“Hey - did you hear that the farm down the road just sold?” Have you ever heard someone ask that question? When you find yourself in that situation, you might be curious to learn what it sold for. To find out, you give the local auctioneer a call, but they tell you, “it hasn’t closed - so I can’t tell you the price.” You find out that the sale price hasn’t been confirmed and that the closing date isn’t for another 45 days! This leaves a lot of time for changing of minds, confusion and miscommunication. We live and work in a country where owning real property is part of the foundation of our economy. A country where the elected government has gone to great lengths to protect property rights and ownership. A purchase agreement is a tool used to create clarity when transferring property ownership, but to many - it can appear complicated.
Contracts Make Friends
At FarmlandFinder, we’re a firm believer that contracts make friends. I’ve had many business owners reminisce about “the days when a handshake was all we needed” or (and I’m a victim of this sentiment) “the dullest pencil is sharper than the brightest mind.” When handed a contract, experiencing nerves is common - especially given the legal language and potential lengthiness of it. A wise man once told me that, “a good contract makes friends.” Over the years, I’ve come to wholeheartedly believe that statement. So let’s dive into why the real estate industry, specifically the farmland market, uses a Purchase Agreement as a tool and hopefully demystify parts of this legal document in the process.
What is a Purchase Agreement?
A purchase agreement is a vital communication instrument. Each valid real estate contract will have a few critical characteristics:
- It will be a written contract, not a verbal commitment
- It represents an exchange of value between two parties, which is typically an exchange of land for money.
- There will be an offer made and the acceptance of the offer between two parties.
- It will outline the terms of the deal, which include the price, closing date and any contingencies.
- The type of deed used to transfer title (e.g. general warranty deed, deed of trust, quitclaim deed, etc.) will be clearly identified.
Time is Money
Apart from the basic features of a contract, purchase agreements for real estate often contain specific real estate terms related to due diligence. Many purchase agreements will provide a set amount of time that the buyer may evaluate a property before moving to close the transaction. The buyer often may elect to terminate the contract during this time period at no cost, so a long due diligence period is essentially providing the buyer with a substantial period for a buyer to have a change of heart. Additionally, a purchase agreement will frequently include a process for resolving any title or survey issues that may appear on the title commitment or survey for the subject property.
A Purchase Agreement Creates Clarity
When there is vague language in an agreement, it opens up the contract to be interpreted differently by different people. This also applies to lengths of time as well. Over time, motivations change and interpretations can change right along with it. Just because someone agrees to the terms the first time reading through the contract, does not mean they won’t find a way later down the road to change their understanding of it. If the language isn’t clear enough it may open up the agreement or contract to the reader’s interpretation which can lead to some heartburn and in turn, can prevent the contract from closing. Creating a contract or purchase agreement that is clear and concise as possible is key in preventing miscommunication or misinterpretation down the road.
In summary, real estate contracts (aka: a purchase agreement) even for the simplest acquisitions, are much more complicated than might otherwise be apparent. Trying to buy or sell land on a handshake opens up both parties to misunderstandings, broken deals and even potential litigation. To enter into a purchase agreement without competent legal counsel is the same as barreling down a highway without brakes - getting going is simple, but avoiding a catastrophic crash is more difficult the faster you are going or the deeper into the transaction you get.