal property and may or may not go to the buyers. Generally, the seller leaves affixed appliances but this is not always the case. It is for me to ascertain the seller's intent, and then we collectively determine which appliances to ask for in the contract. Rarely is there anything put in the items excluded list, but if there is something you want removed (either fixture or personal property), such as a play structure in the back yard. This is the line where it should be listed.
5 -Liquidated damages limits the potential damages a seller can seek from a buyer if the buyer defaults to 3% of the purchase price. When both parties initial this provision (they generally do) then no matter what happens (even if the seller subsequently sells the home for 10% below the first sales price), all that the buyer can potentially lose is their 3% deposit. If the buyer decides to terminate the contract within their contingency period for a reason related to the contingency, such as inability to get the loan or finding issues wrong with the property, then their deposit should be refunded. However, if there are no contingencies (as often occurs in a seller's market) or if they are removed or expired, and then the buyer decides not to proceed with the purchase, the buyer's deposit is in jeopardy. However, the deposit will not be released to the seller unless the buyer agrees in writing. If the matter is contested, it goes to arbitration or litigation.
6 -In the rare event a dispute does occur between a buyer and seller, mediation is required under the terms of the contract. Mediation is not binding on any of the parties. A trained mediator will strive to find a mutually agreeable outcome.
7 -If the dispute is not resolved by mediation, the next step is either arbitration or litigation. Arbitration is similar to but quite distinct from litigation. Generally, arbitration is considered to be less costly in legal fees and resulting in a quicker resolution than litigation. Arbitration does allow for discovery (taking depositions and providing documents), the submission of evidence, and use of attorneys. However, procedures are more informal and less comprehensive than a trial. The arbitrator is a retired judge or a real estate attorney with at least 5 years of legal experience. Initialing this paragraph means that if a dispute occurs the parties will have the dispute settled by binding arbitration and give up their right to litigate or appeal the arbitrator's decision. I recommend reading this section carefully before making a decision. While the vast majority of buyers and sellers initial this section, it is a personal choice often contingent upon one's view of arbitration.
8 -Generally, before an offer is presented the buyers will receive many disclosures filled out by or provided by the seller. These disclosures include the Transfer Disclosure Statement ("TDS"), which includes information such as how long the seller has lived in the property, any known problems with the property, whether any remodeling or modifications were done and whether or not these modifications were done with permits. Also included in these disclosures is a lead based paint disclosure which states whether the seller is aware of the presence of any lead based paint on the property (Not a concern for properties built after 1978, when lead based paint was outlawed). The Natural Hazard Disclosure Statement ("NHDS") is a document that states whether the property is located in areas of natural hazards, such as a flood or earthquake zone. The Supplemental Seller Checklist ("SSC") is a 7 page document which asks the seller a multitude of questions which can materially affect the the value of the property. Questions such as whether there have been any crimes in the neighborhood within the last 3 years, if the home is on a bus route, and whether any insurance claims have been made against the property in the last 5 years (water damage claims are of particular import given the potential for resulting mold). These seller disclosures, which should be carefully reviewed, are generally considered to be amongst the most important documents in a disclosure packet along with the property inspections. These disclosures and the property inspections are typically available before writing up an offer. If the buyer has received these documents then the boxes in section 8 should be checked to indicate the buyer has received and reviewed these disclosures. If these documents are not provided and no boxes are checked, then the seller must provide these documents to the buyer in the specified time period, generally 5 days. If these disclosures were not provided before writing up an offer, clearly the buyer needs some contingencies to ensure time to consider and review the disclosures. Note: if these documents are not delivered to the buyer prior to the acceptance of an offer then the buyer has the right to terminate the contract. Sellers beware, I have seen shrewd buyers agents use this as a path of escape even though the disclosures were not the real reason for the buyers wanting to terminate the contract.
9 -Discusses a few other items the seller needs to provide the buyer with, including an environmental disclosure report and Earthquake Safety and Hazards booklet. Note: unlike the disclosure documents discussed in section 8, these documents do not have to be delivered to the buyer prior to the acceptance of an offer. They must be delivered to the buyer before
10 -This paragraph discusses the extent of some of the Buyers' contingencies, should the Buyer have some in the contract. A property contingency is one of the most commonly included contingencies and the one that gives the buyer the most reasons to walk away from the contract. As section "A" states, a Property Condition contingency includes "approval of all physical and non-physical aspects of the property that materially affect its value and desirability." This broadly worded sentence allows the Buyers to back away if some aspect of the property does not suit them. Examples would include that an additional inspection finds more problems than anticipated, further investigation yields new information that limits the properties development potential, or drive-by traffic on the street is greater than anticipated. A property contingency is the buyers' strongest contingency for it allows the Buyers to "back out" for any material reason related to the property's present condition or intended future use. Whether a property contingency is desired is often based upon the findings of the inspection reports provided in the disclosure packet. For example, if the property inspection mentions heavily sloped floors and calls for an inspection by a structural engineer, the potential for a damaged foundation would warrant a property contingency period to have the foundation inspected. If no property or pest inspections were provided in the disclosure packet, a property contingency is certainly recommended during which time these inspections will be done. Any other issues dealing with the property, such as expansion and redevelopment potential should be dealt with either during the property contingency period or before making an offer.
48 contingencies are also addressed in this paragraph. The Homeowner's Insurance coverage is to determine whether any claims have been made on the property in the last 5 years. If the seller has made claims, particularly claims related to water damage, this might affect your ability to get and the cost of insurance. The seller's supplemental checklist has a question that explicitly asks the seller if they have made any insurance claims, so generally this contingency is only used when the seller has made claims and thus the buyers need to determine if they can get insurance and if there is any extra premium associated with their future policy.
Property disclosures are generally provided to you in the disclosure packet and include the Natural Hazard Disclosure Statement, which lists whether the property is in a flood zone, an active earthquake zone, etc.
11 -This paragraph deals with the pest inspection and how to deal with any pests, such as termites, if any are found. Generally, a pest inspection has already been completed and will be included in the disclosure packet. The inspectors, whether it be a pest or property inspector, are objective and find the same materials whether the seller or buyer hires them. They are potentially liable if they miss an obvious defect, so their goal is to be as thorough as possible, but of course some inspectors are better than others and I will share my opinion of the inspector with you.
Paragraph A is generally checked with the Seller getting the inspection within zero days of Acceptance, as an inspection has usually just been done before the property came on the market. If an inspection has not been done, then the box is generally checked for the buyer and the number of days is not great, usually within 2-5 days.
Paragraph B allocates who shall pay for the various items found, if any, in the pest report. Normally, the Seller pays for Section 1 work. Section I work is categorized as active problems. For pests, this would be active infestation such as wood damage caused by termites and the fumigation required to eliminate the termites. The pest report also covers water damage issues, and an example of this Section I work would be to replace the flooring of a bathroom where water has seeped underneath and damaged the wood. Once all the Section 1 items are addressed and the property is free of active infestation and water damage, the pest company provides a certification stating that all the identified Section I items have been addressed. If the Buyer takes the property in "As is" condition, which is quite common in a seller's market, then the Buyer assumes responsibility for any Section 1 work that has been identified. The termite report lists both the issues found as well as a bid for the cost of addressing all of the Section I and 2 items. For example, to fumigate a house of roughly 1500 square feet is usually about $2000. If you decide to take a house in "As Is" condition, then you should consider the cost of paying for any pest and water issues found in the pest report and factor that into what you feel the home is worth. Section 2 items are the Buyers' responsibility. Section 2 items are things that could lead to, but have not yet resulted in, future pest infestation or water damage. Examples would include wood scraps in the crawl space that are potential food for termites and could bring them to the house, and missing grout that could allow water to seep into the walls and damage the wood framing. Because Section 2 items are more to prevent future damage, they are for the Buyers' information, but I recommend having these items taken care of as a preventative measure.
Paragraphs C and D state that if certain areas of the home are inaccessible, as is often the case if the seller's personal property blocks some areas from inspection, then a supplemental report can be issued once those areas become accessible. Generally, this is not done but should be considered if the amount of inaccessible areas was excessive.
Paragraph E mentions that if the property is fumigated there is likely to be some slight damage to the landscaping that surrounds the home and the Buyer agrees to take the property subject to any such damage.
12a -Paragraph A states that the roof and plumbing system need to be free of leaks, built-in appliances need to be operative, chimneys and dampers free of structural defects, and any broken glass needs to be replaced. Note that if you take the property in "As-Is" condition you eliminate paragraphj I I and I2A from the contract. Taking the property in "As-Is" condition, which unfortunately for buyers is the norm in our current sellers' market, generally means two main things:
1) The buyer absolves the seller of the responsibility for addressing any Section]
items found in the pest report; and
2) The buyer is taking the property in its present "As Is" condition, thus the
protections of Paragraph 12A which requires the roof to be free of leaks, allbuilt-appliances be working, no windows broken, etc. no longer are enforceable. For example, if the property inspector found that one of the window panes was cracked and the property is taken in "As-Is" condition, it is the buyers and not the sellers who will do the repair jobs. However, "As-Is" does not take away all the buyers' rights. Property inspection~ can still be done and are a necessity if the seller has not already had the property inspected. Additionally, if there is a property contingency the buyer still has the right t< back away from the purchase during that contingency period. Whether or not you want to take the property in "As-Is" condition should b, based upon the condition of the property as evidenced by all of the property and pest reports that have been done. Taking the property in "As-Is" condition when no property inspections have yet been undertaken requires that I order inspections as quickly as possible. (Property~
S(
;CL inspections generally cost approximately $400 and pest inspections approximately $215 and are borne by the party who orders the inspections). If the inspections uncover more problems than anticipated, the first step is to try to renegotiate the contract to have the seller address or credit for the extra problems that were found. If these negotiations are unsuccessful, then the debate is whether to exercise your property contingency or instead proceed with knowledge of what is involved in the purchase. For each property you are considering I will provide you with the pros and cons of taking that property in "As-Is" condition. If no Section I work has been found, as is often the case with condos and townhomes, I generally feel taking the property in "As-Is" condition is wise for it makes our offer stronger with little true cost.
12b & c -Paragraph B states that the Buyers shall receive the property in the same general condition as it was in at the time the contract was accepted. Personal property that was not included in the sale as well as any debris should be cleared from the property and your home should be given to you in "broom clean" condition.
Paragraph C allocates the risk of property loss during the escrow period to the Sellers. Thus, if the property burns down in a fire while you are in contract, it is the seller who is liable for this loss. If the Buyers still decide to proceed with the purchase, they are entitled to the Seller's insurance proceeds.
13 -If any repairs are done during the escrow period (such as if the property was not taken in "As-Is" condition and the seller agreed to do certain repairs) they must be done by a licensed contractor. Right before close of escrow the Buyers are entitled to a walk-through of the property to confirm that the property is in the same general condition as when purchased.
14 -A home protection plan can be purchased which protects the appliances, such as the range, dishwasher, etc., from breaking down for the first year after purchasing the home. These plans, which can range in cost from $275-$450, let you get a serviceman to view and repair the appliance for a $45 fee and if the appliance cannot be repaired then it will be replaced. Whether this is money well spent depends upon the age of the appliances and the number of appliances that come with the house, for these plans only cover the appliances that come with the initial purchase and not those subsequently purchased. Occasionally, the seller will offer to pay for a home protection plan, but generally it is the Buyer's choice to determine whether or not to get a plan and be responsible for paying for the plan.
15 -That the home has clear title is essential to your wanting to purchase the home. Thus, in the disclosure packets that will be available before we put in an offer, a title report from a title company will describe the property and also list whether there are any liens on the home. Most homes have no liens except for upcoming property taxes and the seller's mortgage that will be paid off, but occasionally you will see a mechanics lien (the seller never paid a contractor or carpenter for a job they did and then a lien was filed) or a tax lien (for past unpaid property taxes) on a home. In the rare event that there are these liens, I will contact the title company to ensure that there are sufficient funds after paying off all the mortgages to ensure that these liens will be paid off and you will get clear title.
Title insurance is one of the largest closing costs you will pay. This fee is to the title company and they are insuring that you will get clear title from the seller and that they are liable if any problems come up. Two parties require title insurance, the Buyers and the Buyers' lender (if they have one). While the buyer always pays for their lender's title insurance, who pays for the Buyers' title insurance is determined by local custom. In Santa Clara County, the Seller pays for the policy. In San Mateo County, the Buyers pay for their own policy. It evens out in the end because all buyers eventually become sellers. Note that property taxes are paid on a prorated basis, with the seller responsible for all property taxes while they owned the property and the Buyers responsible for all future tax payments.
16 -Governs the time periods for contingencies and their removal. These contingencies must be actively removed, which requires that I send the listing agent a form with your signature removing some or all of the contingencies. Generally, it is best to make contingency periods as short as possible to make the offer competitive. However, what inspections or actions are needed determines the length of the contingencies. For example, if the only property issue is getting a roof inspector, this can easily be done in 3 days. In contrast, to get a foundation inspector and then evaluate the claims may take up to 9 days. Thus, the amount of time needed for any contingencies will be determined by the circumstances of each property. The most important part of the financing contingency is making sure that the property appraises at the purchase price. When setting this time limit I will check with your lender to see what their timeframe is for comfortably getting the appraisal in. Lead inspections are very rare and a moot point for properties built after 1978. Homeowners insurance is only a problem if the seller has had a claim on their property and this will be in the Sellers' disclosures. Generally the property disclosures, such as whether the property is in a flood zone, etc., and Title documents are provided in the disclosure packet before offers are tendered. Thus, Paragraph D deals more with whether future property inspections are needed and how long is required to get these done and evaluated.
17 -This paragraph states that this contract is binding and may only be amended in a writing signed by both parties. California law governs the contract. The paragraph also states that the real estate agents are providing real estate advice only and not legal, tax, title or other advice for which Buyers must consult the appropriate professional.
18 -Should the Buyer default and both parties have signed the liquidated damages provision (~5), then the Seller's potential remedies are capped at 3% of the purchase price. Should the Seller default, the Buyer can seek monetary damages or seek possession of the property. I have never had an instance where my clients have gotten in a dispute with the other party, for I actively use the contingency period if one was sought. I utilize the contingency period to address any issues that may arise or any indecision that the Buyer may have and to pull out then if the Buyer does not want to proceed.
19 -Close of escrow occurs when the Buyers become the owners and get possession of the home in exchange for the Sellers receiving the Buyers' funds. Escrow periods generally range from 15-45 days (but can vary greatly), with 30-day escrows being the most common. The Buyer's funds must be deposited and cleared one day before close of escrow to ensure that the funds are good. Thus, close of escrow should never be on a Monday, because then the Buyers pay extra interest over the weekend.
20 -In a seller's market, an "As-Is" (F.) addendum is generally included as part of the contract. If there is a rent back then D., a Residential lease after sale (Seller in Possession), is included. If you are buying a condo or townhome, then B., a common interest development addendum, will be signed which states that the Buyer must have access to the Homeowner documents before being bound to the contract. Most of these other documents listed are rarely used, but I will alert you when I believe one of these should be included.
21 -Generally, there are no other terms and conditions but if the contract is "AsIs" then we state "All of Paragraph II and Paragraph 12A are stricken from this contract."
22 -This lists who the brokers on both sides of the deal are. As your representative, Coldwell Banker will always be listed as the Selling Agent (the odd term used for the agent representing the Buyer). Know that I always represent you as a buyers' agent and will try to get you the property for the best price and terms possible. Thus, even if another Coldwell Banker agent is representing the seller, I will always be vigorously representing your interests.
23-25 -These paragraphs state that 23) time is of the essence; 24) the property is sold in compliance with anti-discrimination laws; and 25) that the Buyer has a duty of care to protect him or herself, and this would be to follow my recommendation of carefully reviewing the disclosure packet.
26 -Generally, I will present our offer live to the Seller and will be able to get a quick response. Thus, in that instance we will give a limited time period such as a few hours or 12 hours to provide us with a response. Some agents or circumstances, such as an out of state seller, will not allow for a live presentation and then the response time is slower.
27 -You never have to pay for my services, which the Seller indirectly pays fOl Commission rates usually vary between 2-3%, but Uncle Coldwell takes their fair share.
28 -Hopefully this paragraph is not initialed by the Seller and they accept your offer without a counteroffer by just signing '\129. If they do initial here but also sign '\129, then they accept your offer subject to a counteroffer. If they counter then they are accepting all of the terms of the contract and only changing what is listed in the counter, generally raising the price, shortening the escrow period, etc.
29 -If signed with no initials above, then the home is yours!
Page 7
This page contains some general provisions including that you should 1 aware of the condition of the home's foundation, roof, etc., know the size and age of the home, etc. Most of the information addressed on this page will be provided to you in the disclosure packet and the property and pest inspections.
Summary -Each home is unique with unique attributes and problems. Thus, every offer we write up will involve our meeting and discussing how to draft the contra( While most Buyers prefer to just write up one contract, some Buyers most go through the process a few times before succeeding because we are in such a competitive seller's market where most properties receive multiple offers.
Given the importance of the contract and the large sums involved, it is best that you carefully review the sample contract I have provided and let me know of any questions you may have when we next meet.
This article was created by established Real Estate Agent Todd Beardsley