What is a Purchase and Sale Agreement?
A purchase and sale agreement is a legally enforceable contract between a buyer and a seller for the sale of real estate. For wholesalers, this document is the foundation of their business . As a wholesaler, you are going to need purchase and sale agreements to submit to sellers whose property you have identified as a good deal. The seller’s acceptance of the agreement creates a legally enforceable contract and secures a potential deal.
Key Components of a Wholesale Agreement
A purchase and sale agreement for wholesalers is a little different than the standard retail agreement. However, some of the purchase and sale agreement items are standard no matter whether you are dealing in retail or wholesale.
Some mandatory items in a purchase and sale agreement include:
Item description: this must describe the item you are selling right down to its SKU number. The more specific the description, the less room for argument later.
Pricing: Wholesale pricing is always cheaper than retail pricing. Your pricing must reflect that, and it should be billed clearly in multiples. For example if you are selling toothpaste at $4 per tube, then you don’t really want someone ordering one tube. You want them to order 10 and get them at a bulk rate. In this case, your price for 10 tubes would be $36 (instead of $40). For volume-based selling that’s less than one-off selling, your price per unit must be cheap enough to allow for profit.
Production and delivery terms: Your manufacturing capabilities and terms of delivery should be clarified. This will be based both on what you are selling as well as how big the order is. You may have flexibility in terms of delivering orders based on size, or you may have flexibility based on the type of item being produced.
Payment terms: Terms for wholesaling aren’t always as strict as they are for retail. Your payment terms with most wholesalers involve them paying upfront or shortly after delivery. You want to be sure this is clearly stated in the purchase and sale agreement, along with any late fees that will be enacted in the event the time frame isn’t met.
Dispute resolution: All purchase and sale agreements should have some sort of dispute resolution clause. You want to know how you will address potential problems that arise. This could mean that you have to make allowances if there is a shortage in your production run. Or, it could mean having a strict return policy for defective product. You want to be sure that your agreement addresses these type of issues up front, and that you know what your rights are should a problem arise.
Whether you are wholesaling or retailing, there are some basic elements that you should always include in a purchase and sale agreement. You may need to tailor certain aspects of the agreement to your industry, but keep in mind these basic elements for your sales agreement.
Legal Essentials for Wholesale Wholesalers
When writing a purchase and sale agreement for wholesale purposes or entering into such an agreement, there are legal considerations any wholesaler should have in mind when drafting the agreement or when entering into the same. For instance how the purchase and sale agreement is being executed, which parts of the agreement are applicable, and other factors depend on the applicable laws of the countries that are involved.
If the purchase and sale agreement covers the transactions in one country, merely the internal laws of that country shall apply. But if the sales are also covering another country or involve international matters there might be additional legal issues to consider. For example how an unconditional promise is being made and in what form, such issues are dependent on the domestic laws of the country where the promise is being made. Also sales agreements that are valid in one country might not be considered as valid in others, even if damages are required to pay for a breach of the agreement. And damages that can be requested from the creditors in a country might not be valid in another country as well.
The approach is different for agreements that cover international trade. Such agreements shall comply with the Uniform Customs and Practice for Documentary Credits (UCP) rules as published by the International Chamber of Commerce. Even further, the United Nations Convention on Contracts for the International Sale of Goods governs the international sale of goods between parties from different countries for the most part.
If a wholesaler is covering transactions that span multiple different countries, it is often necessary to specify which domestic laws shall be dominating the situation and applicable to the sales agreement, or to refer to the UCP as the dominating law for the purpose of the purchase and sale agreement. In addition, it is prudent to use the United Nations Convention on Contracts for the International Sale of Goods as a guideline for international transactions regarding formalities, export regulations, or storage regulations.
Why an Explicit Agreement is Important
A clearly stated purchase and sale agreement benefits wholesalers because it helps protect their interests, clarifies expectations between parties, and reduces or removes risks. The agreement constitutes the entire deal and guides parties through the process after the signature is affixed. A well-defined agreement will provide your corporation with some level of protection by laying out the rights of the parties, as well as the sufficiency and quality of the things being sold. Also, in the event of a lawsuit, the agreement will be used as a roadmap by the court to determine the obligations of the parties and any potential damages.
Meanwhile, a detailed agreement ensures that the buyer and seller are on the same page when the deal is closed, which may help avoid expensive post-closing disputes. For wholesalers and other real estate investors, there are some key clauses to add to a purchase and sale agreement: a due diligence clause, an inspection clause, and a closing clause. These three clauses collectively provide buyers with a period of time to "flip" an investment and exit the deal if they determine that the property is not viable for the agreed upon price. It is important to remember that while such clauses will help your business, an overly protective agreement may scare away sellers.
What to Avoid in a Wholesale Agreement
As an investor looking for properties to flip, it is crucial that you put the deal under a purchase and sale agreement to secure your position and obligate the seller to sell you their property. However, many times, investors (wholesalers) will attempt to use these generic purchase and sale agreement forms without understanding the terms in the contract. Below is a short list of mistakes that I have seen investors make with their contracts:
- Description of the property – It is important in your agreement to clearly state what you are purchasing. Make sure that you have the correct legal description of the property as well as the address of the property.
- Financing – Many agreements have a financing clock on them, which requires the buyer to get financing within a certain time period. If financing is not obtained by that time, the buyer has to exercise due diligence or lose their deposit. In the case of a wholesale deal, often times, there is not a financing contingency and the investor will be obtaining their financing after closing, if at all. This is an area in the contract that is ripe for market manipulation. For example, if the buyer knows that he is going to flip the property immediately after closing and sell the property no later than 30 days after closing, you can request financing be obtained within 30 days after closing and that the buyer’s loan to purchase the property from the seller be in the form of a bridge loan to your corporation . This will allow the investor time to close their deal, put the house on the market, and sell it for a profit. This, of course, would require that you find a lender who will approve financing on a bridge loan. Many times, the investor will take out a 70-75% loan on the initial property purchase and use that money to pay the seller and put the property into the investor’s LLC name before selling it after a couple months of ownership.
- Time periods – Make sure that all time periods are reasonable. Often times research into the property will show that repairs may be extensive, which could potentially require a longer time period to obtain financing or assign to an end buyer.
- Omitted items for a good deal – Many times I see a good deal where the wholesaler agrees to some or all of the closing costs or agrees to forfeit their deposit to the seller. These agreements should be clearly stated to avoid any confusion at the closing. Often times, these concessions have not been contemplated which can cause an agreement to fall apart.
- Representations made by the seller – Make sure that you have clearly placed the duties on the seller to investigate the property prior to closing so that the seller cannot sue you later. This will include changing the closing date to accommodate the seller’s schedule, obtaining the requisite documents from the lender, and satisfaction of the loan prior to closing. By including such language, you give the seller the responsibility to look out for their own interests while protecting yours.
How to Customize Agreements for Various Products
We noted above that there are many factors that you will need to consider to make the purchase and sale agreement work for your unique situation. These factors apply to any purchase and sale agreement, but some products have additional factors that you need to consider. After reading this section, you will understand if your product requires you to add language to your agreements to make them work or whether your product is fine using any of the generic agreements above.
Perishable Products
When dealing with perishable products, such as fruits and vegetables, you need to have terms in your purchase and sale agreement that account for the time and place of delivery, as well as liability when a product spoils. The provisions with regard to damages, inspection and liabilities in this situation are detailed below. It is also important that any perishable products are carefully inspected at the time of delivery. In some cases, if there is a dispute over whether a product has spoiled or was unacceptable at the time of the contract, it may be necessary to actually determine who was responsible for holding the product. In many cases it will then be determined hands down who spoiled the product by the mere fact that one party held control of the product longer than the other.
Bulk Purchases
Purchasing products in bulk require different methods of inspection than standard products. Having bulk users inspect the product is often times impractical. Therefore, you may want to consider adding detailed language that accounts for this additional liability. One suggestion is to allow for a 30 day inspection period from shipment. During this period, the other party can come to visit your facilities to inspect the product. This way, the risk is fairly shared and liability is limited for both parties.
Market Limitations
Sometimes the market you are selling into has a limited number of buyers. In these situations, it is important that you add terms to specify whether your agreement is exclusive to one buyer or one territory. Another point to consider is in regard to availability. If you only have a few loyal customers who regularly buy from you, you may want an agreement that allows you to not sell your product to your wholesaler offering a higher price. This is often seen with regular retail customers who frequently pay a bit more for a big buy.
Quantity Changes
When a wholesaler is purchasing a large quantity of products, they often times do not know the exact quantity they wish to purchase. However, the price of the products changes as the quantity increases. Because of this, you may want to add terms that will give the purchaser a little wiggle room in order to change the amount in which they are buying without increasing or decreasing the price.
Additional Note
Before drafting a purchase and sale agreement, you should sit down with your business lawyer and discuss the types of products your business buys and sells, in order to find out which types of products you will need additional terms for.
Wholesale Templates and Resources
Having access to a purchase and sale agreement template can expedite the drafting process. A quick search reveals several options for wholesalers. While all such templates should be reviewed by an attorney, many industry experts indicate that the following templates provide a decent starting point:
• Bcadventures.net Purchase Agreement Template
• BiggerPockets.com Purchase Agreement Template
• Realestatetools.net Purchase Agreement Template
• Thehouseandhomeshopper.com Purchase Agreement Template
• Housebuyersbible.com Purchase Agreement Template
• Diligentinvestor . com Purchase Agreement Template
For a small fee, the Legal Templates Website provides a step-by-step tutorial to drafting a purchase and sale agreement. This website can be very useful for real estate novices, as the step-by-step guide suggests what clauses to insert. Above all, a purchase and sale agreement template should be used merely as a starting point. Ultimately, the terms should reflect the wishes of both the seller and the wholesaler. In addition, the final product must be in compliance with the laws and regulations of the state in which the agreement will be executed.
