Woman signing a contract.

What Is A Real Estate Purchase Agreement And Why Is It Important?

Scott Steinberg6-minute read

February 26, 2021

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A real estate purchase agreement is a legally binding agreement that governs the purchase and sale of a property. Made between a buyer and seller, it defines the terms of the transaction, and the conditions under which a sale will occur. Whether you’re planning to buy a new home, apartment or condo, or looking to sell a primary residence or investment property, it’s important to make sure that your contract is ironclad. Taking time upfront to spell out the terms under which a property transaction will occur and safeguard against potential hiccups or unexpected events is important, as it can help you avoid potentially legal or financial hurdles on the back end.

What Is A Purchase Agreement?

A real estate purchase agreement spells out the agreed-upon terms under which a buyer and seller agree to engage in 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.” A binding legal agreement that outlines key details of the home sale transaction, it may also be referred to as a real estate sales contract, home purchase agreement, real estate purchase contract, or house purchase agreement.

In effect, when an offer is made to purchase a new home, a buyer will propose conditions for the sale, and spell out important financial details such as their offer price. A home seller will then have the opportunity to accept, reject, or negotiate the terms of this offer. Following any ongoing negotiations which may occur in the form of counteroffers, both parties will sign the purchase agreement when they are satisfied with the terms of the agreement. At this time, both the property that’s up for sale and any parties to the agreement (for example, the home buyer and seller) will be determined to be “under contract.” This contract signals the intent of all parties to engage in a home sale transaction and explains which conditions must be met in order for the sale to close and ownership of the property to transfer to the new buyer.

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Who Prepares The Purchase Contract?

Most commonly, the buyer’s real estate agent will write up and prepare the purchase agreement. Note that agents (not being practicing attorneys themselves) cannot create their own contracts. Rather, for consistency’s sake and the protection of all parties, they typically fill in preexisting documents created by a law firm that specializes in real estate transactions. In other words, a prepared purchase agreement template will be adapted for the purchase of the individual home, with the agent filling in any blanks with information on the property’s specific details.

Components Of A Real Estate Sales Contract

A real estate sales contract and purchase agreement is a detailed document that breaks down the specifics of the property transaction. Within its pages, you’ll find a number of common elements, including the below.

 

Buyer and seller information: Full names and contact information for all buyers and sellers involved in the transaction.

 

Property details: Information on the property’s address, a description of the property, and any other pertinent details about it.

 

Purchase price: The total agreed-upon selling price for the property, including any deposits or additional costs associated with the transaction.

 

Representations and warranties: Statements of facts made by the seller regarding the condition, structure, and composition of the property that is being sold. This information can be disclosed by the seller in a warranty deed.

 

Financing: Specific details that explain how the buyer will be paying for the property, whether by borrowing a mortgage loan from a lender or assuming 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.

 

Title insurance: A note specifying whether the buyer or seller will 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 that is being purchased.

 

Closing date: Your purchase agreement should specify the exact date on which the official transfer of title will occur, and when and at what time the buyer will receive the keys to the property.

 

Contingencies: Any conditions (such as repairs that have to be done by a certain date, or inspections that must be performed) that must be met before a sale of the property can go through.

 

Earnest money: 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.

 

Option to terminate: Some purchase agreements may include an option for the buyer to back out of the deal and terminate contract up until a certain time before closing.

 

Lead-based paint disclosure: For safety’s sake, homes that were built before 1978 are required by law to include information regarding the dangers of lead-based paint, giving the buyer the opportunity to have an inspection performed if necessary.

 

Signatures: Every purchase agreement must be finalized with the signatures of each party.

Contingencies

The word contingency refers to a condition that must be met and depends on certain real-world circumstances occurring. In the field of real estate, a purchase agreement that contains contingencies is one that specifies that although an offer has been made and accepted on a property, certain additional criteria must be met before the deal is complete. Several common contingencies that you might encounter when buying or selling a home include:

 

  • Inspection contingency: Allows a buyer to walk away from a home purchase deal if a home inspection is conducted that subsequently uncovers any defects on the property.
  • Appraisal contingency: An appraisal contingency is designed to ensure that a home’s appraised value is equal to or higher than the agreed-upon purchase price.
  • Financing contingency: Also called a mortgage contingency, a financing contingency can protect the buyer if they are unable to obtain a mortgage and ensures that they get their earnest money deposit back.
  • Title contingency: A title report, or chain of title, is intended to assure the buyer there are no liens or other problems with the property.
  • Home sale contingency: A form of insurance of sorts that states that the buyer’s purchase of the property is dependent on whether they can sell their current home.

Earnest Money Deposit

Think of earnest money as a good-faith deposit from the buyer to the seller that shows that the buyer is serious about their offer to purchase a home. Except in the case that certain contingencies are met, a buyer will lose this earnest money deposit if they choose to back out of this 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 want to make sure they aren’t wasting their time or missing other opportunities by pursuing a contract that won’t close. This earnest money is typically held in escrow by a third party to make sure there are no issues with it, and that it is properly distributed at the appropriate time. Any sums paid in escrow will be credited toward your down payment or closing costs when you close upon the property.

Closing Costs

What are closing costs? Put simply, they are processing fees and operating expenses that you will pay to your lender when you close upon a home. These sums are charged by lenders for the servicing of your loan. Contained within them you’ll find amounts designed to cover common needs such as home appraisals, title searches, taxes, 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) should be defined in your purchase agreement. Ultimately, closing costs may total 3% – 6% of a home’s purchase/sales price.

The Bottom Line

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 a number of different variables associated with selling a home. Understanding the basics associated with these documents can help you steer clear of potential pitfalls as you go about acquiring a new residence.

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Scott Steinberg

Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. A strategic adviser to four-star generals and a who’s-who of Fortune 500s, he’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD. The CEO of BIZDEV: The Intl. Association for Business Development and Strategic Planning™, his website is www.AKeynoteSpeaker.com.