What Is a Real Estate Purchase Agreement?
Are you thinking of buying or selling a home? If so, there is likely a real estate purchase agreement in your future.
Also called real estate sales contracts, home purchase agreements, or real estate purchase contracts, purchase agreements are used only when transferring property between seller and buyer. So most people don’t encounter these agreements often. And this lack of regular exposure leaves many homebuyers and sellers with questions about real estate purchase agreements, including:
- What does this agreement contain?
- Is a purchase agreement required?
- Is it possible to cancel the contract after the agreement has been signed?
This article will provide all the answers to these questions and more.
What Is A Purchase Agreement?
A real estate purchase agreement is a legally binding contract that governs the property transfer from seller to buyer. It outlines the terms of the purchase, including the price, down payment, and proposed closing date, so that all parties are clear on these important points.
The purchase agreement's purpose is to ensure that both the buyer and the seller understand and approve of the terms of the deal. This can reduce the risk of costly disputes as the deal progresses toward closing.
Purchase agreements start as offers. If you are buying a home, you make an offer to the seller, documenting your proposed terms. The seller can accept your offer, decline your offer, or make a counteroffer in which they propose changes to your original offer. When both parties agree to the terms, the offer plus any counters become the signed purchase agreement.
Are Purchase Agreements the Same as “Contracts”?
In real estate, a purchase agreement is the same as a purchase contract. When both parties have signed the purchase agreement, the property is under contract, meaning that both parties have agreed to the terms of the sale.
What Does The Contract Contain?
Purchase agreements typically contain the following information:
- Parties to the contract. This should include the full names of the buyers and sellers, along with their contact information.
- Identification of the subject property. This may include both a street address and a legal description.
- Details about fixtures and appliances. The contract should clearly state which appliances, light fixtures, and other wall-mounted items will be included and excluded from the sale.
- The purchase price. In addition to documenting the agreed-upon price, the contract should also outline any deposits or other costs associated with the purchase.
- The amount of earnest money required upfront. Earnest money is a security deposit that offers the sellers some assurance of the buyer's intentions to complete the purchase.
- Information about buyer financing. This section should show whether the buyer intends to pay cash, get a mortgage loan, or use alternative financing (like assuming the seller’s mortgage).
- The proposed timeline. This section outlines all applicable deadlines, such as dates by which the inspection and appraisal must be completed. It also lists the proposed closing date, which is the date upon which the property officially passes from the seller to the buyer.
- Representations, warranties, and disclosures. The seller is expected to disclose the known condition of the property through these statements.
- Notes on the title insurance and property taxes. The title insurance clause should state which party is responsible for paying for the insurance. And the property tax clause should disclose estimated property taxes, as well as how much each party is responsible for paying based on their occupancy periods within the tax year.
- Signatures from all parties. Buyers, sellers, and their real estate agents, as applicable, all sign the purchase agreement.
- A list of contingencies. This is a list of conditions that must be met before the sale can close. The next section will cover contingencies in greater detail.
What Are Purchase Agreement Contingencies?
Purchase agreement contingencies must be met before the deal can close. The purchase agreement outlines the contingencies and deadlines for each contingency to ensure that the deal remains on schedule for the closing date listed in the contract.
Contingencies offer some protection for the buyer. If a contingency cannot be met, the buyer may be able to terminate the purchase agreement without penalty. This could mean that the earnest money deposit would be returned to the buyer if the deal cannot close because of an unmet contingency. Having said that, the buyer is responsible for confirming whether contingencies have been met based on the timeline in the purchase agreement. If, for example, the buyer fails to have the property inspected before the inspection deadline, they may waive their rights under their inspection contingency.
Common examples of contingencies include:
- Appraisal contingency. The buyer, or their lender, can have a licensed appraiser determine the property's fair market value. If the property appraises for less than the offer price, the buyer may be able to back out of the deal.
- Financing contingency. The buyer must get a loan before the property can be transferred. If financing cannot be secured, the buyer cannot complete the purchase.
- Inspection contingency. The buyer can have a licensed inspector assess the condition of the property. If the condition is not as expected, the buyer may be able to back out of the deal.
Can The Buyer or Seller Back Out Of The Agreement?
The purchase agreement contingencies outline options for terminating the agreement without penalty. For example, if you are buying a home with an inspection contingency in the purchase agreement, and the inspection report comes back full of issues that would be difficult or expensive to repair, you could potentially back out of the agreement without penalty.
An important point: Failing to release the contingencies on the schedule outlined in the purchase agreement could waive your rights under the contingency. If, for example, you do not schedule the home inspection in a timely manner, and the deadline for the inspection contingency passes, you might lose the ability to cancel the contract penalty-free on the basis of a poor inspection result.
Steps To Take Before Signing the Purchase Agreement
Here are three steps to take before signing a purchase agreement:
- Carefully consider your options. With so many negotiable terms in a real estate purchase agreement, you have some flexibility in creating a deal that works for both parties.
- Read the contract in its entirety. Confirm that the information contained in the agreement correctly represents your intentions.
- Have a professional review the contract. If you have a real estate agent representing you, your agent can review the agreement and answer any questions you may have. If you do not have an agent, you might consider hiring an attorney to review the document before signing.
What Are The Next Steps After Signing The Agreement?
Here is an overview of the steps to complete after signing the purchase agreement:
- The buyer wires the earnest money deposit to the agreed-upon account, which is typically a neutral escrow account.
- The buyer schedules inspectors to assess the condition of the property.
- The buyer finalizes their mortgage loan application immediately. This gives the lender time to conduct their underwriting process and prepare the loan docs.
- The buyer's lender chooses an appraiser to assess the value of the property.
- The seller begins the title search. The title search determines if any parties have a claim against the property, which are called clouds on title. Clouds can be caused by several circumstances, including divorces in which the spouse who gave up the property did not properly release their claim, owners of record who have passed away, or unpaid property taxes that resulted in a tax lien against the property.
- Both parties start packing and preparing for their moves.
Purchase Agreement FAQs
Here are a few more quick purchase agreement FAQs.
Who Writes The Purchase Contract?
Assuming that real estate agents are being used to facilitate the sale, the real estate agent for the buyer completes the first draft of the purchase contract by filling in a local industry-standard purchase offer form. If the seller wishes to counter, their agent may complete a counteroffer form. The original offer plus any counteroffers become the purchase contract.
If real estate agents are not being used, you may want to have a lawyer who specializes in real estate draft the contract.
Do Purchase Agreements Include Contingencies?
Yes, properly drafted real estate purchase agreements contain a list of contingencies that must be met for the deal to proceed and a schedule of contingency deadlines to keep the deal on track for the proposed closing day.
Is A Purchase Agreement Necessary?
The transfer of property must be documented in writing to be binding. So a purchase agreement is necessary if you are buying or selling a property.
The Bottom Line
A real estate purchase agreement is a necessary document used to clarify the terms of the property transfer from the seller to the buyer. As with any contract, it is important to read and understand the contents before signing. If you have questions about your real estate purchase agreement or wish to make an offer on a home, contact a licensed real estate agent in your area for guidance.