What is Form 21 in the State of Washington?
Form 21 or the Real Estate Purchase and Sale Agreement is the latest version of one of the most commonly used forms in Washington state real estate. Although it was introduced as the new form at the beginning of 2017, many Washington real estate professionals were prepared for it beginning at the end of 2016, when the Washington Association of Realtors began circulating the new version of the old form, which had remained mostly unchanged since 2011. Like the forms before it , Form 21 is a legally binding contract that governs all real estate transactions in Washington State. The form details the terms of sale for Washington real estate to include price, who pays for closing costs, the costs of repairs, etc. Form 21 may be used to make offers to purchase residential or commercial real estate. Because it is a legal document with financial ramifications should any terms be broken, it is highly recommended that parties involved in a Washington state real estate transaction speak with an attorney before signing Form 21 or signing a counter-offer to it.
Important Aspects of Form 21
Form 21 is divided into specific sections that detail the various aspects of a real estate transaction. The first section generally lays out the key details of the property itself. Does it have a school district? Connection to a water source? Any easement? Only when the seller formally accepts the offer can any final alterations be made to the form.
The latter sections address the financial details of the purchase of the property, including any earnest money paid by the buyer, a complete list of any personal property included in the sale (e.g., appliances, equipment or furniture) and details of settlement costs. It also addresses the closing cost method and writing terms of payment. A closing date, settlement agent and the form of title are also part of the contract.
Contingencies represent another major element, and the parties must agree upon their specific terms and requirements to adhere to. This section sets a time frame for each documented contingency, such as the need to close any first mortgage, properties subject to a rental agreement or other specified repairs in the home before closing.
How to Properly Complete Form 21
In order to fill out a Washington State Purchase and Sale Agreement "Form 21" correctly, begin on the top left where the buyer(s) should sign and print their names. The big space in the center of the form is for the street address of the property as well as the legal description from the title insurance report. The bottom block on the right is for the parcel number and the date of the agreement.
Section A is the seller’s information and must be identical to the names on the title, mortgage and other property documents. There is a small box where the seller can list a spouse or partner. If the seller wants to list a limited liability company or a corporation, they should do that in the seller’s name box and then list the official name of the company or corporation box.
The buyer’s information is listed on the bottom left. The same rules apply for an individual, LLC or corporation. Make sure you have the name on the title and the mortgage correctly spelled. It is easy to reverse the names of a husband and wife or a partner in a domestic partnership. Indeed, more often than not, we see this problem.
Section B includes the selling price which is usually negotiated before the parties agree to fill out the contract. Payment methods follow, usually cash, conventional financing or VA financing. Seller financing includes interest only, amortized payments, or a balloon. A lease option is also considered owner financing.
Section C is the closing date. Closing cannot occur less than 30 days from the date of the offer, so use a date that is in the future from the date of the contract.
Section D deals with possession. Is it "as is" or is there something that the seller will fix? If the buyer has an inspection, they typically ask the seller to fix a problem that was discovered. That does not mean the buyer will not discover more problems, so the contract should include the language that "the property will be delivered in its present condition including ordinary wear and tear," meaning "I know that house is old and that I did not discover all the problems."
Utilities are usually shared closing costs. This way, if the buyer takes possession on the day of closing then they will pay for the utilities for that closing date. If the seller holds the closing and lets the buyer move in early, then at the beginning of the next month, the buyer will owe the utility companies for the entire month unless the seller agrees otherwise.
Warranty is section G which states that the seller is not aware of any other problems with the property except as provided in the contract. An inspection is a good idea because a buyer can get out of the contract if they discover a problem that the seller did not disclose.
Much of the rest of the purchase and sale agreement is fairly standard. Make sure, however, that you consider the mandatory arbitration clause and the mediation section. A mandatory arbitration clause means that there will be no trial with a jury. The parties instead will submit their dispute to a panel of arbitrators. Mediation also is a process whereby the opposing parties will meet with a mediator to try to settle the dispute. Mediation is required under the contract before any case can be filed in court.
Make sure there is a legal description of the property in addition to the address. If you are selling a piece of land that does not have an address and may never have one, such as on an Alaskan island, then it becomes even more important to make use of the legal description on a property. The listing agreement usually requires the listing broker to obtain the legal description from the seller’s title insurance report. But the seller should also verify that what the listing broker is putting in the agreement is correct.
The Legal Aspects of Form 21
Form 21 is comprehensive in dealing with the myriad issues which typically arise in a real estate purchase and sale. This is essential to proper function and operation of such contracts in Washington State. Failure to have coverage of these issues could leave one or both parties vulnerable after execution. It is strongly recommended that all parties to the transaction obtain the services of a legal expert, whether in-house or otherwise, to review the agreement before its execution. It is in the best interest of all parties that gaps in the contract be filled and any questions or advice on the interpretation be also clarified at this early stage.
Common Errors and Avoiding Pitfalls with Form 21
Despite seemingly being a fairly simple and straightforward contract, we see common mistakes in the usage of Form 21 all the time. Here are a couple of the most frequent ones and what you can do to avoid them:
– Mistake: Failing to disclose the source of funds
The financial statements can be complex or basic but the point is to disclose the source of funds. The reason why this is so important is because as an all cash buyer you are responsible for verifying where the dollars are coming from. This should be done in conjunction with a CPA or bookkeeper who is familiar with your financial history. If there is a desire to use money from a third party to help with closing costs, be sure to document it. Without proper disclosure, obtaining the loan from a non-qualifying person could be grounds for canceling the contract. Further, lender requirements often include needing a letter from any non-qualifying person who intends to provide assistance. This letter should document the fact that the contribution is not a loan and does not need to be paid back.
– Mistake: Including copies of bank statements, tax returns , credit bureaus and other personal financial statements.
This is not necessary and should be avoided altogether. It creates unnecessary issues regarding confidentiality and exposes a buyer about their financial condition. Keep in mind that even if you don’t intend for the lender to look at statements, there will still be a signed particular (a.k.a. authorization) permitting the lender to look at your entire financials.
– Mistake: Confusion over "on the structure" and "the underlying structure"
Both of these phrases refer to the existing structure on a property that was built before the Title 29 law was changed. Understanding how it works is very important when it comes to purchasing the property in case any deferred assessments are present.
– Mistake: Not checking the "upon acceptance" box.
Just because you checked the "upon recording" box does not mean that the sellers have received and signed. The "upon acceptance" box should always be checked. In fact, the "upon recording" box is now highlighted in gray so it should no longer be used at all.
– Mistake: Failing to include the initialed pages of the Contact Form 21.
All pages of Form 21 must be initialed by both buyer and seller. While it may be obvious, it is still often overlooked.
What to Know About Real Estate Agents and Form 21
The vast majority of purchase and sale contracts for residential real estate in Washington will be based on the Washington State Purchase and Sale Agreement Form 21. Real estate agents working in our state are thankfully permitted to advise their clients in the preparation of Form 21. Agents should be conversant enough in available legal forms to be able to answer most questions about the Forms, to help their clients complete the Blank with the correct information, and to be able to explain what all of this means in the overall process of closing a typical real estate transaction.
Form 21 is quite straightforward. It is drafted simply but with enough flexibility to accommodate most residential transactions. If a fill-in-the-blank form can be said to be "intuitive", it is so. The problem though is that the flexibility can be very problematic if the correct boxes aren’t ticked for the benefit of your client. I have had a number of people contact my office about their Form 21 purchase and sale contract, and I have found that most of the problems are beyond easy repair. For example, I encounter documents where the buyer deposited an earnest money check with the Title Company, but they forgot to tick the box designating which company will be holding onto the check. I’ve encountered documents where the seller makes a counteras a "counteroffer", but fails to check the box to designate that. There are forms which designate that the earnest money shall be applied to the down payment, but then the box indicating that the earnest money is to be applied to the down payment is not checked. These errors can be easily avoided with proper guidance.
Form 21 is filled out by buyers or sellers mostly for use by the lawyers and closing agents who complete the complicated work of conveying title to real property through the transfer of money and preparation of documents. Form 21 itself is not a perfect document, but it is a tool used by each party to convey specific instructions to the closing agent. As with the IRS and many contracts, ambiguity in the language may be used to the advantage of either party. It is simple enough, though, that the direction given by each party can be clearly understood by professionals experienced in the closing of real estate transactions. The biggest danger then is that a mistake is made by anyone preparing or completing the Form. A real estate agent’s work in guiding their client through this form can be invaluable to the client’s best interest.
Form 21 Changes You May Not Be Aware Of
Recently, the Washington state legislature enacted RCW 61.34.020. Under this new statute, a form representing disclosure requirements in real estate transactions is required to contain on its face a notice to a buyer or seller informing the buyer or seller that signing the document creates binding legal obligations. This law requires each Washington State purchase and sale form (including Form 21) to include language on the first page as follows:
"NOTICE TO BUYER AND SELLER: THIS FORM CREATES LEGAL OBLIGATIONS THAT WILL BE ENFORCEABLE AGAINST THE PARTIES BY LAW. BEFORE SIGNING THIS DOCUMENT YOU SHOULD KNOW WHAT IT SAYS! IF YOU DO NOT UNDERSTAND THE PROVISIONS OF THIS FORM OR HOW THEY AFFECT YOUR LEGAL RIGHTS, YOU MAY WISH TO SEEK LEGAL ADVICE . "
This law becomes effective as of July 1, 2015. WRA Form 21 is revised from a sales contract to an offer to purchase and attends to edits necessitated by this new legislation. It looks more like an offer to purchase rather than a contract for sale. There is also a revised Section 21, Buyer’s Due Diligence Period, reflecting WRA’s new approach to due diligence (formerly known as Inspection Contingency), without affecting the commentary or other provisions in the contract. In addition, the revised Form 21 includes new flexibility in how time periods are calculated.
