California has become known as the land of sunshine, adventure, and opportunity, and whether you are a California native looking to relocate or a newcomer to the Golden State, you will find that the California real estate market can pose significant challenges, especially in the hot market of the San Francisco Bay Area. Shocking price tags, fierce competition, and a complex closing process can be discouraging, but thankfully, the dedicated attorneys and staff of Brewer Offord & Pedersen LLP are always available to answer your questions and address your concerns from beginning to end (and beyond) for just about any real estate matter you may find yourself dealing with.
Amongst all this uncertainty, one thing is sure: buying a home in California requires a carefully crafted purchase agreement, and in this article, we will discuss the two types of purchase agreements most used in Bay Area real estate: the California Association of Realtors form agreement and the Peninsula Regional Data Service contract.
Throughout California, the most commonly used purchase agreement used for residential real estate is the California Association of Realtors (“CAR”) Residential Purchase Agreement. However, along the San Francisco Peninsula and in Silicon Valley, another type of form agreement is available, the Peninsula Regional Data Service (“PRDS”) purchase agreement. Not every consumer may be aware that there is a choice in form contracts available to them, and many real estate professionals still do not understand the differences between these two options.
A purchase agreement is a legally binding document that outlines the terms of the sale, protecting both buyers and sellers, and while the CAR agreement and the PRDS agreement share the same goal, their specific language can significantly impact your buying/selling experience, so it is important that you and your agent understand the differences!
Here are some of the key differences between CAR and PRDS purchase agreements:
Property Condition
The condition of the property can become a major point of contention during a sale. The CAR agreement operates on an “as-is” basis. This means the seller is not obligated to fix anything unless negotiated beforehand. As a buyer, you may find yourself shouldering the responsibility for repairs if you proceed with the CAR agreement, potentially leading to unexpected costs.
The PRDS contract, however, takes a more buyer-friendly approach. It stipulates that the property must be delivered with all major systems (like electrical, plumbing, heating) in working order. If problems arise during inspections, the seller might be required to fix them using a licensed contractor, potentially at their own expense, before closing the sale. This provides buyers with greater peace of mind and a higher level of functionality upon move-in. One important thing to note is that the contract can operate on an ‘as-is’ basis, but it is not the default like with the CAR contract.
Contingencies
Contingencies are provisions of an agreement which allow either party to back out of the deal under specific circumstances, giving the cancelling party legal cause to cancel the contract. Both agreements offer inspection and loan contingencies, but how they handle appraisals differs. The CAR form treats appraisal and loan contingencies as separate entities, with parties able to retain both contingency or one or the other. For example, waiving the appraisal contingency (meaning you accept the purchase price regardless of the appraised value) won’t affect your ability to back out if financing falls through due to a low appraisal.
The PRDS contract, however, might not include an appraisal contingency by default. If it’s included and you waive it, you could be stuck moving forward with the purchase even if financing collapses due to a low appraisal. This highlights the importance of carefully reviewing and potentially adding an appraisal contingency to a PRDS agreement, especially for first-time homebuyers relying heavily on mortgage approval, as well as buying properties that are older or not in the best condition that might not appraise.
Financial Fine Print
The agreements also differ in how they handle the financial aspects of the transaction. The CAR form offers a dedicated section for specifying details of specific loan types like FHA (Federal Housing Administration) or VA (Department of Veterans Affairs) loans. This can be helpful for buyers utilizing these government-backed programs. The PRDS contract places less emphasis on specific loan details but does have a separate line for seller financing, which can be attractive to buyers seeking alternative financing options.
Fees and Responsibilities: Who Pays What?
The division of fees and responsibilities also varies. The CAR agreement allows some flexibility in how escrow fees and title insurance costs are divided between buyer and seller. This can be negotiated based on specific circumstances or industry standard. The PRDS contract, however, often requires the seller to cover both the escrow fees and the owner’s title insurance policy. Additionally, PRDS offers a separate timeframe for addressing title issues that may differ from other inspection contingencies. This can be advantageous for buyers if unforeseen title problems arise.
Choosing Your Champion: CAR vs. PRDS
Ultimately, the best choice depends on your role in the transaction.
- Sellers: If you prefer an “as-is” sale with more control over repairs and potentially lower costs, the CAR agreement might be right for you.
- Buyers: If you prioritize a functional property with potential seller-funded repairs and a higher level of protection, the PRDS contract could be more advantageous.
Consulting the Experts
Of course, this is just a simplified overview of what is ultimately a complex process, and specific agreements will have variations throughout. It is vital to work closely with and communicate with your real estate agent and attorney to understand the nuances of each agreement in the context of your specific transaction. They can guide you towards the option that best protects your interests in the competitive California real estate market. Remember, a well-chosen purchase agreement can make the difference between a smooth journey to homeownership and a bumpy ride filled with unexpected hurdles. So, get informed, ask questions, and choose wisely.