An Explanation of the Residential Purchase Contract
Introduction
This document provides a detailed, section-by-section analysis of the Arizona Association of REALTORS® (AAR) Residential Resale Real Estate Purchase Contract, updated August 2024. This contract is a legally binding agreement. The content herein is for informational purposes and is not a substitute for professional legal or tax advice, which is recommended by the contract itself.
Chapter 1: Pre-Transaction Requirements (Buyer Attachment)
The Buyer Attachment, which should be provided to a buyer before any offer is submitted, outlines critical preliminary diligence.
- Legally Binding Agreement: The buyer is notified they are entering into a legally binding agreement and must read the entire contract before signing.
- Disclosures and Inspections: The buyer is instructed to review the Seller’s Property Disclosure Statement (SPDS) and investigate any unclear or blank answers. The attachment recommends hiring qualified inspectors for various property components, including general home, heating/cooling, mold, pest, pool, and roof .
- Verification: It is the buyer’s responsibility to verify material details such as square footage and whether the property is on a sewer or septic system.
- Insurability: The buyer must confirm the ability to obtain homeowner’s insurance for the property during the inspection period.
- Financing: Buyers are directed to apply for their loan promptly and provide all requested information to the lender to meet contract timelines. Failure to do so may result in contract cancellation and potential liability for damages.
- Document Review: Timelines are established for reviewing key documents. The title commitment must be reviewed within five days of receipt. CC&Rs and other governing documents must also be reviewed within five days of receipt.
- Walkthrough: The buyer is to conduct a thorough pre-closing walkthrough to ensure the property’s condition is acceptable, as it may be too late to address issues after closing.
- Wire Fraud Warning: A prominent warning is issued about wire transfer fraud, advising parties to always independently confirm wiring instructions before sending money and not to transmit sensitive banking information via email .
Chapter 2: Section 1 – Property Definition and Terms of Sale
This section establishes the foundational elements of the sale.
- 1a-1b. Parties and Premises: Identifies the Buyer and Seller and defines the “Premises” to be sold via address, Assessor’s Number, and legal description . The Premises include the real property, improvements, fixtures, appurtenances, and specified personal property.
- 1c. Purchase Price and Earnest Money: Specifies the full purchase price and the amount of earnest money to be deposited. The form of earnest money may be a personal check, wire transfer, or other agreed-upon method .
- 1d. Close of Escrow (COE): Defines COE as the date the deed is recorded. Buyer and Seller must perform all acts in sufficient time to allow COE to occur on the specified COE Date. The buyer’s failure to pay the required closing funds by the scheduled COE, if not cured after a cure notice, constitutes a material breach and subjects the earnest money to forfeiture. All funds must be in U.S. currency.
- 1e. Possession: Seller must deliver possession, occupancy, and all keys and means to operate locks to the buyer at COE, unless otherwise specified in writing.
- 1g. Fixtures and Personal Property: This clause details what conveys with the property.
- Fixtures: All existing fixtures are included in the sale. The contract lists numerous examples, including built-in appliances, ceiling fans, draperies, attached floor coverings, storage sheds, and smart home devices like video doorbells and automated thermostats .
- Owned Items: Specific items are included if owned by the seller, such as solar power systems, security systems, water softeners, and in-ground pool/spa equipment .
- Additional Personal Property: Items such as a refrigerator, washer, or dryer are not standard but may be included by checking the appropriate boxes . Any such property is transferred with no monetary value and must be free of liens.
- Leased Items: Leased items are not included in the sale. The seller must deliver notice of all leased items within three days of contract acceptance. The buyer then has a specified period to provide notice of any disapproved leased items.
Chapter 3: Section 2 – Financing Contingencies and Obligations
This section governs the financing portion of the transaction and does not apply to an all-cash sale.
- 2b. Loan Contingency: The buyer’s obligation to complete the sale is contingent upon obtaining loan approval without Prior to Document (PTD) conditions no later than three days prior to the COE Date. By this deadline, the buyer must either: (i) sign all loan documents; (ii) deliver notice of loan approval without PTD conditions; or (iii) deliver notice of inability to obtain said approval .
- 2c. Unfulfilled Loan Contingency: If, after a diligent and good-faith effort, the buyer is unable to obtain loan approval and provides timely notice of this inability, the contract shall be canceled, and the earnest money returned. If the buyer fails to deliver such notice, the seller may issue a cure notice, and a subsequent breach could entitle the seller to the earnest money.
- 2d. Ineligible Contingency Claims: A buyer cannot claim an unfulfilled loan contingency due to: (i) the failure to lock an interest rate and points by separate written agreement with the lender, or (ii) the failure to have the necessary down payment or other funds to close.
- 2l. Appraisal Contingency: The buyer’s obligation is contingent upon an appraisal of the Premises for at least the purchase price. If the property fails to appraise for the purchase price, the buyer has five days after receiving notice of the appraised value to cancel the contract and receive a return of the earnest money. If the buyer does not cancel within this five-day period, the appraisal contingency is waived.
- 2j. Seller Concessions: If agreed upon, the seller will credit the buyer a specified amount (either a percentage of the purchase price or a flat dollar figure). These concessions may be used for any buyer fee, cost, charge, or expenditure to the extent allowed by the buyer’s lender.
Chapter 4: Sections 3 & 4 – Escrow, Title, and Disclosures
These sections cover the roles of third parties and the seller’s disclosure obligations.
- Section 3. Title and Escrow:
- The contract itself serves as the escrow instructions.
- The Escrow Company is instructed to obtain and deliver a Commitment for Title Insurance to both parties, along with complete copies of all documents that will remain as exceptions, such as CC&Rs, deed restrictions, and easements.
- The buyer has five days after receipt of the Title Commitment to provide notice to the seller of any disapproved items.
- The seller is obligated to provide, at their expense, an American Land Title Association (ALTA) Homeowner’s Title Insurance Policy or a Standard Owner’s Title Insurance Policy if the former is not available. The buyer is responsible for the cost of the lender’s title insurance policy.
- Section 4. Disclosure:
- 4a. SPDS: The seller must deliver a completed AAR Residential SPDS form to the buyer within three days of contract acceptance. The buyer has the Inspection Period or five days after receipt of the SPDS, whichever is later, to provide notice of any disapproved items.
- 4b. Insurance Claims History: The seller must deliver a written five-year insurance claims history (or for the length of ownership, if shorter) within five days of contract acceptance. The buyer’s disapproval period mirrors that for the SPDS.
- 4c. Foreign Sellers (FIRPTA): The Foreign Investment in Real Property Tax Act (FIRPTA) applies if the seller is a “Foreign Person”. This requires that up to 15% of the purchase price be withheld for federal income taxes unless an exception applies. A buyer who fails to withhold may be held liable for the tax. The seller must deliver a certificate to Escrow indicating their Foreign Person status.
- 4d. Lead-Based Paint (LBP): If the property was built before 1978, the seller must: (i) notify the buyer of any known LBP; (ii) provide the buyer with any LBP risk assessments or inspections in their possession; and (iii) provide the buyer with the official “Disclosure of Information on Lead-Based Paint and Lead-Based Paint Hazards” and related pamphlets . The buyer is granted an “Assessment Period” to conduct an inspection for LBP and may cancel the contract based on the results .
Chapter 5: Sections 5 & 6 – Condition, Due Diligence, and Inspections
These sections address the property’s condition and the buyer’s right to investigate.
- 5a. Condition of Premises: The buyer and seller agree the Premises are being sold in their present physical condition as of the date of contract acceptance. However, the seller is obligated to maintain and repair the Premises so that at COE they will be in substantially the same condition. The seller must also remove all personal property not included in the sale, along with all debris.
- 5b. Warranties that Survive Closing: The seller warrants that they have disclosed all known material latent defects. The seller also warrants that payment in full has been made for all labor and materials furnished within the 150 days preceding COE and that information regarding the sewer or on-site wastewater system is correct to the best of their knowledge.
- 6a. Inspection Period: The buyer’s Inspection Period is a negotiable timeframe (defaulting to 10 days) to conduct all desired physical, environmental, and other investigations at their own expense. The buyer must keep the property free of liens, indemnify the seller from any liability or damages arising from the inspections, and provide the seller with copies of all obtained inspection reports at no cost.
- 6i-6j. Inspection Period Notice and Resolution: This process is strictly defined.
- Notice: Prior to the expiration of the Inspection Period, the buyer must deliver to the seller a single, signed notice of any items disapproved.
- Election: In the notice, the buyer must elect to either (1) immediately cancel the contract or (2) provide the seller with an opportunity to correct or address the disapproved items.
- Seller Response: If the buyer gives the seller an opportunity to correct, the seller has a specified timeframe (defaulting to five days) to respond in writing. A failure to respond is deemed a refusal to correct any items.
- Final Resolution: If the seller is unwilling or unable to correct any of the items, the buyer may cancel the contract within five days of the seller’s response (or the expiration of the response period) and the earnest money shall be released to the buyer. If the buyer does not cancel within this five-day period, they are deemed to have elected to proceed with the transaction without the correction of any disapproved items. Verbal discussions do not extend these time periods.
Chapter 6: Section 7 – Remedies and Dispute Resolution
This section details the procedures for handling contract defaults and disputes.
- 7a. Cure Period: If a party fails to comply with any provision of the contract, the other party must first deliver a notice specifying the non-compliance. The non-complying party then has three days to cure the issue. The failure to comply only becomes a breach of contract after the Cure Period expires.
- 7b. Breach: In the event of a breach, the non-breaching party may cancel the contract and/or proceed with any claim or remedy available in law or equity. The contract specifies that in the event of a buyer’s breach, the seller may, at their option, accept the earnest money as a reasonable estimate of damages (liquidated damages) and their sole right to damages. This option is mandatory for the seller if the buyer breaches due to failure to provide the required financing notice or inability to obtain loan approval after waiving the appraisal contingency.
- 7c. Alternative Dispute Resolution (ADR): The parties agree to first mediate any dispute arising from the contract, with costs paid equally. If mediation does not resolve the claims, they shall be submitted for binding arbitration. However, either party may opt out of binding arbitration by providing written notice to the other within 30 days after the conclusion of the mediation conference.
- 7e. Attorney Fees and Costs: In any dispute or claim between the buyer and seller related to the contract, the prevailing party shall be awarded their reasonable attorney fees and costs.
Chapter 7: Section 8 – General Provisions
This section contains miscellaneous clauses that govern the contract’s interpretation and execution.
- 8b. Risk of Loss: If any loss or damage to the Premises occurs between contract acceptance and COE (e.g., from fire, flood, or act of God), the risk of loss is on the seller. If the cost to repair the damage exceeds ten percent (10%) of the purchase price, either the seller or the buyer may elect to cancel the contract.
- 8e. Time is of the Essence: This clause signifies that the performance of all obligations within the specified timeframes is a material term of the contract.
- 8h-8i. Calculating Time Periods: All references to days are calendar days. In computing time periods, the day of the triggering act or event is not included, but the last day of the period is. Acts that must be performed “three days prior” to COE must be performed three full days prior; for a Friday COE, the act must be performed by 11:59 p.m. on the preceding Monday.
- 8j. Entire Agreement: This contract, including any addenda and attachments, constitutes the entire agreement between the parties and supersedes any other written or oral agreements. Any modifications must be made in a writing signed by both seller and buyer.
- 8l. Cancellation: A party wishing to exercise a right of cancellation must do so by delivering a notice stating the reason for cancellation to the other party or to the Escrow Company. Cancellation becomes effective immediately upon delivery of the notice.
- 8o. Terms of Acceptance: An offer becomes a binding contract only when the seller’s signed acceptance is delivered to and received by the buyer’s broker by the deadline specified in the offer. The buyer retains the right to withdraw the offer at any time prior to their broker’s receipt of the seller’s signed acceptance.
