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Real Estate Purchase Agreement: Essential Guide for Landlords, Investors, and Tenants

Comprehensive guide to understanding real estate purchase agreements for tenants living in properties being sold, real estate investors with multiple rentals, and individual landlords selling rental properties.

Introduction

A Real Estate Purchase Agreement is a legally binding contract that outlines the terms and conditions of a property sale between a buyer and seller. Whether you're a tenant concerned about your living situation when your landlord decides to sell, a real estate investor expanding your portfolio, or a landlord looking to sell your rental property, understanding this document is crucial to protecting your interests and ensuring a smooth transaction. This guide breaks down the key components of a Real Estate Purchase Agreement and provides specific insights for tenants, investors, and landlords navigating property sales.

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Key Things to Know

  1. 1

    A Real Estate Purchase Agreement is legally binding once signed by all parties, so review it carefully or have an attorney review it before signing.

  2. 2

    Tenants generally maintain their rights under existing leases when a property is sold, as the new owner must honor the terms until the lease expires.

  3. 3

    Contingencies protect buyers by allowing them to back out of the deal under specific circumstances without losing their earnest money.

  4. 4

    Landlords selling rental properties must disclose existing leases, security deposits, and any known property defects to potential buyers.

  5. 5

    Real estate investors should include contingencies for reviewing tenant payment histories, lease agreements, and property financial records.

  6. 6

    The purchase agreement should clearly state whether the property will be delivered vacant or with tenants in place at closing.

  7. 7

    Security deposits must be transferred from the seller to the buyer at closing, with proper accounting and notification to tenants.

  8. 8

    Financing for investment properties typically requires larger down payments and carries higher interest rates than primary residence loans.

  9. 9

    Local landlord-tenant laws may impact how a property sale can proceed, including requirements for tenant notification and rights of first refusal.

  10. 10

    Tax implications of selling rental property differ significantly from selling a primary residence, including potential capital gains tax and depreciation recapture.

Key decisions before you file

Before you file a Real Estate Purchase Agreement in Michigan, a few decisions shape the document: which option to choose and what each one means. The Real Estate Purchase Agreement guide walks through them.

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Michigan Requirements for Real Estate Purchase Agreement

  • Statute of Frauds (Michigan Compiled Laws (MCL) § 566.106)

    Real estate contracts must be in writing to be enforceable under the Statute of Frauds. In Michigan, any contract for the sale of land or an interest in land must be in writing and signed by the party against whom enforcement is sought.

  • Property Disclosure Requirements (Michigan Seller Disclosure Act, MCL § 565.951-565.966)

    Michigan law requires sellers to provide a Seller's Disclosure Statement to prospective buyers, disclosing known conditions and defects of the property. This must be delivered before a binding purchase agreement is executed.

  • Lead-Based Paint Disclosure (Residential Lead-Based Paint Hazard Reduction Act, 42 U.S.C. § 4852d)

    For properties built before 1978, sellers must disclose known information about lead-based paint hazards, provide buyers with an EPA-approved lead hazard information pamphlet, and allow buyers a 10-day period to conduct a lead-based paint inspection.

  • Legal Description Requirement (MCL § 565.201)

    The agreement must contain an accurate legal description of the property being transferred, not just a street address, to be valid under Michigan law.

  • Earnest Money Provisions (Michigan common law and MCL § 339.2512)

    The agreement must specify the amount of earnest money deposit, who will hold it (typically in escrow), and the conditions under which it may be forfeited or returned to the buyer.

  • Marketable Title (Michigan Marketable Title Act, MCL § 565.101-565.109)

    The seller must be able to convey marketable title to the buyer at closing. The agreement should address title examination requirements and remedies if title defects are discovered.

  • Real Estate Transfer Tax (State Real Estate Transfer Tax Act, MCL § 207.521-207.537 and County Real Estate Transfer Tax Act, MCL § 207.501-207.513)

    The agreement should specify which party is responsible for paying the Michigan State Transfer Tax (0.75% of the sale price) and County Transfer Tax (0.11% of the sale price).

  • Property Tax Proration (Michigan common law and standard practice)

    The agreement must address how property taxes will be prorated between buyer and seller at closing, typically based on the fiscal year of the taxing authority.

  • Closing and Possession Dates (Michigan contract law, MCL § 566.106)

    The agreement must clearly specify the closing date and when the buyer will take possession of the property. Michigan law requires these terms to be definite and certain for the contract to be enforceable.

  • FIRPTA Compliance (Foreign Investment in Real Property Tax Act, 26 U.S.C. § 1445)

    If the seller is a foreign person, the agreement must address compliance with the Foreign Investment in Real Property Tax Act, which may require withholding of 15% of the sale price.

  • Homestead Exemption (General Property Tax Act, MCL § 211.7cc)

    The agreement should address the transfer of homestead exemption status, as Michigan provides property tax benefits for principal residences.

  • Condominium or HOA Provisions (Michigan Condominium Act, MCL § 559.101-559.276)

    For condominiums or properties subject to homeowners associations, the agreement must address disclosure of association documents, fees, and assessments as required by Michigan law.

  • Environmental Disclosures (Michigan Natural Resources and Environmental Protection Act, MCL § 324.101 et seq.)

    The agreement should address environmental concerns specific to Michigan, such as disclosure of known environmental contamination, underground storage tanks, or wetlands regulations.

  • Financing Contingency (Michigan contract law and common practice)

    If the purchase is contingent on the buyer obtaining financing, the agreement must clearly state the terms, timeframe, and consequences if financing cannot be obtained.

  • Inspection Contingency (Michigan common law and standard practice)

    The agreement should include provisions allowing the buyer to inspect the property and potentially negotiate repairs or price adjustments based on inspection findings.

  • Arbitration Clause (Michigan Uniform Arbitration Act, MCL § 691.1681-691.1713 and Federal Arbitration Act, 9 U.S.C. § 1-16)

    If the agreement includes an arbitration clause for dispute resolution, it must comply with the Michigan Uniform Arbitration Act and federal arbitration laws.

  • Electronic Signatures (Michigan Uniform Electronic Transactions Act, MCL § 450.831-450.849 and Federal Electronic Signatures in Global and National Commerce Act (E-SIGN), 15 U.S.C. § 7001 et seq.)

    The agreement may be executed with electronic signatures, which are legally valid in Michigan under both state and federal law.

  • Agency Disclosure (MCL § 339.2517)

    Michigan law requires real estate agents to disclose whom they represent in the transaction (seller, buyer, or dual agency) before the parties sign a binding agreement.

  • Water and Septic System Disclosure (Michigan Public Health Code, MCL § 333.12751-333.12758 and local county regulations)

    For properties with private wells or septic systems, some Michigan counties require testing and disclosure of results before property transfer.

  • Fair Housing Compliance (Federal Fair Housing Act, 42 U.S.C. § 3601-3619 and Elliott-Larsen Civil Rights Act, MCL § 37.2101-37.2804)

    The agreement and all related transactions must comply with federal and Michigan fair housing laws, which prohibit discrimination based on protected characteristics including race, color, religion, sex, disability, familial status, national origin, age, marital status, and height/weight in Michigan.

Frequently Asked Questions

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