Real Estate Purchase And Sale Agreement: Everything You Need To Know
Andrew Dehan5-minute read
June 14, 2022
There’s a lot of paperwork involved with buying a home. Understanding what you’re filling out and signing is important when it comes to one of the largest purchases you’re likely to make. The purchase and sale agreement is a crucial document involved in your home purchase.
Read on to learn everything you need to know about the purchase sale agreement, what info is included in it and the answers to some frequently asked questions.
What Is A Purchase And Sale Agreement?
A purchase and sale agreement, or PSA, is a document that is written up and signed after a buyer and seller mutually agree on the price and terms of a real estate transaction. Depending on state laws, either a real estate agent or a real estate attorney will prepare the PSA.
The PSA includes details like earnest money needed, the closing date and specific contingencies the buyer and seller have agreed to. The PSA is where the seller and buyer agree on the terms for purchasing the home and sets the transaction in motion toward the closing.
PSA Vs. Purchase Agreement
Though they sound similar, a PSA is different from a purchase agreement. PSAs define the terms of the transaction and include the date of closing and other details. Signing a PSA does not complete the sale of the home.
Signing a purchase agreement, however, does complete the home sale. Where the PSA lays out the details of the transaction leading up to the closing date, the purchase agreement is what you sign to finalize the transaction.
What’s Included In A Purchase And Sale Agreement?
Here are the different categories typically included in a standard PSA.
One major purpose of the PSA is to establish an agreed-upon sale price in writing between the buyer and the seller. It’s important to know that, in many cases, this sale price can change or be negotiated even after the PSA is signed.
These negotiations can occur in situations where problems could cause the sale to fall through. For instance, if a home inspection comes back with a major issue or the appraisal comes back low, the buyer may try to negotiate a lower house price with the seller.
Earnest Money Details
Earnest money is a small deposit the buyer puts down to solidify the seriousness of the PSA. It’s also known as the good faith deposit. The PSA outlines many details around earnest money, including:
- How much earnest money needs to be deposited.
- When earnest money must be deposited by.
- Any contingencies that could cause the buyer to receive the money back.
- How long the buyer has to perform due diligence like a home inspection.
- Who manages the earnest money (typically a third-party escrow agent or title company).
The PSA states the planned closing date, which sets the sale process in motion. A home inspection, a title search, an appraisal and mortgage underwriting are all things that typically need to happen before the closing date. When you close on a house, all these components come together in one meeting at a real estate attorney or title company’s office.
Title Insurance Company Details
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, can be where you go to close on the property.
Your PSA contains the information on how the house title is transferred. This includes who pays for the title policy, how the title is insured and how the title is conveyed.
The PSA also gives information regarding the escrow company, including who the escrow agent is, who pays escrow agent fees and when loan proceeds must be delivered to the escrow agent. Unless otherwise noted, the escrow agent and the title insurance company are usually the same.
Contingencies are reasons buyers and sellers can legally back out of the transaction without losing money. Common contingencies include an appraisal contingency and a home inspection contingency. Want to learn more about contingencies? Read this article for more examples of contingent offers.
Addendums, or riders, are additional documents added onto the standard PSA. These contain requests from the buyer to the seller to keep the sale on track. Some examples of an addendum include a septic inspection addendum if the property has a septic tank and closing date extensions in case the date needs to be changed.
Some addendums are optional and others are required by law. Work with your agent or real estate attorney to determine which you need to include.
Finding A Purchase And Sale Agreement Template
If you want to find a generic purchase and sale agreement, many templates are available for free online. A simple search of “purchase and sale agreement for (your state)” will pull up many results. These are good for developing an understanding of what these contracts look like.
FAQs About PSAs
With any type of legal paperwork, there’s a chance for confusion. Here are a couple commonly asked questions around purchase and sale agreements.
Who Signs The Purchase And Sale Agreement First?
It depends on who sends the agreed-upon offer. Typically, the buyer starts by sending a signed PSA to the seller. If the seller accepts the terms, they will sign it. If the seller counteroffers, they will sign the counteroffer and send it to the buyer. If the buyer accepts the terms, they will sign.
When Do You Sign A Purchase And Sale Agreement?
The PSA is signed by both parties when both agree to the proposed terms. As explained above, usually it’s signed by the buyer, submitted to the seller, then signed by the seller if they accept the terms. The PSA establishes a schedule for the proposed transaction, including when and where closing will take place.
Are Purchase And Sale Agreements Legally Binding?
Yes, PSAs are legally binding contracts. If either the buyer or the seller don’t uphold the terms of the contract, the other party has the right to take legal action. They can sue the offending party to uphold their part of the contract.
Note that the time for negotiating the contract is before you sign it. After the contract has been signed by both parties, you are legally bound to its terms.
The Bottom Line: A Purchase And Sale Agreement Is An Agreement, Not A Sale
Your home purchase is one of the biggest financial transactions you’ll undertake in your life. Chances are, it’s one of the more complex purchases too. The purchase and sale agreement is a core part of the paperwork that gets the transaction rolling. Being familiar with the ins and outs of it will help you make sure every detail is covered before you sign.
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