What is a Purchase and Sale Agreement?
A purchase and sale (PSA) is a legally binding contract between a buyer and a seller for the purchase of a piece of property. This contract is crucial in formalizing the intent of both parties and helps to ensure that all aspects of the sale are clearly defined and agreed upon before closing. For the real estate market in Maine, a purchase and sale agreement is particularly important . Such contracts are often used to help buyers secure financing, and are a requirement in property conveyances in the state. A purchase agreement conveys an interest in property, identifying the property (thus making it distinguishable from other properties) and clearly describing the rights of the seller and buyer.
The Components You’ll Find in Maine’s Purchase Agreement
Maine purchase and sale agreements do a lot of heavy lifting in the context of a real estate transaction. It provides more protection to the buyers than most warranties, it’s the vehicle that describes closing procedures, and it also summarizes the terms of how your new home is secured and which contingencies must be fulfilled before you’re compelled to complete the purchase.
At the very least, a Maine purchase and sale agreement needs to have the following components covered, in addition to the specific negotiations between the buyers and sellers:
- The precise location and description of the property being bought and sold. Street address alone is not enough. The purchase and sale agreement should provide the lot number, the range and number(s) for the recorded book and page, as well as a fairly detailed description of the boundaries of the property. If there is a dispute after closing over the boundaries of the house, it can be difficult to resolve those boundary issues in the context of a boundary dispute if you don’t have a good description of where the boundaries actually lie.
- The names and addresses of all the parties involved in the transaction, including buyers, sellers, attorneys, and insurance companies. It’s also essential that if there are multiple buyers, that all of the buyers are included on the purchase and sale agreement. If one buyer is omitted from the contract, they may still have a claim to ownership – but you may have to pay them a share of the property’s value out of your own pocket.
- The price you’ll pay on the home and the deposit you’ll put down once the contract is finalized. It should also include contingencies, such as what will happen if the mortgage cannot be obtained, or if the home fails inspection. The date to complete these contingencies, known as the "forfeiture date," should also be included – as this sets up the timeline for closing the sale, and helps you plan for additional contingencies.
Legal Prerequisites in Maine
Maine has its own requirements, regulations and disclosure requirements for sales. The purchase and sale agreement must comply with Maine law. The sales contract must include the Transfer Tax Deposits (Uniform Real Estate Transfer Tax Declaration), separate line item together with the statement of Tax Proration. The standard in Maine is to prorate the transfer tax which means at settlement buyer pays their portion. An option for a seller in Maine to avoid Capital Gains Tax is to leave the sale of a home as an installment sales contract. There are specific disclosures that must be given to all parties and a sales contract must be structured properly so that the buyer has the option of not purchasing the property. There are very specific laws that must be followed as well as numerous statute references that must be followed to comply with Title 36 MRSA Chapter 571 as amended and Title 9-A MRSA Chapter 74 as amended.
Typical Purchase and Sale Contingencies in Maine
Contingencies are a fact of life in real estate transactions. They serve to protect both the buyer and the seller and generally put a time limit on certain responsibilities or obligations. There are a variety of contingencies that are commonly included in purchase and sale agreements, although many times an attorney will modify them or insert different contingencies according to the situation at hand. If the property is in a homeowner association, for example, a contingency would be added to obtain the association documents and give the Buyer a certain period of time to review them. One of the most common contingencies is for inspections. Buyers and sellers usually have a thirty day period to review and complete any inspection issues that arise. Similarly, Contingencies also exist for financing. Many times, a buyer will enter into a purchase and sale agreement before having spoken with a lender about the general terms of his or her loan, and will need time to arrange for the financing. At the same time, lenders will rarely approve a loan until the applicable title opinions are submitted. If the buyer and seller are unable to quickly get the financing arranged and satisfy all of the contingency deadlines, the sale will fall apart. Appraisal contingencies can be especially important in a declining real estate market and if a lender has agreed to lend money to a buyer in this market, it is almost always necessary to have an appraisal included as a contingency. Many other types of contingencies can be added to a purchase and sale agreement, and some of them carry more value than others. It goes without saying that the more contingencies that a buyer enters into with a seller, the less attractive the offer will look to the seller, as the seller knows that there are more things that need to occur for the sale to close. Similarly, if a seller enters into a purchase and sale agreement and then later decides not to proceed, the burden on the seller to make sure the contingencies activates is considerably heavier so the seller many times inserts time limits for every item related to the contingency since they want to be out as quickly as possible. Bottom line: between the buyers and sellers there is always a push and pull about how many contingencies should be in the purchase and sale agreement. Ultimately, including the right contingencies is a responsible course of action for both the buyer and the seller and they should take the time to choose the ones that best suit their needs.
How to Put Together a Purchase and Sale Agreement
It is important to draft a Purchase and Sale Agreement in consultation with an attorney. The terms and conditions should be specific to your transaction and any blank spaces for dates, time frames and other contingencies should be discussed with your lawyer. When confronted with a lengthy, complicated agreement, the prudent consumer will spend a few hours getting direction from his or her attorney and making changes to the standard forms in order to better reflect the terms and conduct a smart purchase and sale. Most standard forms in use by professionals in Maine, such as the home buyers and sellers alliance, are a good starting point, but lawyers typically make alterations to fit their individual clients. In any event, if it is a complicated transaction with financial victim potential, such as investment properties with tenants and pre-existing leases, buyers and sellers should sit down with their attorney, review the Agreement, and ensure that they are informed to the degree necessary in negotiating and drafting a final agreement that best satisfies their needs.
Negotiation of Purchase Agreement Language
Not satisfied with the listing price? They thought you were crazy for offering such a low price? Well, many times the deal or the price is subject to negotiation. So, negotiation, in a sense, is part of the purchase and sale process. As with seller disclosures, other points of negotiation can include: sale price; contingencies to closing; indemnification clauses; closing attorney; deed delivery; title insurance; occasion of possession; home inspection process; and representation (in Maine, a home buyer has the right to be represented by a real estate attorney). Be advised , however, if you are using a real estate broker, it is important to make sure they are not pushing you into making your offer higher than you should go or to settle on a price that is higher than the property is worth. Remember, your broker works under the agency representation rules where the responsibilities of a sub-agent are to do what the real estate agent who hired them tells them to do. Make sure that you have a clear idea of what you are looking for before you enter into an agreement.
The Real Estate Agent and Attorney’s Roles
Perhaps the most common way to draft a purchase and sale agreement in Maine is through the use of a real estate agent and an attorney. Most real estate agents have purchase and sale forms that are specific to their agency. Some will allow you to use your own form but they will often not. The form may be slightly different depending on the agency so if you are buying or selling you should always make sure the form is the one for your transaction. It is important to note that if you are selling and refuse to use the agent’s form the other party can still use the form where the transaction does not involve that agent. Because the seller is usually amenable to signing the agent’s form, the buyer essentially has no choice.
Sometimes an attorney will have a good form completely different from the real estate agent’s form. If that is the case, you will have a choice. As a seller, be aware that the real estate agents know their forms, and not all attorney forms favor the seller.
In any case, even if you do not have an agent to help you prepare a purchase and sale, it is wise to have an attorney review the contract before you sign it. You would be amazed at the things which go into contract and then affect the title to the property. If there has been a real estate agent involved in the acquisition of the property, many of the usual issues with a purchase will be resolved before the sale of the property so an additional lawyer cannot hurt you.
Closing the Deal: Completing the Agreement
Once both Buyer and Seller have reached an agreement in principle on the terms and conditions of a purchase and sale agreement, the next step is to work toward closing the transaction. Closing is when the actual sale and transfer of the property occurs. Closing is generally conditioned upon the satisfaction of any conditions precedent set forth in the purchase and sale agreement, as well as the fulfillment of all of the obligations of Buyer and Seller. In most cases a formal closing will be held where the documents are exchanged and funds are transferred between the parties. In certain circumstances, if it is not possible or practical to hold a formal closing, the transaction may be able to proceed in some other manner. Once the funds have been paid and all other conditions of the agreement have been satisfied, the Seller’s attorney will distribute the funds to Seller, or wherever directed by Seller, and will, at or shortly after closing, deliver to the Buyer, or Buyer’s attorney, a fully executed Recordable Deed. The documentation should also include a settlement statement which contains a breakdown of the financial details of the transaction. The Buyer’s attorney will record the transfer deed with the registry of deeds in the county in which the property is located. While the closing process varies from transaction to transaction, certain documents are always required and must be properly executed in order to convey title. In addition to a deed, a notarized bill of sale for personal property, a Warranty of Possession, a non-foreign affidavit and a settlement statement may be required. Depending on the circumstances, compliance with local laws or ordinances may also be required.
Common Pitfalls and How to Avoid Them
To avoid problems, it’s essential that the parties know what they intend to buy and sell. Have facts changed since the purchase and sale began? Are all boundaries in place? Is there any environmental issue? What’s intended use for the property?
Buyers may enter into Purchase & Sales Agreements without sufficiently considering these issues. Believe it or not, a buyer once entered into an Agreement to buy a gas station without considering if it would be permitted to operate a gas station at the location. Not surprisingly, the deal fell through when the parties determined the intended use was incompatible with the zoning.
Questions often arise around financing, deposits, inspections and post-closing obligations that can cause problems down the road. To avoid problems from these types of issues, the parties should perform appropriate due diligence prior to entering into a Purchase and Sale and then ensure the Agreement addresses their obligations. There is no substitute for a carefully negotiated Purchase and Sale Agreement, which enables the parties to adequately provide for, among other things, contingencies, such as financing and title concerns .
Many Buyers pay lots of good money for a survey and title work before they even sign a Purchase and Sale Agreement. There are good reasons to do so, such as to determine the boundaries of the property, rights-of-way and easements, and encroachments on the property. But surveys and title work may be old and may not address current questions. It’s recommended that Buyers ensure the Agreement expressly addresses the scope of the survey and title work that the Agreement requires. For example, if a Buyer intends to rely on a new survey that will not be available until after signing the Agreement, the Agreement can require the Buyer to close only if it’s satisfied with the new survey.
If a Buyer is going to do all the work, the Agreement can provide that the Buyer will be reimbursed for its costs at closing or deducted from the purchase price. If the Seller is to get a credit in some form, whether cash at closing or a reduction in the purchase price, the Agreement can provide that the Seller will compensate the Buyer for the cost of the work.