This overview of the Hawaii Real Estate Purchase Contract covers major parts of the contract in an easy to understand format with simple explanations. I will review highlights of the contract and focus on key parts.
To keep things simple, I will reference a range of days typically used for the contingencies.
Review of Key Sections of the Purchase Contract
Page 1 (top part of page)
Items written by hand or typed out will override printed parts, in case there is a conflict.
A-1 (Agency Disclosure)
Dual agency occurs if the same agent or the same brokerage represents both Buyer and Seller in a transaction. In this instance, the agent or agents “must remain neutral in negotiations”. This means your agent (whether you are the Buyer or Seller) cannot advise on price, terms or negotiation strategy.
B-1 (Initial Earnest Money Deposit)
The default language in the contract states the initial deposit is due by the next business day after acceptance. We will often change this to 2 to 4 business days after acceptance. If Buyer is overseas, it may not be realistic to get funds wired into an escrow bank account by the next business day. The initial deposit is typically about 0.5% to 1% of the purchase price.
List of possible addenda to be included with the contract.
The “AS IS Condition” addendum is the most commonly used addendum and included in the majority of accepted contracts. There is no law in Hawaii requiring Sellers to complete repairs before closing. The AS IS Condition addendum restates the Seller is not interested in making repairs or giving credits in lieu of: “I am selling my property as is, don’t bother me with any issues you may find during the home inspection”. Buyer can still ask Seller to make repairs or extend a credit at closing, although Seller can reject any such request from Buyer.
D-1 (Offer to Buy)
Date and time the Buyer’s offer to purchase expires.
D-2 (Purchase Price)
Schedule of Buyer’s payments due.
Initial deposit: See B-1.
Additional (2nd) Deposit: Typically 1% to 10% of purchase price and typically due 1 to 3 business days after J-1 (home inspection contingency) removal.
Balance of Cash: Due 2 business days prior to closing (if funds arrive late, then closing will be delayed).
Loan Amount: Lender typically wires the loan amount into the escrow account no later than 2 business days prior to closing.
CAUTION BUYER: Do NOT be late with any scheduled payments, as Seller can otherwise cancel contract based on Paragraph O-1, which means Buyer’s deposit(s) could be at risk.
If Seller has a strong back–up offer or regrets selling, a Buyer with late scheduled payments presents a great opportunity for Seller to cancel the contract.
TMK (tax map key) number, is what the tax office uses to identify the property.
Check box whether property is fee simple or leasehold. Fee simple means permanent ownership. Leasehold means rights to the land reverts to land owner at a future date.
In this section we also write a brief property description, including number of bedrooms, bathrooms, parking etc.
Built-in furniture, attached fixtures, built-in appliances, if any, that are included with the sale.
This section has a list of about 20 items to check if included with the sale, such as washer, dryer, range, dishwasher, etc.
E-3 (Inventory List)
Seller must provide Buyer a list of furniture included with the sale, if any, by a certain date.
Buyer typically has 5 to 10 days to review and approve the list. If not satisfied, Buyer may cancel the contract based on Paragraph O-2.
F-2 (Scheduled Closing Date)
Scheduled closing date is the scheduled date the Buyer becomes the new homeowner. If the scheduled closing date falls on a day the Bureau of Conveyances is closed, then closing shall be on the following day when the deed, the legal document transferring ownership of title, can be recorded.
F-3 (Change to the Scheduled Closing Date)
Paragraph (a): Buyer and Seller typically agree either party may extend the contract for ‘reasons beyond their control’, typically by 7 to 10 days.
When Buyer requests an extension for reasons beyond Buyer’s control, Seller is likely to ask for reason for the delay of closing and normally accepts. In rare cases, Seller may argue the reason is not beyond Buyer’s control
An independent neutral escrow company holds all funds deposited by Buyer, requests an attorney to prepare the deed, orders and reviews the title report and prepares the closing statements outlining all costs to Buyer and Seller.
F-5 (Prorations and Closing Adjustments)
Escrow prorates property taxes, maintenance fees, mortgage interest, tenant rent, etc. as of the closing date. For instance, if a Seller has paid property taxes covering January through June of a given year and closing is April 15, then escrow charges the Buyer and refunds the Seller for property taxes covering April 15 through June 30.
F-6 (Closing Costs)
List of standard closing costs and allocation of costs between Buyer and Seller.
A) Escrow fee is split 50 / 50 between Buyer and Seller,
B) Buyer’s standard title insurance is paid 40% by Buyer and 60% by Seller,
C) Conveyance tax (transfer of property ownership tax) is paid 100% by Seller.
D) Costs associated with the Buyer obtaining a mortgage are typically paid by Buyer.
F-7 (Notice of Conveyance Tax)
The conveyance tax paid by Seller is lower if the Buyer is purchasing the home to occupy as their principal residence. The Buyer has to make a selection to indicate if the property will or will not be Buyer’s principal residence.
Buyer and Seller agree who pays for an assessment levied against the property before the acceptance date. An assessment could arise for a number of reasons, such as cost of making improvements to the property (new drain pipes, spalling repairs, new roof), cost of litigation, etc.
If an assessment is levied against property after the acceptance date, then Buyer and Seller need to agree within 5 days of both Buyer and Seller learning about such assessment. If Buyer and Seller can’t agree within the time period then either party may cancel the contract based on paragraph O-3.
F-12 (Keys to the Property)
Seller shall provide Buyer all existing keys and at a minimum 1 set of keys at closing.
G-1 & G-2 (Preliminary Title Report & Title)
Shortly after Buyer and Seller accept the contract by signing it, escrow orders a preliminary title report, which shows names of owners on title and if there are any outstanding mortgages and liens, etc. against the property. Escrow’s title company division carefully reviews the title report since the title company’s responsibility is to insure a clear title and issue a title insurance policy for the Buyer.
If Buyer is not satisfied with the preliminary title report, Buyer may cancel contract typically within 5 to 7 days of receipt based on Paragraph O-2.
G-3 (Vesting and Tenancy)
When listing the name of Buyer it may be worthwhile to write “NAME and / or assignee”. Let’s say Buyer’s name is “John Smith”, then consider writing “John Smith and / or assignee”, which would give John Smith the option to assign contract to someone else, without needing Seller’s approval. If we wrote “TBD” (to be determined) then we would need an amendment signed by Buyer and Seller.
In Hawaii we have 4 types of tenancies – 4 ways Buyer can hold title. For married couples “Tenants by the Entirety” is the most common type of tenancy and for an individual owner “Tenant in Severalty” is the most common type of tenancy. Learn more about the 4 types of tenancies here.
H-1 (No Contingency on Obtaining Cash Funds)
Select if Buyer has no contingency on obtaining the cash funds. Buyer shall provide proof of cash funds to Seller, typically within 2 to 4 days of acceptance. Proof of funds could be a letter from Buyer’s banker stating Buyer has sufficient funds for the purchase, or a bank statement that shows name of bank, Buyer’s name and balance ( make sure you white-out account number). Some clients show proof of highly liquid assets (stocks, bonds). However, the Seller can cancel the contract based on Paragraph O-3 if the proof of funds is not satisfactory to Seller, which is an ambiguous term. Rarely happens, but I have seen it happen.
H-2 (Contingency on Obtaining Cash Funds)
Buyer’s purchase is subject to necessary cash funds becoming available and Buyer must explain reason and list a date by which such funds will be available. If Buyer is unable to provide proof of available funds by a certain date then Seller may cancel contract based on Paragraph O-3.
H-3 (Financing Contingency)
If Buyer is unable to obtain a conditional loan commitment letter or is unable to satisfy all conditions of the loan within timeframes outlines in Paragraph H-4, then Buyer may cancel the contract based on Paragraph O-2.
H-4 (Buyer’s Obligations)
Buyer must submit a completed loan application typically within 5 to 7 days of acceptance, obtain a pre-qualification letter typically within 0 to 3 days of acceptance, and provide to Seller a Conditional Loan Commitment Letter typically no later than 12 to 15 days prior to the scheduled closing date. Buyer also needs to provide Seller proof that all conditions have been removed, typically within 7 to 10 days of the issuance of such loan commitment letter, except those conditions Buyer can’t remove prior to closing.
If Buyer fails on either count, then Seller may cancel the contract based on Paragraph O-3.
H-5 (Seller’s Right to Cancel)
If Buyer fails to fulfill obligations outlined in Paragraph H-2, H-3 and / or H-4 with the timeframes specified, then Seller may cancel contract based on Paragraph O-3.
Section I (Seller’s Obligation to Disclose)
Hawaii law requires Sellers to fully disclose, typically within 5 to 10 days after acceptance, “any fact, defects, or conditions, past or present, that would be expected to measurably affect the value of the Property to a reasonable person.” This is typically done by the Seller completing a standard Disclosure Statement – about 100 questions – a way for the Buyer to learn about possible issues, defects, repairs or improvements (leaks, damages, remodel work, etc.) the Seller is aware of. The Seller is obligated to provide Buyer an updated disclosure during escrow with any later discovered information, if any, that had not already been disclosed on the initial disclosure statement.
If Buyer finds something that “directly, substantially, and adversely affects the value of the property”, Buyer may consider this later discovered information. Buyer may cancel the contract within the review / approval time period of the disclosure, the updated disclosure, and or later discovered information, based on Paragraph O-2.
J-1 (General Inspection of Property Contingency)
Buyer has the right to conduct a home inspection – typically by hiring a professional home inspector. Buyer may also have general contractors, concrete specialists, structural engineers and other subject matter experts inspect the home as well.
If Buyer is not satisfied with the inspection results, Buyer may cancel the contract within the specified time period, typically within 7 to 14 days after the acceptance date.
J-3 (Property Condition Maintenance and Final Walk Through)
Buyer can have a final walk-through inspection, typically no later than 4 to 6 days before closing, to verify the property is in the same condition as it was during the J-1 home inspection or as otherwise agreed with Seller. If the property is not in the same condition, then Paragraph J-4 shall apply. However, as addressed in Section I, if Seller becomes aware of defects or conditions that could “directly, substantially or adversely affect the value of the property” then Seller is obligated to disclose and Buyer may cancel based on Paragraph O-2 of the contract.
Would a missing light bulb require Seller to update Disclosure – probably not. Would a major leak damaging the entire kitchen and floors require Seller to update Disclosure – certainly. What about a damaged kitchen cabinet door where Seller argues it cost $50 to replace, but Buyer argues we can’t find the exact color of cabinet again and that significantly impacts the value of the property – that’s a tough call!
J-4 (Withheld / Collected Funds for Repairs / Maintenance)
If Seller fails to maintain the property in same condition as it was during the J-1 home inspection or as otherwise agreed in writing between Buyer and Seller, then escrow shall withhold 150% of the estimated repair cost from Seller’s proceeds at closing and Seller shall make needed repairs / corrections no later than as specified in the contract, typically within 0 to 5 day after closing.
If Seller fails to do so within the specified time period, then escrow shall release the withheld funds to Buyer.
J-8 (Removal of Items from Property)
Seller shall remove personal belongings and trash typically no later than 5 to 7 days prior to closing. If Seller fails to do so, then Paragraph J-4 shall apply.
Seller shall clean the property and have the carpets professionally shampooed typically no later than 5 to 7 days prior to closing. If Seller fails to do so, then Paragraph J-4 shall apply.
J-10 (Pet Related Treatment)
Seller shall have the property treated for fleas/ticks by a licensed pest control operator, after carpet has been shampooed. If Seller does not get this treatment done prior to closing, then escrow shall withhold 150% of the estimated cost from Seller’s proceeds. If Seller does not get treatment completed, typically 1 to 3 days after closing, then escrow shall release funds to Buyer.
K-1 (Staking – Boundary Points)
Applicable for single-family homes – not for condos.
Seller is obligated, at Seller’s cost, to have a land surveyor stake the Property. Buyer should understand staking is not the same as a survey, described in Paragraph K-2, and staking does not confirm if there are encroachments. It is recommended to select K-2 Survey instead of K-1 Staking.
K-2 (Survey): Applicable for single-family homes – not for condos.
Seller is obligated, at Seller’s cost, to have a land surveyor survey the property even if boundary points are visible and create a map that shows any improvements close to the boundary of the property.
K-3 (Boundary Encroachment): If there are encroachments then Buyer can accept such encroachment or ask Seller to either remove encroachment (not always easy – think of a rock wall) or get an encroachment agreement in place with the adjoining owner.
If Seller can’t cure the encroachment (removing or getting agreement in place) then Buyer may cancel contract within the specified time period based on Paragraph O-3.
L-1 (Scope of Termite Inspection Report): Buyer understands a termite inspection report is likely to only report visible evidence of live termites and is unlikely to address possible termite infestation in inaccessible areas. Seller agrees to disclose any current or past termite issues Seller is aware of.
L-2 (Termite Inspection Contingency): If box is checked then we typically check box for Buyer to select termite inspector and check box for Seller to pay for the inspection and a termite inspection report shall be delivered to Buyer typically 10 to 15 days prior to closing. If the termite inspection report reveals live termites then Seller shall pay for the recommended treatment. Buyer is only obligated to purchase the property if Buyer receives a termite inspection report saying there are no live termites or the recommended termite treatment has been completed at the latest 5 days prior to the scheduled closing. Otherwise, Buyer may cancel based on Paragraph O-3.
L-3 (Termite Damage): If the termite inspection report reveals visible damage caused by termites and the damage ‘directly, substantially and adversely affect the value of the Property” then Seller shall disclose per Paragraph I-2, which means Buyer may cancel contract based on Paragraph I-4.
M-1 (Contingency on Documentation Approval): Applicable for condos and homes managed by an association.
Seller shall provide Buyer a complete set of all current condo and or association documents at Seller’s expense, typically within 10 to 12 days from the Acceptance Date. Documents commonly include Bylaws, Declaration, House Rules, Approved Minutes of the last 3 Board of Directors meetings, Financials, Insurance Summary, etc.
If Buyer is not satisfied with the documents, Buyer may cancel the contract typically 7 to 10 days of receipt of these documents based on Paragraph O-2.
N-1 (Rental Documents): Applicable for properties with tenants or rental agreements in place.
Seller shall provide any existing Rental Agreements, Rental Management Contracts, Short Term Vacation Rental Reservations, etc., within the time period specified, typically within 3 to 7 days after the Acceptance Date.
If Buyer is not satisfied with the documents, Buyer may cancel within the specified time period, typically 5 to 10 days after receipt based on Paragraph O-2.
O-1 (Termination Due to Default): If Buyer is in default failing to perform as outlined in this contract, Seller can terminate the contract and Buyer’s deposits may be at risk. Seller can also seek compensation for damages.
If Seller is in default Buyer may cancel the contract and receive a refund of the deposits. Buyer can also seek compensation for damages.
O-2 (Termination Within Contingency Time Period): Either Buyer or Seller with the right to cancel based on the contingency may cancel the contract within the specified time period before the contingency expires. If the Buyer cancels within the time period, Buyer receives a refund of deposits paid. Unless canceled prior to the contingency expiration, the right to cancel has been waived.
O-3 (Termination After a Specified Contingency / Condition Time Period): Either Buyer or Seller with the right to cancel based on the contingency may cancel the contract within the specified time period after the contingency expires. If the Buyer cancels within the time period, Buyer receives a refund of the deposits paid. Unless cancelled within the specified time period after the contingency expiration, the right to cancel has been waived.
P-1 & P2 (HARPTA & FIRPTA): Learn about HARPTA & FIRPTA here.
If Seller is not a resident of Hawaii then Buyer must ensure escrow withholds HARPTA from Seller’s proceeds and escrow pays such funds to the department of taxation. HARPTA is a withholding mechanism and not an actual tax.
If Seller is a foreign person then Buyer must ensure escrow withholds FIRPTA from Seller’s proceeds at closing in addition to HARPTA withholdings and escrow pays such funds to the IRS.
In reality a Seller will fill out HARPTA & FIRPTA declaration forms during the transaction, clarifying if HARPTA and/or FIRPTA withholdings are required. Buyer reviews and acknowledges Seller’s completed HARPTA & FIRPTA declaration.
If the Hawaii Tax Department and / or the IRS do not receive any required HARPTA and or FIRPTA withholdings from the Seller’s proceeds, the Buyer could be held responsible!
Q (Special Terms): List of any additional “special” terms to be part of the contract.
This sums up my simplified review of the Hawaii real estate Purchase Contract. I hope it has been helpful. Feel free to leave feedback in the comments section below.
Disclaimer: This information is for general information purposes only and should not be relied upon in making any decisions. Always consult with your attorney for advice. Also, keep in mind, the Purchase Contract, rules, regulations, guidelines, laws etc frequently changes.