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The Agreement of Purchase and Sale (Part 3)

Posted July 20th, 2013 under pitfalls, say what?, smart buying, smart selling.

In Part 2, we talked about the irrevocable period, fraud, and notices.

Continuing through the standard agreement, we're going to talk about which items are included and excluded from the sale.

What's Included?

Continuing from where we left off, we come to Paragraphs 4-6.

These paragraphs deal with chattels, fixtures, and rental items, and are crucial to having a smooth deal.

These paragraphs are often misunderstood, leading to arguments over property, and sometimes to thousands of dollars of additional costs.

Chattel vs. Fixture

To clarify, a chattel is any item in the house that is free-standing, meaning it's neither built-in nor permanently attached to the main structure.

Meanwhile, a fixture is any item that's permanently fixed to the house, whether it's by nails, bolts, screws, glue, cement, or whatever.

For example, a stove is a chattel, but a counter-top stove set into the counter is a fixture.

A picture hung on the wall is a chattel, but the hook it hangs on is a fixture. Curtains arechattels, but mounted curtain rods are fixtures.

A light or chandelier that's hung from an outlet box in the ceiling is a chattel, but the outlet box is a fixture.

Finally, sheds and other free-standing outbuildings are also considered chattels.

Why the Difference Matters

Normally, all fixtures are part of the sale, but any chattels are not.

If the Seller wants a fixture excluded, or the Buyer wants a chattel included, this must be specified in the contract.

When writing the contract, it's best to be on the safe side. If there's an item that's important to you, don't make assumptions about whether it's a chattel or a fixture.

Instead, write it into the agreement explicitly. This applies to both Buyers and Sellers! The more you clarify in the contract, the smoother your transaction will be.

Rental Items

A rental item is anything that you've had installed in the house and pay a monthly fee for.

Some items that may be rental items are your furnace, water heater, alarm system, central air conditioner, and water softener.

A rental item is not the same as an installment purchase. When you buy on installments, each payment you make reduces the total amount owing, whereas rental fees continue indefinitely.

Why Rental Items Matter

Paragraph 4 of the standard contract reads as follows:

"Unless otherwise stated in this agreement or any schedule hereto, Seller agrees to convey all fixtures and chattels included in the purchase price free from all liens, encumbrances or claims affecting the said fixtures and chattels."

This means that if you, as the seller, have a rental contract or payment plan on any item included in the sale, you are responsible for paying it off by the closing date!

I have seen thousands of dollars spent on buying out a rental contract because the seller had mistakenly sold the item to the buyer. Imagine signing up for a 3-year alarm contract, then needing to pay it all at once!

This is why it's essential to know if any fixtures are rentals or installment purchases.

Assuming Rental Contracts

Some rental contracts allow the buyer of a home to assume the contract, which means the contract responsibilities are transferred to the buyer.

As the seller, you must check your rental contracts to see if they are assumable. If so, make sure you list the item in the Agreement of Purchase and Sale.

If not, make plans to buy out or cancel the contract when you sell.

In Summary

Make sure you understand the meaning and significance of chattels, fixtures, rental items, and installment purchases before you sign an Agreement of Purchase and Sale.

If in doubt, do your research and ask your agent. A clear understanding and a clear contract will help you avoid any nasty surprises.

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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