By Gordon McKinlay
PropertyGuys.com Comox Valley & North Vancouver Island
Understanding the Contract of Purchase and Sale
The Contract of Purchase and Sale is a contract that will stipulate the exact terms that a buyer agrees to purchase a seller’s home. The seller should review this Contract with their lawyer or agent. All contracts dealing with land must be writing to be enforceable. Typically, in BC, if a buyer has a real estate agent, that agent will use the standard Contract of Purchase and Sale form developed by BCREA. Otherwise, if the buyer is private, they should provide a Contract obtained from their lawyer, which is also usually a standard form.
Because the Contract of Purchase and Sale can be lengthy, I will only focus on a few key components. For my complete guide to selling your home, click here.
When you review your offer, pay close attention to these items, ensure that they are correct and that you agree to all of them.
1. Buyer and Seller
Every Contract of Purchase and Sale will have the full legal names of all buyers and sellers involved.
2. Address
The Contract contains the postal address of the seller’s property, a description of which way the home faces, and the legal description (plan and lot numbers) of the address.
3. Purchase Price
The purchase price is the amount proposed to purchase the property. A buyer should never feel discouraged if the offered purchase price is low, negotiate, never dismiss. Buyers may low-ball sellers to see if they can get the property at a bargain. Buyers and sellers are typically willing to negotiate; a compromise is generally possible.
The price is the first thing a seller looks at when they receive an offer. Sellers, look beyond the purchase price and look at the offer in its entirety. For example, the seller is carrying two mortgages because they have already purchased another home; the closing date might become financially significant. The seller should weigh both price and closing date because both could be economically important, especially if the seller can avoid additional mortgage payments.
4. Deposit
The deposit is an amount held in trust by the seller’s brokerage or law firm to secure the offer, show seriousness, and count towards the down payment and the full purchase price. A “herewith” deposit is given with the offer or within a set time after the offer acceptance called “upon acceptance.” Any deposit is generally 5-10% of the purchase price. The buyer’s deposit is held in trust with their agent brokerage or lawyer until closing. The buyer should never give the deposit directly to the seller. Offer conditions are essential because if not met, entitle the buyer to receive the full amount of their deposit back. Conditions or “subject to” clauses are crucial to the buyer to protect their interest fully. Most Contracts give the seller the option of keeping the deposit as “liquidated damages” if the buyer fails to complete the agreed to terms and pay the balance of money on the closing date.
The buyer should consider the appropriate interest paid on deposits while held in trust. The deposit can represent a large amount of money, and the closing date may be months away.
5. Irrevocability
The irrevocability period gives the seller a certain amount of time to consider the offer—typically up to 24 hours. During this time, the buyer is legally bound to the terms of the offer if the seller accepts it as-is. The seller should respond during this period by accepting the offer, sending a counter-offer, or declining the offer given.
6. Completion date
The Completion Date or more commonly called the “closing date” is the date when the buyer takes possession of the home.
7. Chattels included
The chattels are moveable objects included in the sale, not permanently affixed to the house. For example, chattels can be the refrigerator, washer and dryer, and light fixtures. If not stated in the agreement, the seller agrees to remove all chattels before closing.
8. Fixtures excluded
Fixtures are typically “nailed down,” objects like built-in shelves and window treatments. If not stated in the agreement, the seller must leave the fixture.
9. Warranties
A warranty is a minor requirement that is not fundamental to the sale. If there is a breach of a warranty, the sale will still go through; however, the offended party can sue for damages. The buyer should frame all of their requirements, pivotal to purchasing a property as conditions.
10. Conditions
A condition is fundamental to the offer. A buyer/seller condition is stating that an executed purchase/sale will only occur if there is a completion of all conditions. For example, a buyer condition might be receiving a mortgage for the property. A breach of a condition allows the buyer to get out of the Contract and obtain a full deposit back. A violation of a condition set by the seller allows the seller to get out of the Contract. For example, a seller condition may ask the buyer to remove all conditions within 72 hours or the deal collapses. Typically if the seller has other offers, and they need to ensure completion of sale before the other buyers walk away.
There can be an unlimited number of conditions, and until they are fully satisfied, neither the seller or buyer is obligated to fulfill the Contract of Purchase and Sale.
10.1 Condition Examples
Typical conditions stipulated by the home buyer include:
- Home inspection – If there is any possible concern about the home due to its age, the seller should always get a home inspection before listing the home. This will ensure there are no big surprises when the buyer has the home inspected. It also gives the seller time to deal with any issues which may hold up a sale. If there are a few unexpected issues found by the buyer’s inspector, the buyer and seller can negotiate on how to handle them. To get around this, typically, the seller can offer cash at closing. In other cases, the buyer’s appraiser may require certain repairs completed for the purchase to go through based on the buyer’s loan and the value of the home.
- Appraisal – The home buyer’s financial institution will require an appraisal of the property before they give a mortgage. If the buyer cannot make payments, the bank can recoup the loan amount. Sellers should take the appraisal seriously and ensure the home is clean and tidy to show it is well maintained and state all improvements made to the home. Sellers should always give themselves time to deal with any issues due to a low appraisal.
- Financing – Typically the buyer’s issue; buyers must find a lender willing to provide the mortgage. For a seller to mitigate their risk, they should ensure that before they accept an offer, the buyer has already been pre-approved for the mortgage needed to purchase the home. This not foolproof every time, as buyers can lose jobs or have other financial issues come up.
- Upon the final sale of the buyer’s home – This is a prevalent condition, unfortunately for many sellers. It is easy for a deal to time out, causing the home to go back on the market, looking for a new buyer.
- Title – The title should be free and clear of all financial encumbrances or charges registered against the property on or before the closing date.
10.2 Condition Components
Both sellers and buyers frequently insert conditions or “subject to” clauses in the Contract. These conditions should have the following components.
- Precise, clear, and detailed wording.
- Removal of the condition by a specific time and date.
10.3 Waiving Conditions
The Contract should contain a clause that specifically states that the conditions that are for the sole benefit of the seller or the buyer can be waived at any time by the party requiring the condition. This clause is essential in case any party has second thoughts about their conditions and do not want to stop the home sale going through because of an unmet condition.
Meet Gord
Gordon McKinlay is the owner of PropertyGuys.com in the Comox Valley & North Vancouver Island. Gordon is a private sales expert who loves helping people sell their own homes and save tens of thousands of dollars. He has created this website to help others sell their homes privately.
PropertyGuys.com has developed a system that has helped over 90,000 private home sellers in Canada to sell their homes successfully. PropertyGuys.com is the largest private home sales network in Canada.