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The Real Estate Purchase Contract
By Paul W. Samarin, Attorney at Law
This article is the third in a series on Understanding Your Real Estate Transaction.

When you use the services of a Realtor® to purchase real estate in California, the Realtor® will use a "standard" contract entitled "Residential Purchase Agreement (and Receipt for Deposit)". It is commonly known as the "Deposit Receipt." This document is currently 5 pages, plus a one-page "Buyer's Inspection Advisory." Your agent will use it to draft your offer. It will be presented to the seller for his approval or disapproval. If he signs it, you've got a deal; or, he may make a counter-offer on another form.

Your Realtor® is a professional, and like most Realtors®, probably wants to do his or her best for you. The problem is that it is not really possible for your Realtor® to always do what is best for you for two reasons: 1) your Realtor® is not qualified to advise you as to the legal ramifications of the various clauses you will be obligating yourself to, and 2) there are several conflicts of interest involved in every transaction. You can only become aware of them through learning about the contracts and the transaction ahead of time.

One more important reason to study ahead of time: timing. When you find the house you've been looking for, you don't have time to learn about each clause in the contract. You'll want to make an offer right now. Are you going to sit down with a six page contract and determine what goes where? You're doing the right thing now to learn all about it.

Four Points You MUST Understand Ahead of Time

1) The "standard form" was drafted by attorneys working for the California Association of Realtors, and written with the best interests of the Realtors® in mind;

2) Some of the clauses benefit the Buyer, but most benefit either the Seller or the Realtor®;

3) It is very unlikely that your Realtor® understands the form in its entirety; and,

4) Every clause in it effects your rights and obligations; and, therefore, you must take an active role in deciding how to complete the form to take advantage of the clauses which benefit you rather than the other guy.

By the way, there are several versions of this "standard form" in use. Most recent versions of the Deposit Receipt are 80%-90% the same as each other recent Deposti Receipt, and contain very few additional or different clauses. Once you learn one of these forms, reading the differences in the others is very simple.

YOU Should Decide What Goes in the Offer

Whatever you do, DO NOT simply allow the Realtor® to fill-out the form however he or she sees fit. DO NOT fall for the "standard" line which is, "This is a standard form that everyone uses." This salesman's line is designed to disarm your concerns and make you believe that it must be OK if everyone uses it. It is a time saver. To explain the entire contract, point by point, even assuming your agent knows what everything means, would simply take too much time. It is so much easier to say, "This is the way we always do it," and then ask you to sign the form. Study ahead of time and know what you want to include.

How Big Should the Deposit Be?

The first thing to understand is what the deposit is and how big it should be. The deposit is meant to be a "good faith" deposit designed to show the seller that you mean business and are committed to the purchase. Accordingly, the larger the deposit, the more serious you look to the seller. The second, and hidden, purpose of the deposit is to coerce the buyer into closing the escrow even after he has determined that he may no longer want to. The Realtor® will tell you in the beginning, "Don't worry, if you can't get a loan, or if the inspection finds something wrong, you can get your deposit back." Once you're in escrow, it becomes, "If you don't go through with the sale, you're going to lose your deposit."

Receipt For Increased Deposit

The second thing about the deposit, and in some ways more important than the total size of the deposit, is to understand an almost unknown law which is part of the California Civil Code. What is amazing is that this law is specifically referred to in the Deposit Receipt, and still almost no Realtor® understands it or complies with it. Briefly, it states that unless very specific rules are followed, the seller may not keep your deposit EVEN IF you are in default. Now, most Realtors are aware of part of this law which states that all parties must initial a certain clause in the Deposit Receipt entitled a "Liquidated Damages" clause.

However, almost no one is aware that if you only pay part of your deposit with the offer and the rest of your deposit later (e.g., upon opening escrow), the amount paid later is not part of the Liquidated Damages unless these rules are complied with again. You need to know how to take advantage of this "loophole" if you are the buyer; and, how not to get cheated by it if you are the seller.

Passive Removal of Contingencies

One very important part of the standard contract is a paragraph (which contains several sub-paragraphs) which attempts to address the issue of how contingencies will be dealt with. It is a confusing paragraph, but you must study it carefully. You will be asked to choose between "active" and "passive" removal of contingencies. If you are a buyer, you should always choose the "active" removal box. Sadly, this is almost never done. If this is not done, your approval or disapproval rights to certain contingencies will automatically expire after a specified period of time--eliminating your right to the return of your deposit--unless you are paying careful attention to the dates and you take the steps necessary to prevent it!

The two goals of the attorneys drafting all of the "standard" forms are:

1) keep the buyer from backing-out of the deal, and
2) keep the buyer from suing.

So, what should you do about it? This first thing is to understand what the actual contingencies are, what needs to be done about them, and when. Then you have to keep track of the time line. I've developed a special form just for this purpose, which you can see at: Contingency Timeline. Then hit your back button to return to this article.

There are several of these important issues involved in every transaction. They will be handled in the way the Realtor has always done it--which may or may not be in your best interest--unless you step-in and demand that the offers and counter-offers are completed in the way that serves your interest more than the other guy's. The only way to ensure that this is done is to learn the details of the contract, and then become an active participant in its completion, rather than a passive potential victim who sits back and allows the Realtor® to do what he thinks is best.

I give seminars in which I discuss all of the above issues plus many others, including, prorations and impound accounts, bargaining chips vs. deal breakers in negotiating, what to watch-out for in a preliminary title report, how to deal with an escrow officer who tries to be more than just a neutral third party, how to get the most out of property inspections, how to demand estoppel certificates and what they should contain, and so much more.

You are much better-off learning how to be your own lawyer so that you can draft the deal correctly from the beginning, rather than seeking the help of a lawyer to save you from a poorly drafted contract. Congratulations on having the good sense to do this learning on your own!

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