17 Purchase Contracts Part 2: Arizona Real Estate License Exam Prep

Arizona Real Estate License Test Prep: Purchase Contracts Part 2

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IV. TYPICAL PROVISIONS FOUND IN PURCHASE CONTRACTS
A. Contingency Clause: Makes the sale contingent upon a certain event. Failure to fulfill the contingency voids the contract.
1. Mortgage Contingency Clause: Makes the sale contingent upon the buyer obtaining financing. Usually specifies the loan amount, interest rate, terms and the date by which the buyer must obtain a commitment.
2. Other Common Contingencies include: home inspection and roof, mechanical equipment inspections and termites.
3. Evidence of termites could include rotted wood and cellulose debris.

B. Escrow Instructions
1. Escrow agent is a disinterested, neutral third party hired to close the transaction.
2. The escrow company is hired by and acts as the agent of the buyer and seller.
3. If there is a conflict between the pre-printed words and written words in the contract, the written word prevails.

C. Prorations: Specifies what items will be prorated and the date of such proration (commonly date of closing).

D. Time is of the Essence
1. Contract contemplates a punctual performance.
2. Parties agree to make diligent effort to complete the transaction within the agreed time periods.

E. Title Insurance
1. It is the seller’s responsibility to deliver a clear title.
2. Evidence of clear title is most commonly an Owner's Title Insurance Policy.

F. Default & Remedies
1. If buyer backs out for no valid reason the seller may:
a. Allow buyer to withdraw without penalty.
b. Retain earnest money as liquidated damages.
Liquidated damages: The amount pre-determined by the parties as the total amount of compensation an injured party should receive if the other party breaches a specified part of the contract.
c. Sue for damages or for specific performance. Specific Performance is a court order to enforce the terms of a contract.


2. If seller backs out for no valid reason the buyer may:
a. Let the seller back out.
b. Sue for damages or for specific performance.

G. Warranties: Until closing, the seller agrees to maintain the property in substantially the same condition as of the date of the contract.

H. Risk of Loss: If property is damaged prior to closing, the risk of loss is on the seller and buyer has the option of voiding the contract if change in property is substantial.

I. Representations
1. Defects in the property:
a. Obvious defects- Buyer is responsible. Caveat Emptor (let the buyer beware) applies.
b. Latent Defects (Hidden defects)- Seller is responsible.
c. Agent must disclose all known defects to the buyer.
2. Agent must use care in making statements to buyers:
a. Puffing the goods: Making overstatements of personal opinion, is not considered misrepresentation.
b. Misrepresentation (Negligent misrepresentation): False statements of material facts which a party relies on to his damage.
c. Fraudulent Misrepresentation: Occurs when a person intentionally misrepresents a fact.
3. Liability: Agent can be held liable for misrepresentations either by commission or omission when within agent's area of expertise.
4. Errors and Omissions (E & O) insurance insures licensees against errors or omissions the agent makes. Similar to malpractice insurance for doctors.

J. Indemnification Clause (aka Hold Harmless Clause): Provision whereby one party agrees to protect another party from damages or lawsuits.










V. RESCISSION OF CONTRACT
The legal remedy of canceling a contract and restoring the parties to their original positions prior to entering into the contract.

VI. DISPUTE RESOLUTION
A. Mediation: A dispute resolution process conducted by an independent third party mediator who works with the parties to
help resolve their difference(s). If unsuccessful the next step for
the disputing parties is binding arbitration.

B. Arbitration: The non-judicial submission of a dispute to a third party arbitrator with both parties agreeing, in advance, to comply with the final decision of the arbitrator. In a mediation, the mediator works to have the parties come to a resolution on their own. In arbitration, the arbitrator imposes his/her decision on the parties.