Here’s the next installment of The Washington State Bar Association’s info on the Real Estate Process. This section attempts to help clarify the topic of Purchase and Sale Agreements.

Purchase and Sale Agreements

Often called the “earnest money agreement,” a purchase and sale agreement is prepared to specify all the terms and conditions of the transaction. This document states the price and terms under which the buyer is obligated to buy and the seller is obligated to sell. It is a legally binding contract which establishes the respective rights and responsibilities of the purchaser and seller. An agreement for the sale of real estate is void and unenforceable unless it is in writing and signed by the buyer and seller.

The buyer often makes a deposit, known as an earnest money deposit. This “evidence of good faith” is usually in the form of a cash deposit, but it may also be a promissory note (or signed acknowledgment to repay a debt at a later date). The amount can vary and the deposit is usually applied to the down-payment obligation or to the buyer’s share of the closing costs.

Importance of the Agreement
The importance of the purchase and sale agreement cannot be overstated, and it is advisable to have a lawyer review the document before signing. If this is not possible, a condition can be included to provide that the transaction is subject to the approval of the buyer’s (and/or seller’s) lawyer within a specified number of days.

A buyer may lose the deposit and be liable for damages if an agreement is signed and he or she fails to abide by its terms. A seller who fails to perform after signing the agreement may also be liable for damages.

A preprinted form is frequently used for purchase and sale agreements, with specific terms added by completing blanks on the form. A specially prepared agreement or addendum may also be used in place of, or to supplement, a preprinted contract.

In addition to naming the parties, price and terms of the purchase, a purchase and sale agreement should also include the following items:
•    legal description of the property;
•    condition of the title (or legal right to ownership) and assumed debt;
•    warranties of title (restrictions, rights or limitations) ;
•    condition of property and of zoning or use rights (if applicable);
•    prorations of taxes, special assessments, obligations and prorations regarding insurance premiums;
•    stipulation of who bears costs for such items as transfer fees, state revenue stamps, etc.;
•    financing, if it is a contingency of the purchase;
•    complete terms and documents to be used if the seller is supplying financing and receiving security for such financing (with copies of any such documents attached);
•    items of furnishings, fixtures or appliances to be included or excluded;
•    right of inspection (if any) given the buyer;
•    date of possession; and
•    conditions under which an offer may be canceled, as well as provisions for return or forfeiture of the deposit.

Disclosure Statement
In the purchase and sale of an existing home, the sellers must complete a disclosure statement regarding the home. Disclosures cover a variety of topics, including the condition of legal title, the availability of essential services to the home such as sewer and water, and a listing of the history of significant repairs or changes in the condition of the house.

Unless the buyer waives review of this statement, the seller must deliver a completed statement to the buyer for review within a certain time after the purchase and sale agreement has been signed by both parties. The buyer then may elect to terminate the transaction by giving timely and appropriate notice to the seller. If the buyer does not object, then the disclosures are deemed to be acceptable to the buyer.

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Next up on the list… Financing Agreements.

Here’s the second part of this info from the Washington State Bar Association on the Real Estate Process, which attempts to help explain the topic of Listing Agreements.

Listing Agreements
The usual form of contract between a seller and broker is a listing agreement. It is usually a printed form, but the amount of commission, the duration of the agreement and duties of the broker are all items that may be negotiated. There are several forms of listing agreements, with great variation in terms, liability, duties and services rendered.

Most brokers request an exclusive listing (or “exclusive right to sell”), a written agreement entitling the listing agent to a commission regardless of who sells the property. The agreement may also provide for a commission even after the listing agreement has expired, if the property is sold to a prospect produced by the broker during the term of the contract.

An exclusive agency listing designates one broker as the “exclusive agent” with entitlement to a commission unless the owner effects a sale without assistance from any broker.

An open listing contract may be given to any number of agents, and often allows the property owner to sell the property directly. In the event of a sale, only the broker who has found a buyer receives a commission.

A multiple listing association enables participating brokers to pool listings and share commissions in order to give maximum exposure to the property.

A broker who produces a purchaser who is ready, willing and able to buy the property on the terms specified in the listing agreement (or otherwise acceptable to the seller) is normally entitled to a commission. The fee (typically a negotiated percentage of the selling price) should be stipulated in the agreement.

Although contracts may sometimes provide for payment of a commission only if a sale is completed (or “closes”), the seller usually must pay a broker who performs according to an agreement, regardless of whether the sale was ever consummated. In other words, if a sale fails to close because a seller reneges, the seller generally must pay the commission.

A broker’s role may be negotiated by the parties to the agreement, but the broker is usually the seller’s agent. In representing the seller’s interests, a broker must report all offers and proposals. The broker or agent sometimes acts as an intermediary, delivering offers and counteroffers between the buyer and seller. Rates, terms and services vary with the type of listing, geographical area and other factors.

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Next up in the Real Estate process: Purchase and Sale Agreements.

The Washington State Bar Association recently put together some information aimed at providing helpful insights into the real estate process for home buyers and sellers. This information is rather lengthy, so it’ll appear here as a series of blog entries.

Here’s the first part, which provides some helpful insights on starting the home buying / selling process.

Explanations of the real estate process, and some of the primary forms used in buying or selling a home

Buying or selling real estate may be the largest single investment — and one of the greatest satisfactions — of your lifetime. Along with a substantial financial commitment, such transactions usually involve risks, technicalities and legal considerations.

Starting the Process
Before signing any document or paying any money, you should carefully examine your requirements, resources and needs for professional help.

An experienced, reputable real-estate broker may be indispensable. Although the seller ordinarily hires the real-estate broker and agrees to pay the fee, it is possible for a buyer to make such arrangements.

The Washington Administrative Code requires agents to disclose whether they represent the buyer or seller (or both). Verbal and/or written disclosure is required before showing homes for sale. In addition, the disclosure must be confirmed in a separate paragraph in a written purchase and sale agreement.

Types of Documents Used
Various documents are used to specify rights and obligations in real-estate transactions. Preprinted forms, individually drafted forms, or a combination may be used; your lawyer can assist you in determining which are best for your situation. Typical documents include listing agreements, purchase and sale agreements, and financing agreements.

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Up next… Listing Agreements.

J.D. Power and Associates, the global firm best known for its customer satisfaction research on new-car quality and long-term dependability, recently announced the results from its 2009 Home Buyer/Seller Study. The study announced Coldwell Banker as the top-rated agency for home sellers across the country.

Coldwell Banker Top Among Sellers
This year’s research consisted of feedback from 2,801 respondents who bought or sold a home between April 2008 and June 2009. Coldwell Banker ranked highest among consumers in the four factors examined for the home-selling experience: agent (34%); marketing (34%); office (17%); and package of additional services (15%).

Keller Williams Top Among Buyers
Keller Williams ranked first in terms of customer satisfaction for home buyers. Overall satisfaction for home buyers was determined by examining three factors: agent (47%); office (28%); and package of additional services (25%).

Agent Most Important Factor in Satisfaction
According to this year’s research, both buyers and sellers still identify their agent as the most important driver of overall satisfaction. However, the importance of additional services has increased significantly: up 12 percentage points among buyers and 8 percentage points among sellers.

Proportion of First-Time Home Buyers Up
The study also found that the proportion of first-time home buyers has increased considerably: up to 56 percent in 2009, from 44 percent in 2008.

More information on this year’s findings can be found here, or you can watch the video summary on this year’s study from JD Powers here.

I recently shared some notes on the local job market that Hart Hodges from WWU’s Center for Economics and Business Research sent me. In addition to the local job market, Hart also had some thoughts on the impact of the economy on several other items, including inflation, retail sales and the public sector.

Here’s Hart:

Inflation? Maybe for some.

Surely we will see inflationary pressures as a result of all the stimulus activity. Right now, however, there is no inflationary pressure from wages and a tremendous amount of productive capacity to keep inflation at bay for a while… or so the reasoning goes.

One thought to keep in mind is we might see inflation-type problems in some sectors – such as higher interest rates on bonds, price increases in health care, etc. – while some sectors (think manufacturing) struggle with the threat of deflation. In other words, the average rate of increase in prices may be tolerable in the future, but the spread around that average could increase and present new policy challenges.

Retail – Cautious consumers could mean a slow, bumpy road to recovery

Household deleveraging means less spending on consumer goods… period. We are going to experience in the coming years a correction of sorts in the retail sector. Articles appeared years ago saying that we’d overbuilt our retail sector. The articles cited Home Depot versus Home Base and K-Mart versus Target to show where contractions might be expected. Now we have consumers adjusting their savings rates as well. These corrections suggest to me a slow and bumpy recovery.

The following graphic (from the San Francisco Federal Reserve) shows the run-up in household debt in the US. The US ratios are compared to those that occurred in Japan in the 80s… with the subsequent “lost decade”. The graph implies that declines in consumer spending in the US (as savings rates get back to normal) will be a drag on the US economy … or at least dampen the recovery.

Public Sector – state governments, Whatcom County hit hard

The public sector is also, I would guess, going to be slow to recover. Less consumer spending means less revenue for governments from retail sales (as well as less from the Real Estate Excise Tax, or REET).

The following graph (taken from a recent issue of The Economist magazine) shows how hard state governments were hit in this recession relative to previous recessions. The decline in state spending matters in our area, where government accounts for approximately 18% of the job base and 20% of the wages.

3rd Qtr Outlook – year-to-year comparisons

… and speaking of retail sales. I’d expect the retail figures for our region to be gloomy again in the third quarter. You may recall that the economy in our area remained active until October 2008. When we look at economic data, we often compare it to the same period a year earlier. For example, we might compare taxable retail sales in the third quarter of this year to the third quarter from last year (to be sure we compare activity in similar seasons).

As such, we may see that retail sales in the third quarter of 2009 were flat compared to the third quarter of 2008. We just need to remember that 2007 was a record year and most of 2008 wasn’t too bad. Sales figures may appear strong in the fourth quarter, because when we compare data from the fourth quarter of 2009 to the fourth quarter of 2008, the point of reference will be lower.

When looking for insights on the local economy, one resource I typically turn to is Hart Hodges. Hart is a good friend of mine, and he is also the Director of Western Washington University’s Center for Economic and Business Research.

Hart recently shared some notes on the local job market with me, and I thought I would post some of those insights here on our CBMA blog. So, here’s Hart:

Whatcom Co. Job Market – Signs that we’re near the bottom?

The job market has – quite obviously – weakened over the past year. In both Whatcom County and the state as a whole, there were 4.6% fewer jobs in June 2009 compared to the peak of the market in spring 2008.

The following graph shows employment levels (nonfarm jobs) in Washington State and Whatcom County from January 2000 through June 2009.

While the employment graph shows similar percentage declines in the number of jobs from 2008 through June 2009 in Whatcom County and Washington State – one can note two differences. The first is how Whatcom County “missed” the recession of 2001, with its jobless recovery. The decline and slow recovery experienced in many places is clearly evident in the series for Washington. The other difference is simply that Whatcom County saw job growth in June 2009.

The increase in the number of jobs in Whatcom County in June could be a sign that we’re near the bottom of the recession. But again, look carefully at the Washington State series. The recovery from the 2008/09 recession could be as slow or slower. Note: the time it has taken the job market to recover after a recession has gotten longer with each recession since 1983.

You might be interested in the labor area summaries prepared by the Employment Security labor economists. You can access the summaries here.

Looking at the most recent local housing numbers, most numbers are moving in the right direction, with Bellingham neighborhoods coming to life and move-up buyers re-entering the market.

Recovering Market
The variable results we saw in July reflect what we’d typically expect from a recovering housing market—a few steps forward for some neighborhoods, a step back for others. Whereas comparisons to a year ago reflect some substantial gains, on a month to month basis, we’re probably going to experience some “spongy” results for a while.

Tax Credit Motivation
First time buyers are motivated by a looming deadline for the federal $8,000 tax credit, which is propelling activity. There seems to be a feeling of urgency to take advantage of this program before it goes away on November 30, 2009.

Pending Home Sales Stable
The Whatcom County housing market continues to show mixed signals, but the most important number, pending home sales, is trending in the right direction.

Pending sales are contracts that are accepted by a seller but have not yet closed. They represent the most current activity and show how active buyers are in the market. Nationally, the Pending Sale Index has increased for five consecutive months. Even though Whatcom County was about even from July 2009 to July 2008, the trend is positive. I expect the Pending Sales Index to continue rising over the next few months.

Inventory Levels Flat
While the local housing inventory levels have ebbed and flowed during the past year, recent numbers are pretty flat from this time last year. Currently, our market is at about 7.8 months of inventory (which is the current amount of inventory divided by the average monthly sales).

Closed Home Sales Down Slightly
Unfortunately, the number of closed home sales in July 2009 was down 3% from a year ago, logging 213 sales versus 220 in July of 2008. After June sales posted only the second consecutive month of year-over-year increase in about two years, it is disappointing to see fewer sales in July.

The difference in the performance of closed and pending sales is due primarily to the fact that many local sales are simply taking longer to close. Short sales, where the net proceeds to the seller will not cover the outstanding debt on the property, are taking 60 to 90 days to close, as the buyer and seller must wait for the bank to approve the sale.