What is a purchase agreement?
Updated April 13, 2022
A purchase agreement is a legal, binding contract used in transactions between a buyer and a seller that includes the specific details of the sale. Purchase agreements are most often used in real estate transactions for the sale of apartments, condos, or single-family homes of both primary residences and investment properties. Real estate purchase agreements can also be referred to as a house purchase agreement, a home purchase agreement or a real estate sales contract.
When a buyer makes an offer to purchase a home, they will often negotiate the price and the conditions of the contract while the seller has the choice to agree, deny, or further negotiate the terms. When both parties are satisfied with the terms of the agreement and each signs the document, the home sale is considered to be “under contract.” The signed purchase agreement serves as the intent for both parties to see the transaction through to its closing.
A purchase agreement is a legally binding document that includes terms of the sale of a home. Credit: Tumisu/Pixabay
Purchase agreements are typically written up by the buyer’s agent using a standardized form contract where they include the details of the specific home sale. Only practicing attorneys–not agents–can create their own contracts. Real estate purchase agreements often include the following information:
- Buyer and seller names and contact information
- Legal description of the property, including address
- Appliances and fixtures included in sale
- Pricing and financing, including the agreed-upon purchase price and deposit
- Title insurance
- Property taxes
- Closing and move-in dates
- Closing cost information
- Lead-based paint disclosure
- Contract termination conditions
- Special contingencies for sale to be processed
- Expiration date for agreement
Pricing & Financing
In addition to the sale price of the house, the purchase agreement will include how the property will be paid for, such as with cash or through a loan. Buyers may obtain their own mortgage to pay for the property or assume the current mortgage on the property. They also have the option to make payments directly to the seller instead of a mortgage lender, which is known as seller financing.
After signing the purchase agreement, the buyer makes what is known as a good faith deposit or an earnest money deposit. This is an agreed-upon amount that proves the buyer is serious about seeing the contract through to closing, which provides the seller with confidence in the buyer.
If the buyer chooses to back out of the sale, they will lose their earnest money deposit to the seller unless there is a particular stipulation in the contract giving a reason the buyer can back out. These types of deposits are held by a third party in escrow and can be put toward the closing costs or down payment for the property.
When the sale of a home is closed, a negotiated cost of the closing, which is detailed in the purchase agreement, is paid by the buyer and the seller. Closing costs often include inspection fees, appraisal costs, the real estate agent’s commission, insurance costs, and lenders fees. Closing costs are often 3%-6% of the buyer’s purchase price and often a little higher for the seller.
The purchase agreement may include a number of contingencies on behalf of both the buyer and the seller. A contingency is a condition that must be met in order for the sale to proceed.
- An appraisal contingency means that the property must be appraised for an amount that is equal to or more than the agreed upon purchase price.
- A financing contingency stipulates that the sale will proceed only if the buyer is able to secure financing such as a mortgage.
- A title contingency confirms for the buyer that there aren’t any liens or problems with the property.
- An inspection contingency allows a buyer to cancel their purchase if they are dissatisfied with a professional inspection of the home.
- A home sale contingency allows the buyer to cancel the sale if they are unable to sell their primary property.
Ideally, if the buyer or seller chooses to back out of a real estate purchase, they do so before signing the purchase agreement. Once under contract, the party canceling the contract can be subject to fees if their reason is not listed in the agreement’s contingencies. Both parties should confirm the purchase agreement clearly identifies the situations that allow for termination of sale without penalties. State law also allows the buyer to terminate the contract if the seller neglects to reveal major problems with the property.