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The Agreement of Purchase and Sale (Part 1)

Posted April 24th, 2013 under pitfalls, say what?, smart buying, smart selling.

Over the last few years, a number of changes have been made to the standard ("pre-printed") Agreement of Purchase and Sale.

Some of these changes make it easier to understand the contract, while others were made to improve ambiguous wording that agents would have to correct through their own additions. Unfortunately, a few make it harder to understand.

Over the next few issues, I will discuss some of these changes, how they change the process of buying or selling a home, and what you need to know before signing on the dotted line.

Let's Start at the Top

The standard form now has an opening line that reads: "This Agreement of Purchase and Sale dated this ___ day of ________ 20__".

This seems simple enough, but has created significant confusion. The date indicated on this line refers to the date on which the offer was prepared—not the date it was presented, nor the date it was signed. (The signing date goes at the end, beside your signature!)

The preparation date exists as a reference point, so that someone can refer to "your offer of March 3rd" without any confusion, regardless of when anybody signs the offer, regardless of when any amendments are made, and regardless of when any additional documents are signed or agreed upon.

That may seem like a useful feature, but people sometimes get confused and think that this "preparation date" is the date used to calculate whether a condition has been fulfilled (or failed to be fulfilled).

Under normal circumstances, the preparation date has no functional purpose, and is not referred to by any other clause or condition. It's a "label" and nothing more. The deadlines for various conditions will be based on other dates, such as the signing date.

All About Deposits

Under the Deposit clause, there is a new paragraph explaining how the deposit must be delivered, when the buyer must hand it over, and how it will be held.

Previously, the time limit was not spelled out, and there was some uncertainty as to how long the buyer had to deliver the deposit before the buyer would be in breach of contract. The new paragraph makes things clear for everyone and avoids the buyer dragging things on.

Another addition is the passage reading: "... the Deposit Holder shall place the deposit in trust in the Deposit Holder's non-interest bearing Real Estate Trust Account and no interest shall be earned, received or paid on the deposit".

In the past, when interest rates were as high as 10% or more, a deposit that sat in the bank for two or three months could accumulate a substantial amount of interest. Though any such interest would legally belong to the buyer, some Brokerages would keep the interest for themselves.

The new clause in the base agreement makes it clear that interest will neither be earned nor paid.

However, in practice this clause is often overridden by an attachment called Schedule B, which some Brokerages are misusing as a way to keep skimming interest from buyers.

A New Way to Skim Interest

Schedule B states that the deposit will be placed in an interest-bearing account. It also specifies the amount of interest that will be earned in that account, and the amount that will be paid to the buyer.

In many cases, the Brokerage will deduct an administrative fee of around $50 for their book-keeping. This is reasonable, since they are obligated to issue a T5 slip to the buyer for interest earned.

But some Brokerages go much further, stating that they will pay interest at a rate as much as 2.5% lower than the posted rate! With the administrative fee already deducted, what is the justification for once again keeping some of the buye's interest?

Protecting Yourself

If your deposit is likely to earn significant interest (based on the deposit amount and current interest rates), you should protect yourself.

Talk to your agent and explain that you are willing to pay a reasonable fixed fee for administration, but not a percentage.

If you make an offer on a property where the Brokerage has requested a Schedule B, your agent can modify the Schedule to reflect your wishes.

The selling Brokerage is obligated to present the offer to the seller, and the seller has the option to accept your changes to Schedule B, whether the Brokerage likes it or not.

If the seller wants to negotiate with you, then they have every reason to accept the changes to Schedule B that will eliminate the skimming.

Want to know more about the Agreement of Purchase and Sale? Just ask me, I'll be happy to help.

--Peter

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