Real Estate Purchase Agreement

Last Updated: January 3, 2024 by Phil Ahn

Purchase Agreement Contract Template_1 on iPropertyManagement.com

Examine the different processes of a real estate purchase agreement, including signing and closing the agreement, terminating the agreement, and particular provisions within the agreement.

Real Estate Purchase Agreements by State

What is a Real Estate Purchase Agreement?

A real estate purchase agreement is a binding agreement where a seller and a buyer agree and commit to the terms of the sale of real property. The contract includes:

  • The purchase price
  • Contingency clauses
  • Earnest money deposits
  • Closing date

A real estate purchase document is also known as a:

  • Purchase and Sale Agreement
  • Residential Real Estate Contract
  • Home Sale Contract
  • Real Estate Sales Contract

See Also: Land Purchase Agreement (PDF) and Commercial Real Estate Purchase Agreement (PDF).

Completing a Real Estate Purchase Agreement

The process for agreeing to a real estate purchase include the following:

  1. Preparing the purchase agreement
  2. Negotiating the purchase agreement
  3. Signing the purchase agreement

Preparing the Purchase Agreement

Real estate agents who are licensed to practice law or specialized real estate attorneys may prepare a purchase agreement.

If the sale of the property is by the owner, the buyer’s agent could prepare the paperwork as a transactional agent or “dual agent”.

While certain states allow dual agency, the following states do not:

  • Alaska
  • Colorado
  • Florida
  • Kansas
  • Maryland
  • Oklahoma
  • Texas
  • Vermont
  • Wyoming

Negotiating the Purchase Agreement

There are some points in a purchase agreement that are left open to allow both the seller and buyer agree to  parties to work out their own terms. These include:

  • Closing costs
  • Fees such as escrow and insurance
  • Sales price
  • Listing commission
  • Earnest money
  • Time to obtain a loan
  • Time to obtain an appraisal

The agent(s) will help both the seller and buyer agree to the terms of the sale, allowing the purchase of the residential property.

Signing the Purchase Agreement

A purchase agreement is a legally binding document that is signed by the seller and buyer. Each state has its own requirements when it comes to signing a real estate purchase agreement.

Typically, while a purchase agreement does not need to be notarized or signed by a witness, other real estate documents such as deeds, mortgages or any affidavits will need one.

If an agreement to purchase real estate is not written or signed by both the seller and buyer, it will not be enforceable.

Terminating a Real Estate Purchase Agreement

Terminating a real estate purchase agreement varies from state to state. As a real estate purchase agreement is a legally binding document, it might be difficult for a seller or buyer to terminate it without a penalty, especially if there is no termination clause.

The purchase agreement is made to outline all conditions and contingencies which the seller and buyer can terminate the agreement. If either party decides to terminate the agreement for a reason that is not listed as a condition or contingency on the agreement, they can face consequences such as forfeiting the earnest money deposit, lawsuits and other financial penalties.

Seller’s Termination

A seller may legally back out of the purchase agreement if a:

  • Contingency clause exists permitting early termination
  • Kick-out clause exists allowing the seller to accept offers if a better offer comes along
  • Buyer does not meet obligations (i.e., failure to secure a mortgage, failure to provide a deposit)
  • Buyer commits fraud
  • Seller and buyer mutually agree to terminate the agreement

If a seller improperly terminates the purchase agreement, they may face legal consequences from both the buyer and their listing agent. The listing agent might bring forth a lawsuit for marketing expenses, survey fees, legal fees or even their commission.

Buyer’s Termination

A buyer may legally back out of the purchase agreement if:

  • Major defects are found or there is a failed inspection
  • Agreed upon repairs were not completed by the seller
  • Undisclosed easements
  • The home is uninsurable due to major damages or issues to the property
  • The seller committed fraud
  • The seller and buyer mutually agree to terminate the agreement

If a buyer improperly terminates the purchase agreement, they may face legal consequences from both the seller and their listing agent. The seller may bring forth a lawsuit for a breach of contract.

tip
By having contingencies and conditions in the purchase agreement, it could potentially decrease the financial and legal repercussions of terminating a purchase agreement for both the seller and buyer.

Elements of a Real Estate Purchase Agreement

Each real estate purchase agreement is individually constructed to reflect the specific requirements of the sale. However, real estate contracts also have some common elements such as:

  • Price
  • Contingency clauses
  • Earnest money deposits
  • Closing date

Price

The purchase agreement should include the offered price accepted by the seller as well as the means by which it will be furnished. Common methods include:

  • Paying in full with cash
  • A cash down payment and a new mortgage
  • Another arrangement involving an already existing mortgage.

This information may be detailed in the purchase agreement or a financing addendum may be included to clearly outline the buyer’s down payment and lending situation.

Contingency Clauses

A contingency clause defines or outlines certain conditions or actions that a real estate purchase agreement must meet to become a legally binding document.

Common contingency clause examples include:

  • Appraisal Contingency. An appraisal provides protection for the buyer and is used to ensure that a property is valued at a proper specific dollar amount.
  • Title Contingency. A buyer may review the home’s title for any problems or any conflicting claims of ownership of the property.
  • Financing Contingency. A purchase agreement may not move forward until predetermined financial criteria are met.
  • Inspection Contingency. The buyer can have the home inspected by a professional inspector. The inspector will evaluate the property prior to closing and provides additional protection to the buyer who can cancel the agreement or ask for certain repairs to be completed before purchasing the home.
  • Home Insurance Contingency. The seller can request for a buyer to purchase a home insurance policy.

Each contingency has a specific deadline and if it’s not met by the deadline the agreement can be cancelled by the parties. If all the conditions are met, the contract is legally binding, so if a party decides to back out of the agreement they may be in breach of a contract and could face financial penalties or legal repercussions.

Earnest Money Deposits

Earnest money deposits (EMD) are a good faith deposit, which the buyer pays to show the buyer’s intent purchasing the seller’s property. Generally, the EMD is between 1-3% of the sales price, but it depends on a variety of factors (i.e., the current market, the seller’s requirements, any limitation the state imposes, etc.). The earnest money deposit is usually due within 3 days upon the agreement of the purchase agreement.

Earnest money deposits are usually paid via cashier’s checks or wire transfers and can be paid in phases or all at once. Once payment is made and the funds have been received, the Seller’s agent should provide the Buyer with an EMD receipt. In most cases, an EMD is refundable or has a cancellation fee.

Closing Date

The date of the sale’s closing should be included in the purchase agreement as well as the stipulation that any changes in closing must be agreed to in writing. Possession of the property typically transfers to the buyer upon the listed closing date and time. More importantly, the closing date marks the conveyance of the property’s title from the seller to the buyer. This conveyance may eventually be recorded in a bill of sale.

Next Steps

After signing the purchase agreement, the property is considered to be under contract. While under contract, there are multiple things a seller and buyer need to completed before closing. These include the:

  1. Buyer entering escrow and providing the initial deposit
  2. Seller and buyer performing a title search through a title company
  3. Buyer or seller completing a home inspection to ensure all repairs are completed
  4. Buyer purchasing homeowner’s insurance and providing proof of it
  5. Buyer locking in the interest rate
  6. Seller and buyer addressing the remaining contingencies
  7. Title company sending disclosures and outlining closing costs and it will outline any closing costs.

After the mortgage and other supporting documents are signed and the title company has received the mortgage company’s funds, the property is considered transferred to the buyer.

Additional Addendums & Disclosures

Each state has their own disclosure requirements. For instance, in New York, there is a Property Condition Disclosure Act that states that if there is a problem with the property it must be disclosed to the buyer in a disclosure statement, unless the seller pays a $500 credit to the buyer at the closing process. N.Y. Real Prop. Law §§ 460-467 Below are common examples of real estate addendums and disclosures:

  • Purchase Agreement Termination Letter. This letter indicates that both parties are not obligated under the purchase agreement once it’s terminated.
  • Third Party Financing. This addendum outlines the terms of a loan and makes the contract of the property contingent upon the loan being approved by the lender.
  • Inspection Contingency. The buyer can use this addendum to determine if there are any major defects with the property. If there are any issues with the home, the seller and buyer can negotiate to fix/credit the issue or the buyer can back out of the contract.
  • Closing Date Extension. This addendum is used when both parties agree to extend the closing date.
  • Release of Earnest Money. A form which both parties sign for the Buyer to release the earnest money deposit to the Seller.
  • Earnest Holdback Agreement. This addendum outlines any rules for money that are pending to be release or being held back by the title or escrow company until the seller completes all tasks, responsibilities, and duties before the closing process occurs. During this time, interest can be earned while being held in an escrow account, and interest shall be paid to the Buyer.
  • Seller Financing. This addendum is used when the seller finances the sale and the sale price is payable over a period of time (instead of the closing).
  • Short Sale. This addendum is used when a seller owes more money than what the property is worth.
  • Property Disclosure Statement. Required in most states, the seller shall disclose any issues or defects on the property.
  • Lead-Based Paint Disclosure. According to federal law, every state must disclose a lead-based paint hazard if the home was built before 1978.

Caveat Emptor (“Buyer Beware”)

Caveat Emptor is a Latin phrase that means “let the buyer beware.” In a real estate transaction, a buyer must accept the property “as is.”

example
The buyer asks the seller if there are any defects on the property that they should know about. The seller discloses that there was a leak in the roof about two-months ago, but a contractor made a repair and it seemed to resolve the problem. Relying on this information, the buyer assumes that the roof has been fixed and decides not to pursue a roof inspection and proceeds to move forward with the home purchase.

The following states allow caveat emptor sales:

  • Alabama
  • Arkansas
  • Georgia
  • North Dakota
  • Virginia
  • Wyoming

In states where caveat emptor applies, a buyer would be unable to rescind an offer or sue for damages for relying on a seller’s representations. It is the buyer’s responsibility to conduct investigation and find any defects.

How to Write a Real Estate Purchase Agreement

To get started, download the Real Estate Purchase Agreement Template at the top of the page. This file can be viewed/opened as a PDF or as a Word document. Below is a step-by-step guideline on how to fill out a real estate purchase agreement.

I. THE PARTIES, THE AGREEMENT AND THE PROPERTY

1. Add the date that the purchase agreement was entered into.

2. Provide the Seller’s full name and address.

3. Provide the Buyer’s full name and address.

II. PROPERTY DESCRIPTION

4. Insert the exact property address of the residential property that is being sold to the Buyer.

5. Add the legal description of the residential property that is being sold. If this information is unknown, contact the local County Records office.
III. PERSONAL PROPERTY

6. Insert a description and all items that will be included in the sale, including all fixtures that are embedded in the land or that are attached to the property that cannot be removed without damage.

7. Provide any fixtures and items that are excluded from the sale and will be taken by the Seller.

8. If there are personal property items that the Seller is leaving behind (that is not embedded to the land) list the items here.

 IV. PURCHASE PRICE AND TERMS

9. Insert the dollar amount of the purchase price the Buyer must pay for the residential property.

10. If the Buyer is paying for the property via an “All Cash Offer”, check this box. The date and time of when the Buyer should provide the Seller’s third-party of documentation to verify sufficient funds shall be written here. If the verification of funds are unacceptable by the Seller, the Seller must provide a receipt. Insert the amount of business days a Seller must provide notice to the Buyer that the funds aren’t acceptable.

11.If the Buyer is purchasing the property through “Bank Financing”, check this box. Determine if the financing will be through a “Conventional Loan”, “FHA Loan”, “VA Loan”, or if there is “Other” financing write the description in the space provided.

V. ADDITONAL TERMS

12. Insert the date of which the Buyer will provide the Seller a letter from a credible financial institution to verify the Buyer’s credit report, source of down payment, acceptable income and availability of funds to close the real estate transaction.

13. Identify if the loan is or isn’t contingent on the lease, sale or recording of another property by checking the box marked “is” or “is not”.

14. Insert the due date of when the letter from a credible financial institution must be provided to the Seller.

15. If the letter is not provided by the Buyer, insert the amount of days from the letter’s due date that the Seller must provide a written notice to terminate the purchase agreement.

VI. SELLER FINANCING

16. If the seller is providing financing to the Buyer, check the box marked “Seller Financing”.

17. Insert the loan amount in dollars.

18. Insert the down payment amount in dollars.

19. Insert the interest rate (per annum).

20. Insert the loan term period and check if the term is for “months” or “years”.

VII. SELLER FINANCING (Cont.)

21. Insert the date of which the requested documentation is due.

22. Insert the date of which the Seller must approve the Buyer’s documentation.

23. Insert the amount of business days that a refund must be made in the case that the Buyer fails to obtain the Seller’s approval and the purchase agreement may be terminated.

VIII. SALE OF ANOTHER PROPERTY

24. Provide the address of the Buyer’s property that must be sold and closed for the Buyer to purchase the new real estate.

IX. EARNEST MONEY

25. Write the dollar amount of the earnest money deposit that the Buyer agrees to pay.

26. Insert the date and time when the earnest money deposit is due. Check the box “AM” or “PM” if the payment is due in the morning or evening.

27. If state requires the earnest money deposit to be placed in a separate trust account or escrow account, check a box if it “is” required or if it “is not” required.

X. DISCLOSURES

28. Check the box if there are no attached addendums or disclosures to the purchase or agreement or check the box if there are addendums or disclosures attached to the agreement. If there are addendums or disclosures, list the names in the blank spaces.

XI. SELLER REPRESENTATIONS AND WARRANTIES

29. If there is any additional information that the Seller would like to add, it should be detailed in the blank space provided.

XII. INSPECTION

30. The inspection is contingent under the Buyer’s inspection of the property. The Buyer or Seller must agree upon a date about repairing the unsatisfactory conditions (if any). If the agreement can’t be made by the inserted date, the Buyer may have the right to terminate the purchase agreement and shall be refund any previous deposits.

XIII. SURVEY

31. The Buyer has an option to obtain a survey of the property before closing to ensure there are survey problems including defects, overlaps, boundary lines, etc. If there are survey problems the Buyer must notify the Seller of any issues within a certain amount of business days. Indicate how many days the Buyer must notify the Seller before the closing.

32. Indicate how many days the Seller has to remedy any survey problems before closing.

XIV. TITLE

33. Once a title search report is received, indicate how many business days a Buyer has to notify the Seller of any problems that aren’t acceptable in the report.

34. Indicate how many business days the Seller has to remedy any defects found in the title search report.

XVII. TITLE INSURANCE

35. Check the box marked “Buyer’s” expense or check the box marked “Seller’s expense” to determine who will purchase a title policy.

36. Check “Buyer” or “Seller” to determine who will select the title insurance company.

37. Indicate which state the title insurance company must be authorized to do business in.

38. If there is additional information to add, fill the blank lines here.

XVI. APPRAISAL

39. Mark this box if the Buyer’s performance is not contingent upon the appraisal of the property being equal to or greater than the purchase price.

40. Check this box if the Buyer’s performance is contingent upon the appraisal or the property being equal to or greater than the purchase price. Also indicate how many business days the Parties have to re-negotiate the purchase agreement.

XVII. CLOSING

41. Indicate how funds shall be provided to the Seller. Check either “cash”, “bank electronic transfer”, “cashier’s check”, “money order” “certified check” or “other”. If “other” indicate the type of payment.

42. Include the date and time of which the transaction shall be closed. Check the box “AM” or “PM” if the transaction shall be closed in the morning or evening.

XVIII. CLOSING COSTS

43. Mark “Buyer”, “Seller”, or “Both Parties” to indicate who will pay for the closing costs.

44. Check “Seller Closing Costs” or “Buyer Closing Costs” and indicate if the party should pay “Half of Any Escrow or Closing Fees”, “All Escrow or Closing Fees” or “Other”. If “Other” is chosen, list how the closing costs will be paid.

XIX. SELLER CLOSING DELIVERABLES

45. If applicable, add any additional information in the blank line.XX. BUYER CLOSING DELIVERABLES

46. If applicable, add any additional information in the blank line.

XI. TERMINATION

47. If the agreement is terminated, the Buyer shall be refunded. Indicate how many business days the Seller has to refund the money.

XII. POSSESSION OF THE PROPERTY

48. Add the date the Seller must deliver the property to the Buyer.

XIII. GOVERNING LAW

49. Insert the State that the agreement shall be governed by law.

XIV. NOTICES

50. Add the address of the Seller where notices or other forms of communication can be delivered.

51. Add the address of the Buyer where notices or other forms of communication can be delivered.

XV. OFFER EXPIRATION

52. Indicate a due date of the date and time the Seller must sign the agreement and give a copy to the Buyer or the agreement shall be revoked. Check the box “AM” or “PM”.

XVI. ADDITIONAL TERMS AND CONDITIONS

53. Add any additional terms and conditions in the blank lines, if applicable.

XVII. SIGNATURES

54. Add the Seller’s signature, printed name and date of execution.

55. Add the Buyer’s signature, printed name and date of execution.

56. Add the Agents’ signatures, printed names and dates of execution.