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hi in this lesson we're going to talk about purchase contracts including the offer and acceptance and earnest money we're talking about purchase contracts we can't forget the Louisiana Purchase when President Jefferson back in the early 1800s purchased the Louisiana territory from France what a deal that was well most of your transactions are not going to be that big I presume and when we talk about purchase contracts we have to understand that the purchase contract actually serves three purposes the first is a copy of the buyers offer so commissioners rules here in Arizona require that as soon as someone signs an agreement they must be given a copy as soon as practicable so give the buyer a copy of the offer once they sign it the second purpose is once the seller signs and there's a full acceptance between the parties it becomes a legally binding contract and finally it serves as escrow instructions sometimes people execute separate escrow instructions but in most instances in Arizona the purchase contract serves as the instructions to the escrow company so let's talk about the status of that purchase contract and let's start with a discussion of the offer so an offer by definition it is an invitation typically by the buyer offered to the seller to entered into a contract to purchase that property so the buyer then is the offer or remember oh are always gives EE always receives so in the initial stages of a purchase contract when a buyer makes that offer that buyer is the offer or the seller is the offer E so that offer remember is an invitation to enter into a contract make a note for yourself the offer is not in and of itself a contract to purchase the property it's simply an offer an invitation a wish if you would and it states the buyers terms and that buyer that offer or can withdraw that offer at any time prior to the other party accepting it so let's say for example that the buyer makes an offer on a property and gives the seller until midnight tomorrow to accept the offer but after sleeping on it overnight as buyers often do the next morning the buyer decides that they don't want to purchase the property they contact their agent that agent now has a duty to contact a listing agent and withdraw that offer at that particular point in time the offer is dead please realize commissioners rules require and good business practice of course requires that all offers be presented so sometimes there's a there's a feeling by a buyer's agent that the listing agent may not actually be giving their offer similar treatment or similar similar standing as an offer that the listing agent might have or that some other agent might have it's so important to remember that the listing agent typically is in control here but the listing agent has a duty to the seller to make sure that all offers are presented not only did the commissioners rules require that but the fiduciary duty of disclosure to their seller client I'm talking about the listing agent now dictates that they keep the seller informed of any and all information that includes of course all offers and as we've said in a previous lesson that would even include verbal offers it's important to realize that when a licensee is acting as a principal in other words the licensee is the buyer making the offer they must disclose that he or she is licensed real estate agent conversely if the seller is a licensee that has to be disclosed in the purchase contract as well so let's continue on in our offering process here let's say that the seller decides not to accept the offer as written but wants to make some changes oftentimes that's price that terms closing date etc so now a counteroffer is prepared by the listing agent on behalf of the seller the seller now becomes the offer or in that counteroffer the buyer the offer e so let's take a look at the counteroffer by definition it's an offer made by the offer e back to the offer or which modified that offer or is original offer any change any change is a counteroffer now the original offer or once a counteroffer is made is no longer bound to the terms of the original offer so let's say that a buyer made an offer for $200,000 and the seller looked at that and decided to make a counteroffer at 2:10 and that offer that counteroffer was presented to the buyer and the buyer said No Deal well the seller said well okay then I'll take two two hundred the seller would not just be able to sign that original offer and say hey we've got a deal because of the fact that the seller made the counteroffer the buyers original offer is null and void at that particular point in time so for a binding contract to actually exist there must be not only an offer but an acceptance and written communication of that acceptance back to the offer or so let's go back to the simplest premise and that is the buyer makes an offer the seller then accepts that offer as written do we yet have a contract the answer is well what we have to do is we have to get written acceptance and communication of that acceptance back to the offer or so technically speaking when the seller signs we don't have a contract it's not until the buyer receives written communication of that acceptance from the seller through of course the buyer's agent that we hacked that we actually have a binding contract so for acceptance and communication once there we have that acceptance and communication we have a binding agreement and the buyer said to have equitable title the buyer now has a contractual interest in this property and this is important to understand the buyer doesn't have an equity in the property the buyer doesn't have what we'll define when we talk about deeds of trust as equitable title but the buyer has a contractual arrangement a contractual interest in that property and that buyer should problems arise could actually tie that property up in litigation potentially for years to come so it's so important that the parties understand that we're dealing with a binding contract to buy and sell a piece of real estate here and this contract is binding on the heirs of either the buyer or the seller purchase contracts remember do not terminate at the death of either party so let's say that the seller passed away prior to closing the buyer could force the sellers estate to live up to the end - there under the agreement conversely if the buyer passed away their estate could be bound to live up to the contract to purchase the property now some of you are probably thinking well gee what if the buyer what if the contract was contingent upon the buyer getting financing well in that case of course if the buyers death or one of the buyers deaths would prevent them from qualifying then of course the contract would not be upheld but let's assume a simple situation cash and all contingencies have been satisfied it's a couple of days before closing and the buyer passes away the buyer's estate assuming they have the funds to do it could be bound to purchase that particular property now purchase agreements are generally deemed to terminate if the property is condemned in other words the government exercises eminent domain or destroyed in actual fact if the property is condemned prior to the sale taking place the buyer could say well look I want the I still want the property and I'll deal with the government or if the property was damaged substantially or destroyed in a fire or in a in a storm of some sort the purchaser could still say I want the property and the purchase contract would be upheld all right so but typically the buyer is not going to want the property in these circumstances but for the purposes of the test basically a purchase agreement terminates if the property is condemned or if it's destroyed now in most purchase contracts there's going to be some form of earnest money so let's first of all define earnest money earnest money is money put into the transaction by the buyer to show that the buyer is earnest sincere in making the offer on the property now most people think that the buyer sets the earnest money that's certainly not true the earnest money is just one of the terms and conditions in the contract so that earnest money is really a negotiated item it's negotiated between the buyer and the seller if the buyer if the price is acceptable to the seller but maybe the earnest money is not the seller has the right to make a counteroffer asking for more earnest money and of course it's not required in a transaction I mean it's pretty rare that we don't have earnest money but this is not the consideration the consideration is actually the price the buyer has offered and so the fact that they've reduced their agreement to writing but as a listing agent you always want to have a substantial amount of earnest money this binds the buyer much more earnestly if you would to the transaction and the buyer is much less likely to back out for no valid reason but if they didn't have very much earnest money in the transaction you can see how the buyer would say well go ahead take my earnest money I'm just not purchasing the property and this earnest money is usually held and handled by the buyer's broker the earnest money is deposited as we'll see in escrow typically but it's done so by the buyers broker when there is a final accepted contract so in Arizona what our statutes say is the form of earnest money must be stated so when you have a purchase contract is the earnest money going to be a personal check is it a cashier's check maybe the earnest money is actually not given to the buyer's agent at the time the offer is prepared maybe what happens is since the buyer doesn't even have a checkbook and many times today buyers don't have checkbooks any longer so it may be that the earnest money will be deposited within 24 or 48 hours after the seller's acceptance but the form of the earnest money and when it's to be deposited in the case of a wire situation needs to be stated in the contract the sales persons job so your job as a salesperson is to turn that earnest money over to your broker what the statute says is promptly in most instances however this broker will authorize the salesperson to hold on to that earnest money until such time as there is a binding agreement so what the law states also here in Arizona is that the broker must place the earnest money either in the brokerage trust account or in escrow a license escrow company here in the state of Arizona and they're supposed to do that immediately unless otherwise agreed to by the parties in the contract so let's take a few different possibilities here first of all if they did deposit the earnest money immediately and by the way that term immediately is generally thought to mean no later than the close of the next business day but can you imagine a buyer making an offer let's say the they gave the agent of $5,000 in earnest money and the seller is out of town and the negotiation goes back and forth over a period of many days should the broker be depositing their earnest money in escrow when we don't have an actual binding contract well the way this is handle the law says the broker should do that but the way it's typically handled is the contract a large majority of contract forms that are used out there specify that the earnest money will not be deposited until after there is a complete acceptance of the agreement by all parties that way the broker or the salesperson can hold on to the earnest money until such time as we have a binding contract by the way trust accounts are not required for earnest money now we'll see it another lesson that trust accounts are required for property management accounts but for earnest money what every broker that I know of and brokers throughout the state do is they have the buyer right to check to the escrow company and that way the escrow company handles it and the broker does not does not have to maintain a trust account for earnest money now of course there can't be any commingling commingling of funds means mixing or mingling the clients funds with the brokers funds or the salespersons funds so sometimes it might seem easier let's say a salesperson is given a thousand dollars earnest money in cash which by the way most brokerage firms don't want you to take cash but let's say that the salesperson took cash and rather than deposit it because it was over the weekend so what the salesperson does is actually just put it in her pocket and then writes a check to the escrow company for the thousand dollars on Monday morning that would be considered commingling or if the broker actually mixed or mingled deposited that earnest money check in the brokers operating account that would be commingling even though the broker or the salesperson didn't spend it mixing or mingling money with the personal or business accounts of the broker or sales person is deemed to be commingling another term you should know and and slightly different than commingling is conversion conversion means you've actually gone out and spent that money you've converted it to to a nice dinner somewhere or maybe a new car whatever or however much earnest money there might have been now if the contract is rescinded in other words if the parties agree to go to the separate ways the broker has to follow the sellers instructions here relating to the earnest money the broker cannot just automatically keep a portion or the entire earnest money feeling that they're owed that money as their commission so remember the broker has to follow the clients instructions in all of these circumstances so that's our discussion on the offer and acceptance process and earnest money in the next purchase contract lesson we'll get into some of the clauses that are typically found in purchase contracts