A real estate purchase agreement is a binding agreement where the seller and the buyer agree and commit to the terms of the sale of a piece of real property. This includes the specifics of the property, the purchase price, the downpayment, the payment terms and other terms and contingencies that the parties agree on.
The Basic Components of a Residential Purchase Agreement
A standard residential purchase agreement will include:
- Buyer and seller details. Names and contact information of parties to the contract. This includes full names, addresses, and whether the parties are individuals, a married couple, a business entity, or a trust, as this affects how the deed transfers.
- Property details. The address of the property in addition to the legal description of the land. The legal description is typically represented by meters and bounds and prepared by a licensed surveyor. Additional features may include the condition of the property, and which fixtures and appliances are included in the sale.
- Purchase price. The total price to be paid for the property, including deposits and adjustments.
- Representations and warranties. Facts and promises by the seller regarding the property—the buyer will rely upon these statements when entering the transaction.
- Financing. How the buyer plans to finance their purchase. For instance, will the buyer pay for the property through third-party or seller financing?
- Contingencies. Actions and conditions that must be met before the sale can go through.
- Title insurance. A form of insurance that covers a loss of value in the property due to future discoveries of defects in the title. Commonly, either the buyer or the seller will obtain the insurance in the name of the buyer.
- Closing and possession dates. When the legal transfer of the property occurs, and the buyer takes possession of the property. All agreements are finalized, money is transferred, documents are endorsed and exchanged, and the title of the property passes to the buyer. The title company will usually record the deed at the county land recorder’s office and inform all parties when completed.
- Lead-based paint disclosure. Mandatory federal disclosure for homes built before 1978—provides buyers with information about the hazards of lead.
- Signatures. If a contract to purchase real estate is not written and signed by both the buyer and the seller, it is not enforceable.
The Importance of a Written and Signed Agreement
The statute of frauds in U.S. common law, which requires certain contracts to be made in writing in order to be valid, includes real estate contracts. If a contract to purchase real estate is not written and signed by both the buyer and the seller, it is not enforceable.
An ideal residential real estate purchase agreement will include protections for both parties throughout the entire buying/selling process. In addition to the basic elements and clauses included in these agreements, the parties can also customize the following terms according to their preferences:
- Dispute resolution. This clause will guide both parties on how to resolve any purchase-related disputes—such as requiring both parties to attend mediation, arbitration, or go directly to court for resolution.
- Option to terminate. Allows the buyer to back out of a purchase agreement during a fixed period, prior to closing.
- Inspection. Allows the buyer to have the property inspected within a specific period.
- Closing deliverables. The documents that will be transferred to the other party during closing.
- Closing costs. The fees associated with the closing of the property purchase and who is responsible for paying for each of them. The types of costs and the party responsible for them vary by state. Closing costs are generally 2 to 5 percent of the purchase price of the property—including taxes and fees related to the transfer of property and the real estate agents’ commission.
- Risk of loss. The liability of the seller or the buyer for the property if there is damage to it before the contract is finalized.
- Real estate taxes (property taxes). Taxes imposed on the land and any structures that are permanently attached to the ground, such as buildings or homes.
- Earnest money deposit. A deposit showing the buyer’s good faith to proceed with the purchase of the property—in return the seller takes the property off the market. During the closing, the earnest money is credited to the purchase price. If the contract is terminated in accordance with the terms of the agreement, the earnest money deposit is returned to the buyer. However, if the buyer changes their mind and does not proceed with the transaction (outside of the terms of the agreement), the seller can keep the earnest money as damages.
- Escrow. A neutral third party in charge of holding funds during the transaction. Escrow offers protection for both parties while contractual risks are still outstanding by keeping the property, and any funds, from changing hands until all aspects of the agreement are met, such as home inspections, insurance information, and financing.
- Contingency. A condition that must be met in order for the purchase to occur. If the contingency is not met, the buyer has the option to end the contract and not follow through with the purchase. Some examples of common contract contingencies include:
- Buyer contingencies. These are conditions that the buyer requires to be met before closing can occur. In the event that a contingency is not met, the buyer may end the agreement and be refunded the earnest money and any other deposits made towards the purchase of the property. However, the buyer also has the option to waive a contingency later on if it is no longer needed. Common buyer contingencies include the sale of the buyer’s home or another real estate transaction taking place or an appraisal on the property being sold to determine whether the home is worth what the buyer has agreed to pay.
- Inspection contingencies. Requires that a professional inspection of the property occurs prior to closing. If it does not occur or if an inspector discovers a serious material defect, then the buyer may end the agreement, renegotiate the purchase price or require the defect to be repaired. Depending on the state, a home inspection may be completed before executing a final purchase contract, making an inspection contingency unnecessary (to include in the agreement).
- Financing contingencies. Requires the buyer to gain financing in order to close the deal. Types of financing include mortgage assumptions, third-party lenders, seller financing, and all-cash transactions. (For more information on the different types of financing scroll to the next section titled “Real Estate Financing”.)
- Appraisal contingencies. The property must receive a professional appraisal at a value of at least the amount of the purchase price—if this does not occur, the buyer can choose to terminate or try to renegotiate the agreement.
Real Estate Financing
Rarely will a buyer pay for an entire property in cash—the buyer typically needs additional financing to pay the full purchase price of the property. Which type of financing is chosen depends on the financial position of both parties (the buyer and seller). There are four ways to finance the purchase of a property in a real estate purchase contract:
- Third-party financing. A bank or lending institution provides a loan or mortgage to a buyer which the buyer must pay back over time, with interest. This is the most common way to purchase a property—the approval depends on the buyer’s credit rating, job history, and current financial situation.
- Seller financing. The seller and buyer create a private loan contract. The buyer pays back the loan over time, with interest. Sometimes, a seller will provide financing to a buyer who is unable to obtain a loan from a financial institution. This is often the case when a seller has paid off their mortgage, and a buyer simply pays them a predetermined amount in intervals until the agreed-upon price has been paid in full.
- Assumption of mortgage. The buyer agrees to take responsibility for the seller’s mortgage, thereby becoming liable to repay the seller’s loan.
- All-cash financing. When the buyer will finance the deal themselves by purchasing the residential property in full using their own funds, and will not require a loan. The funds do not need to be in the form of cash, as electronic wire transfers are normally accepted.
The financing arrangement may also be documented in a Loan Agreement, Promissory Note, Mortgage Agreement, or Deed of Trust.
Additional Documents Needed for Real Estate Transactions
A residential real estate purchase agreement is used to outline the terms of a property sale between two parties. It does not have the power to transfer the title, so a Warranty Deed is often used in conjunction with the residential real estate purchase agreement. Additionally, if the parties agree to seller financing, a Promissory Note may be used. The following documents may be needed in conjunction with the residential real estate purchase agreement:
- Warranty deed. A document filed with the County Recorder’s Office that grants title to real estate from the seller to the buyer. The document guarantees:
- The seller is entitled to sell the property
- There are no outstanding liens other than those listed on the Warranty Deed
- The buyer will be defended against any claims brought against the property by individuals claiming to have a prior interest in it
- Loan agreement. A contract between a lender and borrower, where the borrower promises to pay back a sum of money to the lender using a payment plan.
- Promissory note. A legal form that documents a loan between two parties. It enforces a borrower’s promise to pay back a sum of money to a lender within a specific time period. Promissory notes are typically used for:
- Private or personal loans between family members, friends or colleagues
- Real estate loans, mortgages, or property down payments
- Bank loans
- Mortgage agreement. A contract between a borrower (called the mortgagor) and the lender (called the mortgagee) where a lien is created on the property in order to secure repayment of the loan.
- Deed of trust. Used to secure a loan for real property, the legal title to a property is transferred from the lender to a neutral trust until the borrower pays off the loan. Once payment is complete, the legal title transfers from the trust to the borrower.
How to Handle Real Estate Purchase Agreement Disputes
Mediation is a less formal and more cost-effective way to resolve disputes instead of both parties going to court. It allows both parties to discuss their issues candidly and bring them out in the open. Mediation is generally non-binding, meaning either party can walk away without a resolution. The parties are free to decide whether any disputes that are not resolved by mediation should go to arbitration.
In arbitration, each party will offer evidence and/or testimonies to plead their cases. Once both parties have been heard the arbiter will rule on the case. Unlike mediation, where a resolution is only reached if all sides agree, arbitration can rule in favor of either party. Additionally, when arbitration is agreed on, the decision of the arbitrator will be binding for both parties.
State-Specific Purchase Agreement Templates
Below is a list of states we have created specific real estate purchase agreement templates for and provided details about seller disclosures required by state law.
Executing a Real Estate Purchase Agreement
To formally make the agreement effective, the parties must sign and date it in front of a notary or witness. Many states only require a notary, however, Connecticut, Florida, Louisiana, and South Carolina require two witnesses.