Real estate purchase and sale agreement: A complete guide

A real estate purchase and sale agreement (PSA), details the home purchase’s terms and conditions.

Buying a home is one of the largest financial commitments you’ll ever make, so it’s important to know more the typical components included in a real estate purchase and sales agreement in addition to the preparation and signing process

What is a real estate purchase and sale agreement?

A PSA is a written legal document the buyer and seller sign to agree upon terms such as the closing date, contingencies, and required earnest money deposit. The PSA – also known as a sale and purchase agreement, or SPA – is where the seller and buyer agree on the terms for purchasing the home and set the transaction in motion toward closing. This practice typically applies to real estate transactions, but it can also be used in other business agreements. Depending on state laws, either a real estate agent or real estate attorney will prepare the PSA.

It’s important to remember, however, that the agreement itself doesn’t finalize the home’s sale but rather sets everything in motion to proceed to closing.

Who prepares the purchase and sale agreement?

The purchase and sale agreement is typically prepared by the buyer’s real estate agent or can be drafted by a real estate attorney, but it often depends on state laws. In some states, like Washington and California, where escrow agents handle closings, the buyer’s agent will prepare the PSA. In states where a lawyer is required to oversee a real estate transaction, like Connecticut and New York, the attorneys draft the document. It’s crucial to have expert guidance during this process, especially if you’re unfamiliar with your state laws.

Purchase and sale agreement vs. purchase agreement

While they sound similar (and are sometimes used interchangeably), a PSA is different from a purchase agreement. A PSA is typically part of negotiations and outlines the terms of a real estate transaction, while the purchase agreement is what you sign at closing after the final walk-through to finalize the sale.

Both documents share several of the same components, but the purpose and timing are different. The PSA lays out the transaction’s details leading up to the closing date, and the purchase agreement finalizes the transaction.

Why is the purchase and sale agreement important?

A purchase and sale agreement helps ensure buyers get what they agree to pay for, have exit options in case of unmet contingencies, and have documentation outlining the seller’s obligations and promises.

A signed PSA by both parties confirms to the buyer that the seller is financially committed, has clear expectations for proceeding, and has a fallback for issues that may arise, like a buyer backing out. Other parties, like title companies and lenders, also benefit from the explicit structure and planning that comes from a PSA.

What’s included in a purchase and sale agreement?

While every contract differs, most PSAs include some — or all — of the following components. You can preview the layout using online tools to generate purchase agreements.

Buyer and seller information

A PSA will require the full legal names and mailing addresses for the involved parties, along with the effective date.

Property information

The property information includes the property type, street address, description (including size), and other details. The information should be clearly spelled out, and there should be no ambiguities.

Purchase price and terms

One major purpose of a PSA is to establish in writing the agreed sales price between the buyer and the seller. In many cases, the sales price may change or be renegotiated between signing the PSA and closing on the property.

These negotiations can occur when there are problems that may cause a sale to fall through. For instance, if a home inspection comes back with a significant issue or the appraisal comes back low, the buyer may try to negotiate a lower house price with the seller.

In addition to putting the agreed sales price in writing, the PSA also establishes the method of financing or payment such as all cash, bank financing, or seller financing.

Earnest money deposit

Earnest money, also known as a good faith deposit, is a deposit a buyer puts down to support the seriousness of the PSA. The PSA outlines many details of the deposit, including how much to deposit, the deposit deadline and details on who’ll manage the earnest money, which is usually a third-party escrow agent or title company.

Closing date and costs

The PSA states the planned closing date, which sets the sale process in motion. A home inspection, title search, appraisal and mortgage underwriting typically happen before the closing date. When you close on a house, all these components come together in one meeting at a real estate attorney’s office or title company’s office.

The final purchase agreement will outline and specify who is paying for the closing costs which are fees required to fund your mortgage and to transfer legal ownership of the home from the seller to the buyer. Closing costs can include origination fees, home inspection and appraisal fees, title search and insurance fees, and recording fees.

Title information

The PSA contains info on the title company you’re using, including their name and address. The title company usually holds the escrow money, and in some states, this is where you go to close on the property.

Your PSA also contains information on how the house title will be transferred, including who pays for the title policy, how the title is insured, and how the title is conveyed. When buying a property, it’s generally recommended to check the status of the home’s title and to purchase title insurance in case of potential problems.

Escrow company

The PSA also includes information regarding the escrow company, such as: who the escrow agent is, who pays the escrow agent’s fees, and when delivery of the loan proceeds to the escrow agent must take place. Unless otherwise noted, the escrow agent and the title insurance company are usually the same.

Contingencies

Contingencies allow buyers to legally back out of a real estate transaction without losing their earnest money deposit. Your PSA will outline the specific clauses that will need to be met for the deal to close. Here are a few common contingencies.

• Appraisal contingency: Allows the buyer to walk away from the deal with their earnest money deposit should the home appraisal come back for less than the purchase price.
• Home inspection contingency: Allows the buyer to back out of the deal if their home inspection reveals certain issues with the property.
• Mortgage contingency: Gives the buyer a specific period of time to secure home financing.
• Title contingency: Protects the buyer should the home not have a “clean title” that’s free of any liens or encumbrances.
• Home sale contingency: Ensures the sale of the home only goes through if the buyer’s current home sells first.

Addendums and riders

These are documents added to the standard PSA. Addendums and riders contain requests from the buyer to the seller to keep the sale on track. Some examples include a septic inspection addendum if the property has a septic tank, closing date extensions in case the date needs to change, due diligence, and a lead-based paint disclosure.

Some addendums are optional, and others are required by law. Work with your agent or real estate attorney to determine which you must include.

Signatures

A PSA needs signatures from all parties to be valid and enforceable. Notarization is typically not necessary, however consult with your agent or attorney about your specific state laws.

Additional items

Your PSA may include information about several additional items. Here’s a list of some terms you may see on your purchase and sale agreement.

• Fixtures/personal property inclusions/exclusions
• Seller concessions/credits
• Possession/occupancy or rent-back
• Prorations (taxes/HOA/utilities)
• Required disclosures (seller’s property disclosure, federal/state)
• Default/termination and remedies
• Dispute resolution
• Home warranty

What’s not included in a purchase and sale agreement?

A purchase and sale agreement usually doesn’t include a breakdown of the closing costs, the home appraisal cost, the buyer’s financial details, and commission agreements, among other things. This information can be found in other documents such as the Closing Disclosure provided by the lender or the buyer agency agreement signed between a prospective home purchaser and a real estate agent.

How to find a sale and purchase agreement template

If you’re looking for a generic purchase and sale agreement, you can find free state-specific templates online. Searching “purchase and sale agreement for (your state)” will pull up many results tailored to where you live.

You can use these samples to see what a PSA agreement looks like. There are many legal considerations when buying a home, so it’s highly recommended that you consult a real estate attorney or agent before drafting or signing a contract.

FAQ about purchase and sale agreements

Confusion and misunderstandings can happen with any type of legal paperwork. While every PSA is tailored to the specifics of a transaction, we’ve collected several commonly asked questions about purchase and sale agreements.

Is a purchase and sale agreement always required?

All home purchases require a purchase and sale agreement. This document defines the terms around an offer for a home and turns it into a legally binding contract.

Who signs the purchase and sale agreement first?

Typically, the buyer starts by sending a signed PSA to the seller with the initial offer. If the seller accepts the terms, they’ll sign it. If the seller counteroffers, they’ll sign the counteroffer and send it to the buyer. If the buyer accepts the terms, they’ll sign the PSA.

Who pays for the purchase and sale agreement?

A purchase and sale agreement is not usually a specific line item you pay for as it’s typically part of your agent’s services, so it will be wrapped up in your agent’s fees. If you’re hiring an attorney, however, this will be part of their fees.

Can I back out after signing the purchase and sale agreement?

A PSA is a legally binding document, so backing out can come with penalties and legal issues. The exception is if there’s a relevant contingency that triggers the offer to fall through, such as an appraisal contingency or a home inspection contingency.

The bottom line: Purchase and sale agreements are important for real estate transactions

Your home purchase may be one of the biggest financial transactions you make — and one of the more complex purchases, too. The purchase and sale agreement is a vital document that gets the transaction rolling, so carefully review the terms and conditions and get clarification on anything confusing. Knowing the ins and outs of a PSA will help ensure every detail is covered before you sign.

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