Understanding the Hawaii Purchase Contract
This page was written by Bryn Kaufman, Principal Broker and Creator of OahuRE.com. It goes over the most important paragraphs based on our experience handling thousands of transactions. Some paragraphs are skipped as they are self-explanatory, and it makes this page easier to read. Please let us know if you have any questions on your offer.
For those that prefer video instead of reading you can watch short videos on specfic paragraphs of the Purchase Contract.
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Section C: OFFER TO BUY AND PURCHASE PRICE
Section H: CASH FUNDS AND FINANCING
Short Cuts
Paragraphs: B-1, C-1, C-2, D-1, As Is, E-2, E-3, E-4, E-5, F-1, F-2, F-3, F-4, F-5, F-6, F-7, F-8, F-11, F-12, G-2, H-1, H-3, H-4, H-5, I-1, I-6, J-1, J-3, J-4, J-8, J-9, K-2, K-3, L-1, L-2, L-3, M-1, N-1, O-1, O-2 O-3, O-4, O-5, P-1, P-2, Section Q, Coop Broker
Home Inspection, As Is, Disclosure, Termite Inspection, Financing, Survey, Final Walk Through, Cleaning, Special Assessment
B-1 Initial Earnest Money Deposit
It is essential to get your Earnest Money Deposit into escrow on time. Otherwise, the seller has the right to cancel, and we have seen sellers cancel if they have a better offer that came in after yours.
If you choose to take a check to escrow, you must deliver it by the next business day. If escrow is closed, they should have a drop box you can put the check in. The only way you would have more time to deliver the check is if we modified the deadline of B-1 in Section Q.
If you choose a wire transfer, we usually default to having it there within three days.
View Section B-1 from the Hawaii Purchase Contract
C-1 Offer to Buy
We normally allow 48 hours after receipt to respond.
If sellers feel they need more time normally buyers will allow it. Buyers are very interested in the home so unless another home catches their attention they will still be very interested after this deadline has passed.
If the seller needs more time the best thing to do is let the buyer's agent know how much additional time is needed.
View Section C from the Hawaii Purchase Contract
C-2 Purchase Price
The earnest money is normally around 1/2% of the total purchase price and around 1% for the additional deposit.
The additional deposit is normally due 3 days after the removal of the inspection clause which is J-1.
We do not get too hung up on these two deposits. We want the buyer to have enough money in escrow where if they decide to breach the contract they would be concerned about losing their deposits.
Everything in the offer can be countered using a Counter Offer. Sellers that are not satisfied with the purchase price should counter.
We will verbally counter an offer which allows us to go back and forth as needed without having to write up a counter offer each time. Once an agreement is reached verbally, then the counter offer is written up and signed by both sides.
D-1 Addenda
If the home was built prior to 1978 the Lead Based Paint Addendum should be checked. For more information on Lead Based Paint please read how to Protect Your Family from Lead Hazards.
Many agencies use a Standard Addendum and will list it in the other block. Standard Addendums are designed to protect the agency and Realtor making the offer. We have not found anything in a Standard Addendum to be alarmed about.
We also use a Wire Fraud Addendum as wire fraud is on the rise and you want to be aware of how to protect yourself from fraud.
View Section D from the Hawaii Purchase Contract
"As Is" Conditional Addendum
The "As Is" Conditional Addendum sounds intimidating, but if you look at it closer, it does not mean much.
It does not change any of your rights during the inspection. You can still cancel, ask for credit, or ask for repairs.
It does not change the seller's responsibility to disclose everything on their disclosure statement.
It specifically says that the Purchase Contract overrides the "As Is" Conditional Addendum, so if you call for something to be repaired in the contract, this overrides the "As Is" Conditional Addendum.
It does not even help the seller after closing because it specifically says they are still liable for claims where they did not disclose a material fact.
So, what does it do for the seller then? It simply sends a message that they prefer not to do repairs. Buyers can still ask for repairs, but sellers are saying up front that they prefer not to do any.
View "As Is" Conditional Addendum
E-2 Inclusions
Verify E-2 closely. Make sure they do not have anything checked that is not included.
View E-2 from the Hawaii Purchase Contract
E-3 Photovoltaic (Solar) or Alarm
If you have a Solar System or Alarm, this option should be checked. As a seller, you want to provide these documents right away as it does give the buyer an option to cancel if they do not like what they see, so it is best they review these documents during the inspection period.
View E-3 from the Hawaii Purchase Contract
E-4 Inclusion of Furnishings
If there is anything included with the purchase that is not checked in E-2, then a list should be provided to the buyer of additional furnishings.
E-5 Exclusions
If you want to keep something that normally would be included, then it should be listed here.
F-1 Closing
Signing is done 3 to 5 days before closing and it requires signing by hand in front of a notary.
With First American they can also send the notary to you. Learn more about this option.
On closing day, we hear from escrow normally by 9am that you have recorded.
Recording and closing mean the same thing, the house is now owned by the buyer.
On the day of recording escrow can wire the seller funds, or they can pick up a check.
For more about closing please see our frequently asked questions.
F-2 Scheduled Closing Date
The standard closing time is 45 days. Sometimes buyers want a 60-day close. Anything over that is considered too long and should be countered. For cash offers and some conventional offers, a 30-day close is possible.
Keep in mind the signing must take place 2 or more days prior to the closing date.
F-3 Change to the Scheduled Closing Date
Normally a 10 to 15-day extension is requested if needed. Keep in mind either party can extend automatically as needed. They do not need an agreement from the other party to do so.
If the buyer goes over this extension, then they would be in breach of contract and the seller could either cancel the contract and move on to another buyer or negotiate a new closing date. To get an additional extension a buyer might be willing to add some money to help cover the seller's costs for owning the house longer than expected.
View Section F from the Hawaii Purchase Contract
F-4 Escrow
We prefer First American because they are fast to respond to questions and very accurate.
All the escrow companies on the island are good, and they all charge around the same fees.
We use different escrow companies all the time and it is rare that a problem comes up. Here is a rate sheet from First American.
Note that you can sign at the escrow office that is most convenient for you, or if you are out of town they can send a mobile notary for signatures.
To better understand the escrow timeline and more about the escrow process please see our Escrow Q&A.
F-5 Prorations and Closing Adjustments
Sellers do not have to worry about when they paid their taxes as they will get credit for the portion they paid where they will no longer be the owner. Also, sellers should continue to pay their mortgage and HOA fees if a payment is due.
Sellers should contact their insurance providers and utility companies to let them know the closing date, so they do not bill past that date.
F-6 Closing Costs
Note that sellers are paying 60% of the title insurance fee and 50% of the escrow fee. Should the buyer opt for the more expensive title insurance, they would pay 100% of the increased cost. If you would like an estimate on your closing costs, please let your escrow officer know and they can send you one.
View F-6 from the Hawaii Purchase Contract
F-7 Notice on Conveyance Tax
Sellers pay conveyance tax at closing and they do pay a little more if the property will not be the buyer's principal residence. Here is the latest document we have on the conveyance tax rates.
F-8 Assessments
Warning: If there is a special assessment please read F-8 carefully.
If there are any special assessments that being paid monthly this paragraph is very important. Buyers will want sellers to pay any lump sum assessments prior to the Acceptance Date. They might want sellers to pay off any special assessments they are paying monthly on. Sometimes this can be a lot of money depending on the size of the assessment, so if there is a special assessment being paid monthly sellers might want to ask that the buyer keeps paying that assessment after closing rather than paying the entire assessment at closing.
View F-8 from the Hawaii Purchase Contract
F-11 Possession
We do not recommend early occupancy. Possession defaults to at closing.
F-12 Keys to the Property
All keys and garage openers go to the buyer on closing day, but not before.
G-2 Title
Escrow will verify your title is clear. Buyers have the right to cancel if there is a problem with the title report. Title issues are very rare.
G-3 Vesting and Tenancy
The buyer needs to choose their tenancy. Please see this PDF to understand the various options.
H-1 No Contingency on Obtaining Cash Funds
Hopefully this one is checked. If so it is also good to see the verification of cash funds within 5 days just to make sure the buyer has the funds.
H-3 Financing Contingency
Unless the buyer is paying cash this one will be checked. This is the number 1 reason escrows fall out close to the closing date. If the buyer can't get the loan they have the right to cancel. Buyers need this right, so sellers should not counter it, but what sellers should do is make sure there is a pre-approval or pre-qualification from the buyer which states they are approved for this loan.
View H-3 from the Hawaii Purchase Contract
H-4 Buyer's Obligations
Normally the pre-approval or pre-qual has already been delivered before the offer was accepted.
We use 12 days before closing for the buyer to get the conditional loan commitment letter.
Getting a conditional loan commitment letter on time is one thing that is out of the buyer's hands and relies on the lender.
Keep in mind if the lender is going to be late an extension must be requested, otherwise the buyer has breached the contract and the seller may elect to terminate the Purchase Contract.
View H-4 from the Hawaii Purchase Contract
H-5 Seller's Right to Cancel
If the buyer misses any of their loan deadlines the seller can cancel. However, normally it makes more sense for the seller to inquire as to why the deadline was missed and provide the buyer extra days if needed to prevent having to start again with a new buyer.
Low Appraisals - If the appraisal is low the first thing to do is to get a copy of it to look at the comparables used. Getting an appraisal changed is very difficult. If you have a strong issue with one of the chosen comps you can bring it up with the buyer's agent and the buyer's lender. Appraisers will have very good arguments on why they did what they did. Their job depends on doing it right, so they will be prepared to back up the appraisal. Having a bad appraisal is like saying they do not know how to do their job. That is why it is so difficult to get one changed.
If the appraisal is not changed the buyer will most likely request to pay the appraised price. Sellers can either accept this request, negotiate, perhaps to something mid-way between the appraised price and the Purchase Contract price, or stick with the price on the Purchase Contract.
If the buyer can't get the loan at the Purchase Contract price because of the low appraisal, then they would have the right to cancel. If they can still get the loan even though the appraisal is low, then they do not have the right to cancel using H-3.
I-1 Seller's Obligation to Disclose
A complete disclosure is the most important thing a seller can do to protect themselves from being sued in the future.
The rule I go by for the disclosure is if you must think about whether an issue is important enough to disclose, then you should disclose it.
The rule our attorney gives us is you won't get sued for something you disclosed, it is only when you don’t disclose something that you could get sued. Most lawsuits from unhappy buyers have to do with something that was not disclosed.
There is a comprehensive disclosure statement with many questions that sellers will answer and provide to the buyers, normally within 10 days after acceptance.
If a new disclosure comes up, or one that makes a previous disclosure statement not accurate, and this disclosure substantially affects the value of the property, then the seller needs to provide an Amended Disclosure Statement to the buyer. Substantially is a keyword as minor issues that can easily be fixed do not create the need for an Amended Disclosure Statement.
If the buyer is not satisfied with the disclosure statement or amended disclosure statement, they have up to the number of days in I-3 to cancel the escrow and get their deposits back.
The "As Is" Conditional Addendum does not change the seller's responsibility to disclose everything.
I-6 General Disclosures
These are important to read as you might learn more about the property and things you should be concerned about.
J-1 General Inspection of Property Contingency
This is the buyer's opportunity to inspect everything about the property. We recommend using a professional home inspector. Sometimes additional inspections are needed by plumbers, electricians, roofers, etc.
At any time during this period and for any reason the buyer has the right to cancel and get all their deposits back.
After the inspections are completed, but prior to this contingency expiring, the buyer may ask to have repairs done or a credit. A credit is normally an easier solution for the seller and therefore more likely to get approved.
The seller is under no obligation to do any repairs nor give any credit, so it is a negotiating process.
If an agreement is not reached the buyer has the option to cancel and get their deposits back or continue.
Keep in mind the As Is agreement has no impact over this contingency and buyers can still do everything mentioned above even if the As Is was used.
The normal time for this contingency is 7 to 15 days. If it is over 15 days, it will normally be countered.
It is important to understand that if the buyer does not make an election to cancel the Purchase Contract prior to this contingency expiring, then they have waived this contingency. This means even if negotiations are still going on for a repair or credit past the expiration date, then by default the buyer has waived their right to cancel using this contingency.
J-3 Property Condition Maintenance and Final Walk Through
Here the buyer is checking that the seller kept the property in the same condition it was in during the inspection period.
If any repairs were promised the buyer will be looking to make sure they are completed.
The utilities must be on during this walk through.
Issues we see here are some buyers have expectations that the seller is out before the final walk through and the property is cleaned. There is nothing in this paragraph that states that.
Cleaning is covered in J-9 and removal of items from the property is covered in J-8. The dates might all be the same, but to understand when the cleaning needs to be done and all items removed you must review J-9 and J-8.
Once it closes sellers must be out, but not before then.
J-4 Withheld/Collected Funds for Repairs/Maintenance
Escrow won't automatically hold back the seller's money if they find a problem, both buyer and seller must agree to it. We see a lot of confusion on this as many Realtors feel this is an automatic hold back, but the fact is escrow must get signed instructions from both parties to hold back money.
One hopes that everything is OK during the final walk through but if not, you need to work together to reach a solution. This could mean having some funds held back in escrow until repairs or done or offering a credit to settle the issue.
View J-4 from the Hawaii Purchase Contract
J-8 Removal of items from Property
All items need to be removed from the property prior to this date. While you could stay in the property until closing with nothing in the home it will not be very comfortable, so sellers should consider that they must be out of the home prior to this date.
View J-8 from the Hawaii Purchase Contract
J-9 Cleaning
If the 2nd blank is checked then a professional cleaning is needed for the entire home with receipts provided to prove it was done.
If the 2nd blank is not checked then only the carpets need to be professional shampooed. The other cleaning items can be done by the seller or a professional cleaning service.
View J-9 from the Hawaii Purchase Contract
K-2 Survey
We always check this one for our buyers. It is a complete survey. K-1 is normally NA. For condos surveys are not possible.
View Section K from the Hawaii Purchase Contract
K-3 Boundary Encroachments
If a property has encroachments, most of the time, the buyer will continue anyway.
Keep in mind the law of De Minimis allows for 6 inches over the property line without it being considered an encroachment.
For example, if a fence goes 5 inches into the neighbor's yard, that is considered OK. If it goes over 6 inches in, then it is an encroachment.
Most encroachments have been in place for years without an issue, so the new buyer will accept them.
Sometimes they want the seller to try and get an encroachment agreement, and if so, escrow can draft one.
Encroachment agreements are not automatic, the neighbor must sign it, and many times they are not willing to do so.
The buyer can terminate the Purchase Contract if they are not comfortable with the encroachments, and the seller is not able to get an encroachment agreement signed by a neighbor.
L-1 Scope of Termite Inspection Report
Sellers should disclose everything about termites and termite damage. I have seen lawsuits filed against sellers who have not disclosed the extent of the termite damage. Also, make sure nothing is done to hide the damage. You can repair things, but you should disclose you repaired them.
View Section L from the Hawaii Purchase Contract
L-2 Termite Inspection Contingency
Sellers should have the buyer to select the termite inspector. This is for the seller's protection. If the seller selects the inspector and there is a mistake now it is the seller's problem. If the buyer chooses the inspector and there is something missed it is the buyer's issue.
Normally the inspection is done 15 days before closing. Some lenders won't allow it to be older than 30 days and there is no need to do it right away in case the buyer cancels you don't want to pay for it and then have the buyer cancel as you will need a new one for the next buyer.
We can order the termite inspection when the time comes, and it can be billed through escrow.
The seller almost always pays for the termite inspection. Some put actual cost which is OK because we have never seen a termite inspector charge too much.
If there are live termites then you will need to pay for the treatment, which is tenting unless tenting is not possible. If tenting is not possible spot treatment would be recommended.
Seller's select the company to do the termite treatment.
See frequently asked questions about the termite inspection.
L-3 Termite Damage
If there is substantial damage that affects the value of the Property, then you need to update this on your disclosure for your protection. It also does give the buyer the right to cancel if they are not comfortable with this damage.
M-1 Contingency on Documentation Approval
M-1 is not optional. It is mainly for Condos and Townhomes, but it can be applicable for certain Single-Family properties too.
For most buildings with multiple units all the documents are available via a service that charges around $400. This saves sellers time trying get together all the documents and guarantees nothing is missing and normally has the latest documents.
It is critical for sellers to use these condo document delivery service because if sellers try to do it themselves and any documents are missing it could cause a problem after the sale closes.
Buyer has the number of days shown in M-1(e) to review the documents and decide if they want to continue or cancel and get their deposits back.
We recommend getting all documents via email, as there are a lot of pages and this makes it easier to navigate the documents and search.
It is important to note that M-4 states the Brokerage will not explain the meaning of these documents and if there are concerns an attorney should be consulted.
View Section M from the Hawaii Purchase Contract
Section N Rental Property Matters
If N-1 is selected, there should be no tenants or future reservations for the property.
If N-2 is checked, you must deliver all the rental documents that you have based on the list of requested documents. It is important that this is checked if you have tenants or reservations in the future.
View Section N from the Hawaii Purchase Contract
O-1 Termination Due to Default
If the buyer is in default, for example, if they fail to close on time or miss any of their deadlines, you do have the right to cancel. You can try to retain their deposit, but the buyer must agree to it, so many times a settlement is reached, perhaps 50% of the deposits. You could also bring an action for damages, but you would need to hire an attorney to do that and it might not be worth the effort.
If you are in default, then the buyer has the same rights to cancel and bring an action for damages.
There is no time limit in this paragraph.
View Section O from the Hawaii Purchase Contract (2 pages)
O-2 Termination Within Contingency Time Period
If the buyer cancels within the time periods in the Purchase Contract, they are due their full deposits back. For example, if they cancel during the inspection period. If the inspection period expires and they have not let you know what they want to do, then by default they have waived their right to cancel.
View Section O from the Hawaii Purchase Contract (2 pages)
O-3 Termination After a Specified Contingency/Condition Time Period
We normally have 5 days here. This means you would have 5 days after the buyer misses a deadline to let give them written notice that you are terminating the Purchase Contract.
View Section O from the Hawaii Purchase Contract (2 pages)
O-4 Mediation
You are not forced to mediate, but the contract suggests you do. The result is non-binding so if you don't like the result you don't have to settle.
O-5 Arbitration
If mediation did not work out arbitration is an option. You are not forced to arbitrate.
P-1 HARPTA
HARPTA and FIRPTA are not a tax but a hold back to make sure your taxes are paid. You will not pay any additional taxes.
If you are not a resident of Hawaii escrow will hold back money to pay State taxes. If you have tax questions it is best to check with your tax preparer for the best course of action. We are not trained to give tax advice.
P-2 FIRPTA
If you are not a United State citizen, you will have money held back to pay Federal taxes. If you have tax questions it is best to check with your tax preparer for the best course of action. We are not trained to give tax advice.
First, this only applies to sellers, so if you are a buyer you can stop reading. If you are a seller that is a Hawaii State resident and a U.S. Citizen, you can stop reading too, as it does not apply to you. For sellers, you must understand THIS IS NOT A TAX! You will pay not one cent more on your taxes because of HARPTA and FIRPTA. What happened is the state and federal government needed a way to stop tax evaders. Tax evaders were selling their US properties, and then disappearing back to their country of origin without paying their fair share of taxes, just like ALL U.S. citizens pay. The same was happening in the State of Hawaii. Sellers would go back to the mainland and cheat Hawaii out of that tax revenue, even though it is illegal. So, the US Government and the Hawaii State Government got smart about this and said, to prevent tax evasion, we are passing a law that escrow must hold back your taxes due and pay them for you. This way you can't cheat us out of the appropriate taxes due.
Once you file your taxes, you let them know how much tax is due, and if HARPTA or FIRPTA was higher, then you get that money back. So HARPTA and FIRPTA do not cost you one penny, they are not taxes!
Also, if you owe no taxes because of the $250,000 IRS exemption for gain on a residence ($500,000 if married), then there are 3 options regarding FIRPTA:
(1) Apply for an IRS withholding certificate to be exempt from withholding based on gain exclusion.
(2) Withhold FIRPTA tax; apply to the IRS for an early FIRPTA refund based on gain exclusion.
(3) Apply for a refund when you file U.S. Income tax returns the following year based on gain exclusion.
Understand the exemptions for sellers from HARPTA and FIRPTA.
If the seller is not a foreign person, then escrow will withhold federal tax unless an exemption is received. This does not affect the buyer. View the FIRPTA Flow Chart
Reminder: Be sure to check section Q for any special terms.
Section Q Special Terms
Anything that is not standard is written in here so be sure to check this section to see if they did add any special terms.
Cooperating Brokerage Firm's Separate Agreement
On this document make sure the commission percentage the seller is paying the buyer's agent is correct and it should not include GE Tax.
Change to Scheduled Closing Date
Prorations and Closing Adjustments
No Contingency on Obtaining Cash Funds
Seller's Obligation to Disclose
General Inspection of Property Contingency
Property Condition Maintenance and Final Walk Through
Withheld/Collected Funds for Repairs/Maintenance
Removal of Items from Property
Scope of Termite Inspection Report
Termite Inspection Contingency
Contingency on Documentation Approval
Termination within Contingency Time Period