What is a Real Estate Purchase Agreement?

It’s important to understand what’s in a real estate purchase agreement.

Are you looking at a real estate purchase agreement and trying to decipher its essential elements and terms? If so, that is understandable. A purchase agreement for buying or selling property involves complex legal expressions and procedures. So, it’s easy to get confused with terms like disclosures, sale inclusions, contingencies, and earnest money deposits when talking about real estate transactions. 

Understanding the key elements and terms in a real estate purchase agreement is crucial for buyers and sellers. After all, signing the purchase agreement makes it a legally binding document. And trying to terminate a sales contract because you misunderstood key terms will not cut it with the other party. 

This article provides a comprehensive guide to understanding the key elements and terms of a real estate purchase agreement for buyers and sellers. It will cover the importance of a purchase agreement, the key elements of the agreement, and how to ensure expectations from both parties are met.

What Is a Purchase Agreement?

A real estate purchase agreement is a legally binding contract outlining the terms of the property sale. The contract covers each sale element of the buying process. The key elements are buyer and seller information, disclosures, contingencies, and closing costs. In addition, the agreement ensures the buyer’s and seller’s expectations are clear. Once signed, both parties are “under contract.”

The purchase agreement contract is typically the result of lengthy negotiations. For example, the seller and buyer will negotiate the sale price, what the property sale includes, and conditions that affect the final sale. The real estate sales contract is drawn up when both parties are happy with the sale terms. Then the “effective date” starts when the seller and buyer sign the contract.

Who Prepares the Purchase Agreement?

The buyer’s real estate agent typically prepares the real estate purchase contract. However, in some cases, the seller’s agent puts together the real estate contract. Usually, the agent uses a standard purchase and sale agreement template prepared by a real estate attorney and adjusts the details as necessary. 

Hiring a real estate attorney makes sense with some types of property transactions. For example, if you sell your home FSBO (For Sale By Owners), you or the buyer may not have an agent. Or there may be extra contingencies or financing options to include.

Real estate attorneys are knowledgeable about local laws and regulations. Therefore, they can prepare a bespoke real estate purchase agreement contract to ensure it includes all key elements and is legally binding.

Who Pays For the Purchase Contract?

Preparing a real estate sales contract costs are typically included in the seller’s agent commission fee. In the property transaction, the fees are part of the closing costs paid from escrow during the closing process. 

In some cases, both the buyer and the seller agrees to split closing costs. But regardless of who pays for the purchase contract, the buyer and seller must understand their obligations and responsibilities before signing any legal documents.

What Should Be Included In a Purchase Agreement?

The purchase and sales contract should include the following: the full legal names and addresses of the buyer, seller, and any other parties involved in the transaction, the property’s full description, and any additional details that specify the transaction’s terms and conditions.

Eight key elements are included in most standard real estate contracts. 

Buyer and seller information

First, the real estate sale and purchase agreement should include accurate information about the buyer and seller. The information should include their full legal names, addresses, and other parties involved in the transaction. 

Sale inclusions and exclusions

A key element of a purchase agreement is a clause stating what is included and excluded in the sale. For example, the sales contract should include property details, a full description, and the agreed purchase price. Additionally, the seller can list items or fixtures that come with the property.

Unfortunately, inclusions and exclusions are often a reason for conflict after closing the sale. For example, the buyer may assume that a certain item would be part of the property and, therefore, induced. However, the buyer could view the item as a fitting and remove it when moving. 

The purchase agreement typically includes fixtures and appliances that are permanently attached to the property. However, there are exceptions, so the buyer and seller should discuss inclusions and exclusions beforehand.

Here are some typical inclusions in a sale agreement:

• Light fixtures and bathroom fixtures
• HVAC units
• Ceiling fans
• Permanent fixtures and fittings
• Blinds, rods, and other window treatments
• Built-in cabinets
• Shrubs planted in the ground
• Additional appliances the buyer and seller agree to include in the sale

Here are typical exclusions in real estate contracts:

• Free-standing kitchen appliances like washers and dryers, refrigerators, and stoves
• Above-ground hot tubs
• An outdoor pavilion or glasshouse
• Items of sentimental value the seller wants to take

To ensure everyone is “on the same page” regarding inclusions and exclusions, always put in writing the fixtures, fittings, and appliances that will be left or removed. 

Disclosures

Disclosures are crucial in a real estate contract. They provide buyers with information about the property’s condition, history, health and safety risk, and any past problems. They also inform sellers of their obligations before, during, and after the sale. In most states, it’s illegal to conceal defects knowingly. 

When selling a house, it’s important to be aware of the disclosure requirements in your state, as these can vary. In addition to state laws, there are also federal laws that apply to real estate disclosures.

Here are some common issues sellers must disclose to potential buyers:

• Lead based paint disclosure: Federal law stipulates you must disclose the presence of lead paint if your home was built before 1978.
• Flood risk disclosure: Although not a federal statute, state laws may require disclosing if the property is in a flood risk area. Some states, like California, require disclosure regarding risks of fires, earthquakes, and environmental hazards.
• Structural defects: You may be responsible for disclosing any serious structural defects, termite issues, or previous flooding in the basement.

Some states may also require you to disclose the following to a prospective buyer:

• Radon gas
• Boundary issues
• Environmental problems like pollution, odors, and noise
• Whether a violent death or suicide has happened on the property
• The financial health of a homeowners’ association
• Histories of pest infestations

Typically, state or federal governing law only requires you to disclose issues you know about.

Contingencies

Purchase agreement contingencies protect both the buyer and seller when buying or selling a house. These clauses outline what happens if something unexpected occurs, making the signed purchase agreement legally binding only when specific criteria are met.

Here is a list of common contract contingencies you are likely to find in a purchase contract:

• Home inspection contingency: This clause allows the buyer to have a home inspection completed, and if it uncovers significant issues, the buyer has the option to negotiate a lower price, ask the seller to resolve the issues, or withdraw from the agreement.
• Appraisal contingency: A mortgage lender will insist on an appraisal contingency. A home appraisal ensures the purchase price for the property is not excessively more than its value. The purchase agreement can be terminated if the seller wants more than the home is worth.
• Financing contingency: One of the most common purchase agreement contingencies is for financing, typically excluding interest rate. This clause allows a buyer to withdraw from the real estate sales contract if a lender denies their loan or mortgage application. This can also be called a loan contingency.
• Title contingency: Part of the buying process involves title searches. This process ensures the seller is the legal owner of the title. It also checks for judgments or liens against the property. The title contingency allows the buyer to leave the sale if ownership issues are flagged. In addition, the lender usually requires buyers to obtain title insurance to protect against potential losses due to a bad title.
• Home sale contingency: Suppose a buyer cannot sell their current home within a specified time period. In that case, a home sale contingency allows the buyer to cancel the sale without penalties. 

Contingencies mean the buyer can walk away from the deal without losing their earnest money deposit or dealing with other penalties.

Terms and conditions

Terms and conditions explain the exact details of the transaction. For example, they outline responsibilities and obligations, timeframes, the amount of down payment, closing costs, terms of payment, and contingencies. The purchase agreement’s T&Cs should also include a glossary of terms used in the document. 

Earnest money deposit

The purchase agreement terms typically include a security deposit called earnest money. This deposit shows that the buyer is serious about purchasing the property. Depending on the purchase contract terms, the earnest money deposit amount is 1–3% of the total purchase price.

The earnest money deposit usually goes toward the down payment. The purchase contract terms sometimes stipulate that the deposit is non-refundable. However, contingencies in the agreement could allow the money to be refunded in certain circumstances. 

Closing costs

Closing costs are various processing fees when you close on a property and are commonly finalized a few days prior to closing. These costs can include lender’s fees, appraisal fees, property taxes, title searches, loan origination fees, and surveys. The amount you must pay depends on the property value, location, and type of loan. 

Who pays closing costs when completing a real estate transaction? This depends on the terms of the real property purchase agreement. In some cases, the buyer and seller split the amount equally. In other cases, the seller could cover closing costs to sweeten the deal and quicken the sale. 

Signatures

Signatures from both parties are required for the purchase agreement to become legally binding. Valid signatures for real estate contracts include using a pen on paper or digitally signing an electronic document. 

In any case, the signature shows the person’s intent to abide by the terms and conditions of the contract.

Does It Need To Be Notarized?

Real estate purchase agreements do not need notarization or witnessed by a third party. However, sometimes, having a “notary public” witness the signing and verify the signatory’s identity makes sense.

Notarization is unnecessary for purchase agreements because these real estate documents do not have to be filed with local county records.

Do Purchase Agreements Expire?

Purchase agreements can expire for various reasons. The contract should set a date by which the buyer should arrange financing, title searches, and the home appraisal. Therefore, the agreement can expire if issues come up in the contingencies. For example, a common reason sales contracts expire is when the buyer’s ability to finanace the purchase falls through.

It’s good to remember that the date a real estate purchase agreement expires depends on the terms and local state laws. For example, the contract expires on the closing date in some states. Or the agreement could contain special stipulations. Additionally, some agreements have a renewal clause to allow extra time to resolve contingencies.

Can You Terminate a Purchase Agreement?

You can terminate a real estate contract if the terms or state laws allow it. For example, an agreement can be terminated if a home inspection flags serious structural issues that the seller failed to disclose.

Other valid reasons to terminate a purchase agreement include the following:

• Many states allow three business days to “cool off,” allowing either party to walk away from the purchase agreement
• The buyer’s lender denies the mortgage application
• The buyer cannot sell their current home
• The title search flags issues with the title or property ownership

To terminate a purchase agreement, you must carefully check the contract’s terms and state real estate laws. Terminating a real estate contract without a valid cause could mean you forfeit the earnest money deposit and may have to pay penalties.