Real estate purchase and sale agreement: Everything you need to know

Buying a home may be one of the largest purchases you’ll ever make, and there’s a lot of paperwork involved in the transaction. That’s why it’s crucial to understand what you’re filling out and signing during the process. One of these documents, the essential purchase and sale agreement (PSA), details the terms and conditions of your home purchase.

Read on to learn everything you need to know about the purchase and sale agreement, such as what information it includes, and get 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. This practice typically apply to real estate transactions, but it can also be applied to other business agreements. Depending on state laws, either a real estate agent or real estate attorney will prepare the PSA.

The PSA — also known as a sale and purchase agreement, or SPA — includes details regarding the required earnest money deposit, the closing date and 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 set the transaction in motion toward closing.

An example of a PSA

A PSA is essentially a detailed contract that spells out the details about a deal between two parties. It covers elements including price, inspection requirements, when the deal needs to close and any special conditions. These agreements largely take place in real estate, but you'll find them in other industries, too — such as when one business buys another’s equipment or assets, or when a company sells off part of its infrastructure to another.

PSA vs. purchase agreement

While they sound similar (and are sometimes used interchangeably), a PSA is different from a purchase agreement. A PSA outlines the terms of a real estate transaction, including the closing date, among other details.

Signing a PSA doesn’t complete the sale of a home, but signing a purchase agreement does. While the PSA lays out the transaction’s details 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?

While every contract differs, most PSAs include some — or all — of the following components.

Property information

This is a description of the asset for sale. In the case of a home, the property information would include a physical address, the size of the property, etc. This information should be clearly spelled out, and there should be no ambiguities.

Purchase price and conditions

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.

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

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.

Title Information

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. 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.

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. Common contingencies include an appraisal contingency and a home inspection contingency.

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, and closing date extensions in case the date needs to change.

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

Finding a template for a PSA in real estate

If you want a generic purchase and sale agreement, you can find free templates online. Searching “purchase and sale agreement for (your state)” will pull up many results.

FAQs 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.

Who signs the PSA first?

It depends on who sends the offer. Typically, the buyer starts by sending a signed PSA to the seller. 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 PSA?

The PSA is typically part of the seller’s agent’s commission fee, which the seller pays at closing.

What’s not included in a PSA?

While a PSA will provide most of the necessary information to complete a sale, it usually doesn’t include details like closing costs. These are typically included in the Closing Disclosure a lender sends to a buyer for review and approval three days before closing.

Are PSAs legally binding?

Yes, PSAs are legally binding contracts. If the buyer or seller doesn’t uphold the contract’s terms, the other party has the right to take legal action and sue the noncompliant party to uphold their part of the contract.

If you need to negotiate anything, the time to try to rework the contract is before you sign it. Both parties are legally bound to the contract once they’ve signed it.

How long are typical PSAs?

The bottom line: Sales and purchase agreements simplified

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. Knowing the ins and outs of a PSA will help ensure every detail is covered before you sign.