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 real property. This contract includes the purchase price, the closing date, contingencies and other terms and conditions both parties agree on.
This document is also known as a:
- Purchase and Sale Agreement
- Residential Real Estate Contract
- Home Sale Contract
- Real Estate Sales Contract
Real Estate Purchase Agreements by State
Key Things to Know About Purchase Agreements
A purchase agreement should include all the terms of the sale. Below we will take a closer look into the details and components of a residential purchase agreement.
Who Prepares the Purchase Agreement?
Real estate agents (typically the buyer’s agent) and real estate attorneys may prepare a purchase agreement. If a Buyer or Seller wants a real estate purchase agreement uniquely created for them, they must seek the assistance of a real estate attorney who is the only one legally authorized to create a purchase agreement from scratch.
If the sale of the property is by the owner, the Buyer’s agent could prepare the paperwork as a transactional agent or “dual agency”. It is important to keep in mind that the following states do not allow dual agency:
Earnest Money Deposits
Earnest money deposits (EMD) is a good faith deposit, which the Buyer pays to the Seller to show their intent or commitment to 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.
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:
- Appraised Contingency – This contingency provides protection for the Buyer and is used to ensure that a property is valued at a specific dollar amount or the Buyer has the option to back out of the sale or renegotiate.
- Title Contingency – This allows the Buyer the right to review the home’s title for any problems or any conflicting claims of ownership of the property.
- Financing Contingency –This is added to ensure that a deal cannot move forward if predetermined financial criteria aren’t met. Types of financing include third-party lenders, seller financing, cash transactions, etc. This specific contingency helps set a timeframe to apply for a mortgage and close on the loan.
- Inspection Contingency – This clause gives the Buyer the authority to 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 backout of the agreement they may be in breach of a contract and could face financial penalties or legal repercussions.
Caveat Emptor (“Buyer Beware”)
Caveat Emptor is a Latin phrase that means “let the Buyer beware.” In a real estate transaction, it means that the Buyer must accept that the property will be “sold as is.”
For 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.
In this particular purchase agreement, there is language containing the caveat emptor principal. After purchasing the house, the Buyer sees that the ceiling is starting to degrade and has a consistent leak every time it rains. They proceed with hiring a roofing contractor to fix the damage and ends up paying for an entire roof replacement, costing thousands of dollars. The new owner decides to pursue a lawsuit; however, the court finds that the new owner is not entitled to any remedy because the caveat emptor principal is applied. The Buyer did not use due diligence to ensure that the roof was in good working condition and wouldn’t cause any damage in the future.
It is important to note that the following states allow caveat emptor sales:
- North Dakota
Each state has unique laws and it’s important for a potential buyer to ask their real estate agents or attorneys about the risks of buying a home.
Signing the Purchase Agreement
A purchase agreement is a legally binding document that is signed by the Buyer and Seller. Each state has their own requirements when it comes to signing a real estate purchase agreement. Typically, a purchase agreement does not need to be notarized or signed by a witness, but other real estate documents such as deeds, mortgages or any affidavits will most likely need a notary and/or a witness.
If an agreement to purchase real estate is not written or signed by both the Buyer and the Seller, it is not enforceable.
After signing the purchase agreement, the property is under “contract”. Real estate transactions can take weeks to months to complete. There are multiple steps that Buyer/Seller need complete before closing on a home, for example:
- Buyer must enter escrow and provide the initial deposit (i.e., earnest money deposit which is generally used for the down payment) to the escrow agent.
- The Buyer or Seller must perform a title search by contacting the title company to see if they are issuing title insurance on a clear title.
- Buyer or Seller must complete a walk-through/home inspection of the property to ensure that all the requested repairs are completed.
- The Buyer must purchase homeowner’s insurance as the mortgage company and/or the Seller will require proof of insurance before closing.
- Buyer must lock in the interest rate.
- The Buyer and Seller must remove the remaining contingencies.
- Title company will send a disclosure and it will outline any closing costs. The final amount due from the Buyer must be wired to the title company before closing.
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 Buyer and Seller 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.
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 Buyer and Seller 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.
There are several reasons why a Seller might backout of the purchase agreement:
- The purchase agreement includes a contingency that allows the Seller to legally terminate the agreement.
- Unable to find a replacement home.
- If there is a kick-out clause the Seller can continue to accept offers if a better offer comes along.
- Change in financial circumstances (i.e., job loss, death, etc.).
- Buyer does meet their obligations (i.e., failure to secure a mortgage, failure to provide a deposit, etc.).
- The Buyer committed fraud.
- Mutual agreement between the Seller and Buyer to terminate the agreement.
If a Seller wants to improperly terminate the purchase agreement, they might face legal consequences from both the Buyer and the listing agent. The listing agent might bring forth a lawsuit for marketing expenses, survey fees, legal fees or even their commission.
There are several reasons why a Buyer might back out of the purchase agreement. Reasons could include:
- Failed inspection or major defects found.
- Unable to obtain financing.
- Not having a clear title to transfer the property.
- Agreed upon repairs were not completed by the Seller.
- Failure to sell their home.
- Undisclosed easements.
- The home is uninsurable due to major damages or issues to the property.
- Change in financial circumstances (i.e., job loss, death, etc.).
- Another home is put on the market that they Buyer prefers more.
- Seller committed fraud.
- Mutual agreement between the Buyer and Seller to terminate the agreement.
If a Buyer wants to improperly terminate the agreement, it might cost them their earnest money deposit and if damages are incurred, the Seller may bring forth a lawsuit for a breach of contract.
By having contingencies and conditions in the purchase agreement it could potentially decrease the financial and legal repercussions of terminating a purchase agreement for the Buyer or Seller. There are certain formalities to properly terminate a purchase agreement and it is important to contact your real estate agent and/or real estate attorney right away.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.