What is a real estate purchase agreement, and why is it important?

A real estate purchase agreement is a contract made between buyers and sellers that covers the legally binding details and specifics of a real estate transaction.

Meant to help guide the purchase and sale of a property, it clearly delineates the terms and conditions under which the sale of the house, apartment building, or condo will occur.

No matter if you’re thinking about buying a new home or contemplating selling either your primary residence or an investment property that you’re holding, it’s important to make sure that you understand the essential components of the agreement.

Taking time to codify and clearly spell out the terms of a property transaction helps safeguard against potential errors or unexpected events. It can also help you avoid potential legal or financial troubles that may arise after the sale has been finalized.

What is a purchase agreement?

A real estate purchase agreement clearly and concisely spells out the agreed-upon terms under which a buyer and seller agree to a real estate transaction. The completion and signing of a purchase agreement effectively places both the buyer and seller (as well as the property in question) “under contract.”

Note that a real estate agreement purchase agreement for any given house may also be referred to as a real estate sales contract, home purchase agreement, real estate purchase contract, or house purchase agreement. It’s essentially a binding legal document that outlines the key details related to the home sale.

Both the buyer and seller will sign the purchase agreement when they’re satisfied with the terms, typically after the parties have negotiated the final details among themselves. This contract outlines the desire of all parties to engage in a home sale transaction and explains the conditions that must be met for the sale to close and for ownership of the property to be legally transferred to the new buyer.

Who prepares the purchase contract?

Typically, the buyer’s real estate agent will write up and prepare the purchase agreement for a house. Keep in mind, though, that agents can’t create their own contracts from scratch. Noting this, to ensure that legal standards and requirements are adhered to, real estate agents generally fill in preexisting documents that have previously been created by a law firm that specializes in real estate transactions.

In other words, a previously prepared purchase agreement template will be used for buying the individual home, with the agent filling in the blanks with the property’s specific information. Doing so helps buyers and sellers save significant time and expense and minimizes the chances of potential legal issues arising during the process.

Components of a real estate sales contract

If you’re viewing one for the first time, it’s worth noting that a real estate sales contract and purchase agreement is a detailed document that outlines the specific terms under which the property transaction will occur.

Within its pages, you’ll find just about any detail that you could imagine relating to the sale of property, which helps provide clarity and makes it simpler to spot any items of importance or concern at a glance.

As standardized documents, contracts generally contain several common elements that you’ll want to watch for, such as:

• Buyer and seller information: Full names, addresses, and contact information for all parties who are involved in the transaction.
• Property details: Detailed information on the property’s address, a description of the dwelling, and any other pertinent details about the real estate holding.
• Purchase price: The total agreed-upon selling price for the property, including any deposits or additional costs that are required as part of the transaction.
• Representations and warranties: Statements of fact made by the seller about the condition, structure, age, soundness, and composition of the property being sold (this information can be disclosed by the seller in a warranty deed).
• Financing: Specific details explaining how the buyer intends to finance the purchase of and pay for the property, including whether they plan to take out a mortgage loan from a lender, pay cash out of pocket, or assume the seller’s existing mortgage.
• Fixtures and appliances: Any household appliances or wall-mounted items and fixtures that will be included or excluded in the sale of the real estate holding. For example, if you do not intend to sell certain items with your home, such as a mounted TV, light fixtures, chandeliers, or mirrors, this is the place to clearly spell out any such terms and conditions.
• Title insurance: A note specifying whether the buyer or seller will ultimately be responsible for purchasing title insurance to protect against potential discoverable defects in the property.
• Property taxes: Citations regarding any property taxes that will be imposed on the property being purchased.
• Closing date: The exact date on which the official transfer of title will occur as specified on your purchase agreement – and the date and time that the buyer will receive the keys to the property.
• Contingencies: Any conditions (such as repairs that must be completed by a specific date or inspections that must be performed) that must be met before the property can be sold. It’s especially important for buyers and sellers to note any such contingencies, which typically require significant time and effort to complete (time that can potentially delay closing dates) before the sale of the real estate holding and closing can ultimately proceed.
• Earnest money: The terms of any earnest money security deposits that must be made to show the seller in good faith that the buyer is interested in purchasing the property. Please note that any such balances provided may be forfeited if the buyer fails to fulfill their obligations under a real estate purchase agreement.
• Option to terminate: A potential option that allows for the buyer to back out of the deal and terminate the contract up until a specific time before closing. If you’re a property seller, you’ll want to review any such options closely before agreeing to them, as they present a potential source of risk to the transaction.
• Lead-based paint disclosure: As required by law for any home built before 1978, information on the dangers of lead-based paint (this allows the buyer to have an inspection performed on the property to check for it if necessary).
• Signatures: Required from each party to finalize every purchase agreement.

Here are a few tips to keep in mind as you review the items above and take a closer look at your real estate purchase agreement before signing:

• Conduct a thorough check of all details, including final purchase price, terms of payment, and closing date, to ensure that all information is accurate and agreed upon by both parties.
• Review any figures and calculations to ensure that costs are accurate and accounted for, that any buyer or seller credits have been applied, and that the calculations are properly added up.
• Ask your real estate agent or attorney to help answer any outstanding questions that you may have regarding the sale of the property or the next steps.
• To avoid discrepancies, double-check and verify that all details in the agreement, including the names of the buyer and seller, property addresses, and legal descriptions, are accurate and complete.

What are contingencies?

A contingency is a condition that must be met, and it depends on certain real-world circumstances occurring. In real estate terms, a purchase agreement containing contingencies specifies that although an offer has been made and accepted on a property, specific additional criteria must be satisfied before the deal can be completed.

It’s essential to monitor any contingencies outlined in a real estate purchase agreement, as they must be cleared and signed off on before the sale of the home. Bear in mind that certain contingencies (such as having an HVAC system inspected) can take little time and money to complete. But others (like landscaping a lawn or installing a new water heater) can take a significant amount of time and cash to get sorted. Noting this, it’s important to account for any potential contingencies in your budget and timeline.

Some common contingencies that you might encounter when buying or selling a home include:

• Inspection contingency: This allows a buyer to walk away from a home purchase deal if a subsequent home inspection reveals any defects on the property. Note that many buyers use this clause as a universal catch-all, allowing them to back out of a deal if they develop cold feet for any reason.
• Appraisal contingency: Designed to ensure a home’s appraised value is equal to or higher than the agreed-upon purchase price. If your home does not appraise at the required value, you can either seek another appraisal (for an additional charge) or determine how to split the valuation difference as a payment between the buyer and seller.
• Financing contingency: A mortgage contingency that protects the buyer if they can’t obtain a mortgage and ensures that they get their earnest money deposit back.
• Title contingency: A title report, or chain of title, that seeks to assure the buyer that the property has no liens or other legal problems attached to it that need clearing before closing.
• Home sale contingency: A form of insurance of sorts, stating that the buyer’s purchase of the property depends on whether they can sell their current home before the deal closes.

What is an earnest money deposit?

Earnest money is paid as a good-faith, buyer-to-seller deposit, effectively communicating that the buyer is serious about their offer to purchase a home. (Predicated on the assumption that a home buyer wouldn’t commit a significant sum of up-front funds to a real estate transaction if they weren’t serious about going through with the deal.) Except in the case when the seller fails to meet certain contingencies, a buyer will lose this earnest money deposit if they choose to back out of the transaction.

The amount of earnest money required for the real estate contract will be defined in the purchase agreement. In effect, it serves as a form of insurance for sellers, who typically want to make sure that they aren’t wasting their time or missing other opportunities by pursuing or getting locked into a contract that won’t close.

Any such earnest money provided is typically held in escrow by a third party to avoid potential issues with it and ensure that funds are distributed appropriately at the designated time. Note that any sums paid in escrow will be credited toward your down payment or applied to your closing costs when you close on the property.

How much are closing costs?

What are closing costs? Put simply, they’re processing fees and operating expenses that you’ll pay to your lender for providing a variety of professional services that ensure a smooth transaction when you close on a home.

Contained within closing costs are various expenses designed to cover common needs, such as home appraisals, title searches, property taxes, homeowners insurance, lender’s fees, and transfers of ownership. Whose responsibility it is to pay these closing costs (portions of which may be split between the buyer and seller) are up for negotiation in any given deal and should be clearly defined in your purchase agreement.

Ultimately, closing costs tend to average around 3% – 6% of any given home’s purchase price.

FAQ

Below are some of the most common questions that prospective home buyers and sellers tend to have regarding real estate purchase agreements.

Does a real estate purchase agreement need to be notarized?

No, a real estate purchase agreement does not require notarization to be valid as it is not filed with county records.

Can a real estate contract be terminated?

In short, yes, absolutely. A real estate contract can be terminated either when the option is included within the contract or when your state’s regulations allow you to do so. For example, an inspection or home sale contingency might provide a quick way to terminate the contract if you’re unhappy with the results. Typically, state laws also permit an agreement to be terminated when a seller fails to disclose any significant issues with the property.

Who pays for the purchase contract?

Fees associated with drawing up this contract are typically included in the buyer’s agent’s commission fee, which the buyer pays as part of the closing fees. However, a seller can contribute compensation to a buyer’s broker or agent, so long as they adhere to National Association of REALTORS® guidelines, which may specify specific requirements and disclosures.

Keep in mind as well that while the seller’s agent might prepare an initial draft of the real estate purchase agreement, the buyer’s agent will review the document and make any necessary changes or counteroffers as well.

Can I write my own purchase agreement?

In theory, yes: You’re free to do so, given that a buyer or seller is allowed to draft their own real estate purchase agreement. However, doing so does not come recommended unless you also make a point to seek out the services of qualified professionals to assist in drafting the document. Keep in mind that real estate transactions often come with complex legal terms, conditions, and restrictions attached – terms and conditions that it’s best to get professional advice on to avoid any potential headaches that may otherwise arise down the road.

What happens after signing the purchase agreement?

After you sign a real estate purchase agreement, several steps will occur. For instance, the buyer will secure financing, conduct a home inspection, and negotiate with the seller to confirm any price adjustments, contingencies, or repairs necessary on the home. As a general rule of thumb, lenders or parties to the transaction will also require that a home appraisal be conducted as a next step. Afterward, once all the conditions outlined in the real estate purchase agreement have been met, the transaction will progress toward closing. Provided that everything is in order at the closing date, once papers have been signed, ownership will officially transfer to the home buyer.

The bottom line: Purchase agreements bring you one step closer to closing day

A real estate purchase agreement is a definitive legal document that details the particular terms and conditions under which a property will be sold.

Built to protect both buyers and sellers and to ensure a smooth transaction, it’s designed to help you avoid hiccups by accounting for various variables associated with selling a home. Understanding the basics related to these documents can help you avoid potential pitfalls as you acquire a new residence.

Interested in learning more about how you can finance the purchase of a new home – one of the most important investments you’ll ever make? Be sure to apply today at Rocket Mortgage^®.