Real Estate Purchase Agreement: What It Is And How It Works

The process of buying or selling a home can be many things: exciting, stressful, overwhelming. But there’s no denying that the real estate process takes time – and a purchase agreement can play a key role in helping speed things along during the home buying process.

In this guide, we’ll explore what a real estate purchase agreement is, how it works and how it can help prepare you for your future.

What Is A Purchase Agreement?

A purchase agreement in real estate – also commonly referred to as a house purchase agreement, a home purchase agreement, a property purchase agreement or a real estate purchase contract – is a legally binding document detailing the terms of a real estate transaction. The interested buyer presents their proposed purchase agreement to the seller, and the seller can accept or negotiate with the buyer until both parties are satisfied. Once the purchase agreement is signed, the buyer, seller and the property are considered “under contract.”

The buyer’s real estate agent is usually responsible for preparing the purchase agreement. This contract outlines everything from the offer you’ve crafted, financing plans and the settled-upon purchasing price, to details as small as which appliances or pieces of furniture may be included with the home. A real estate purchase agreement defines the terms and conditions under which a sale will take place, which can help govern the sale and expedite the overall purchasing process.

Although it may seem like a lot of work upfront, sorting out the details early on can help you with any unexpected obstacles that could pop up down the road. Real estate purchase agreements serve to protect the interest of both the home buyer and seller. They can help you keep track of the many factors that go into buying a home.

What Does A Purchase Agreement Look Like?

A purchase agreement can seem like an intimidating legal document. But you'll be well-prepared for future negotiations with the right agent and a better understanding of the terms and what it should look like. Here’s a template including the most common details in this contract.

Financing

The financing section of the purchase agreement will outline in detail how the buyer intends to finance their purse of the property. In most transactions, a buyer will use a third-party lender or take on the seller’s existing mortgage. Most home sales fall through due to financing, so including this section is a great way to speed up the home buying process and ensure that neither party will be surprised.

Earnest Money Deposit

Earnest money, also known as a good faith deposit, is made by the buyer to show that they’re a serious buyer and intend to purchase the property. This money is typically held by a neutral third party in an escrow account until both the buyer and seller complete the terms of the contract. If the buyer backs out of the deal before closing without meeting a contingency, then the seller gets to keep this money. If the contract goes through, then the deposit goes toward closing costs or the buyer’s down payment.

Contingencies

Contingencies are clauses that buyers include in the purchase agreement that allow them to back out of the deal if certain conditions aren’t met. Both the buyer and seller must agree to the terms of each contingency in the contract. Almost every real estate deal will include contingencies to protect all parties.

Here are common contingencies that may be in a purchase agreement for a house:

• Home inspection contingency: This contingency gives the buyer the right to walk away from the sale if the property has significant problems that the seller doesn’t want to fix.
• Appraisal contingency: The offer is contingent on the appraised value of the home meeting or exceeding what the buyer agreed to pay. This protects buyers from overpaying for a home.
• Financing contingency: Also called the mortgage contingency, the financing contingency allows the buyer to terminate the contract if they cannot secure a mortgage before the closing date.
• Home sale contingency: The purchase agreement is contingent on the sale of the buyer’s home. This gives buyers the time they need to sell and close on their current home by a predetermined date before committing to a new one.

Closing Costs

Closing costs are fees that come with the transfer of a property. This can include real estate agent’s commissions, appraisal or home inspection fees, lenders fees, insurance and taxes. Closing costs typically make up 3% – 6% of the purchase price and are paid at the closing of the mortgage.

These costs are paid according to the terms of the purchase agreement. The contract specifies what each party is responsible for paying. This helps avoid any confusion and lets the buyer and seller know exactly what they can expect.

How Purchase Agreements Work

Real estate transactions vary depending on where you live, but here’s a general purchase agreement timeline from initial drafting to closing day.

• The buyer’s agent drafts an offer letter on a home on behalf of the prospective buyer.
• The seller’s agent gives the offer to the seller. The seller can choose to accept, reject or counteroffer. Most sellers respond in writing within a few days, usually 48 hours.
• The prospective buyer and seller can negotiate back and forth over several days.
• The buyer’s agent will draft a purchase agreement if negotiations are successful. Both parties typically have up to 2 weeks to sign.
• Once signed, the home is now under contract and the buyer has 30 to 45 days to secure financing. During this time, the seller can move out of the home.
• If there are contingencies in the contract, the buyer and seller must meet them within the specified time frame or they can back out of the deal.
• Three business days before closing, the buyer and seller will receive a copy of the purchase agreement and a closing statement from the closing agent. There may be modifications to the existing agreement, called addendums, which both parties must agree on.
• The buyer and seller sign the purchase agreement (along with other documents like the deed) in the presence of a notary public on the closing date to complete the sale. However, notarization of the purchase agreement is not required. On average, closing on a home takes 30 to 45 days.

Why Are Purchase Agreements For A House Important?

The buyer’s real estate agent typically draws up a real estate purchase agreement. To ensure that the contract is legally sound, however, most agents are likely to fill out preexisting documents created by a law firm with the relevant contingencies and specifications requested by their client.

One of these specifications that is included in a purchase agreement is the “legal description.” This is the written articulation of the real property or home’s boundaries and geography. A legal description will specify the precise borders of the home for sale and its location.

Purchase agreements are a part of what agents allude to when they talk about negotiating throughout the home buying process. They can be volleyed between the buyer and seller by using offers and counteroffers until all details are sorted and agreed upon by both parties. But once the buyer and seller are satisfied and agree upon the conditions stated in the purchase agreement, they are officially placed under contract in the eyes of the law.

A purchase agreement gives both the buyer and the seller clarity about the transaction and helps both parties understand their obligations and the timeline for completing the purchase. The contract gives the buyer assurance their rights and interests are safeguarded and it establishes the buyer’s ownership rights to the property once the transaction is completed. For the seller, a purchase agreement provides security that the sale will go through. If the buyer doesn’t meet their obligations, then the seller can take action to enforce the terms of the contract.

Real Estate Purchase Agreement FAQs

Below are frequently asked questions about real estate purchase agreements.

Can a seller back out of a purchase agreement?

Yes, a seller can back out of a purchase agreement. If the buyer doesn’t meet their obligations during the specified time frame, the seller can terminate the contract. Conversely, backing out of buying a house is also possible for the buyer if the seller doesn’t fulfill their commitments outlined in the contract.

When does a real estate purchase agreement expire?

A real estate purchase agreement doesn’t have to have an expiration date, but many do. By having an expiration date, it establishes a time frame within which the parties must complete necessary actions to fulfill their responsibilities outlined in the agreement.

Is a purchase agreement the same as a mortgage?

No, a purchase agreement is separate from a mortgage. A purchase agreement is a legal document between the buyer and the seller that governs the purchase and sale of property. A mortgage is a security interest in the property in exchange for a loan from a mortgage lender.

What’s not included in a purchase agreement?

The purchase agreement does not cover the commission payable to the listing agent. Instead, this is outlined in the listing agreement.

How do you write a good purchase agreement?

The buyer’s agent typically draws up the purchase agreement. Although real estate agents cannot by law create a legal contract (something only practicing attorneys can do), they typically work with a law firm or have the contract drawn up and ready to be filled in.

The Bottom Line

A real estate purchase agreement is more than just the offer and final price. It’s a legally binding document that holds the buyer and seller under contract. In addition, it streamlines and organizes the home buying process while protecting and holding both parties accountable.

Understanding how a real estate purchase agreement works and what it entails can help you stay informed throughout your home buying process.

If you’re ready to make the leap and submit your purchase agreement or pursue entering into a real estate contract, you can get started on the mortgage process and see which financing options are right for you.