What Every Buyer (and Seller) Should Know About Real Estate Purchase Agreements

Every home sale requires a contract that explains all the details that are required to transfer ownership. That’s where a real estate purchase agreement comes in, protecting the interests of both the buyer and the seller. 

A purchase agreement keeps everyone on the same page by clearly spelling out the requirements for a home sale. This helps minimize the chance of disputes, misunderstandings and even potential legal battles if something goes wrong during the process.

What Is a Purchase Agreement? 

A purchase agreement is a legally binding document that you must sign if you are buying or selling a property. It includes clear details about the transaction by outlining the terms and conditions of the sale. 

As you work with your real estate agent, a purchase agreement might also be referred to as a real estate purchase contract or a real estate sales contract. Depending on the property’s location, an agent or attorney who works for the buyer usually prepares the documents for an offer, including the purchase agreement that must be signed for the sale to move forward. 

How Does a Purchase Agreement Work?

In most real estate transactions, a buyer makes an offer to purchase a property, which includes the terms and conditions of the sale. This includes financial details such as the offer price and any contingencies that the buyer specifies in their offer.  

The seller can accept this offer, reject it, or negotiate and submit a counteroffer. After both parties are satisfied, they will each sign the contract, indicating that they agree to the terms and intend to move forward with the transaction. This makes the purchase agreement legally binding, with specific conditions that are required for both parties to go to closing. 

What Information Is Included in a Purchase Agreement?

• Earnest money: Information about the good faith deposit made by the buyer, which is often held in an escrow account. 
• Contingencies/cancelation terms: These are the conditions that must be met for the sale to move forward. Common contingencies include home inspection, home appraisal and financing clauses. 
• Disclosures: Depending on the property and its location, seller disclosures may be required to help the buyer better understand the condition of the home.  
• Title insurance: The agreement should specify who is responsible for purchasing title insurance, which provides protection against title defects such as financial encumbrances, fraud and disputed claims of ownership. 
• Closing date: The date when ownership is officially transferred to the buyer. 
• Financing information: Details on how the buyer will pay for the property. If the buyer will finance the purchase, this may include the loan amount and interest rate. 
• Buyer and seller details: This includes contact information and the full legal names of both the buyer and the seller.
• Property information: The property address, a legal property description and any relevant property features will be listed.
• Purchase price: The sales price that the buyer agrees to pay for the property.

Do You Legally Need a Purchase Agreement? 

Yes, a written purchase and sale agreement is legally required for real estate transactions. Some states require additional documents, such as disclosures about the property’s condition or hazardous materials. What a seller needs to disclose will vary by location, but some common disclosures apply to: 

• Lead-based paint: If the property was built before 1978, a lead-based paint disclosure is required to inform the buyer of any known lead-based paint within the home. 
• Septic systems: This typically includes a description of the system, including its location, maintenance history, known issues and details on any inspections.
• Resource-protected areas (RPA): Homes built in an area protected for its natural resources may require disclosure. This can be common with properties that are near watersheds, as an example. When a home is in an RPA, there may be limits on the owner’s ability to landscape, cut down trees or build an addition. 
• Homeowners Associations: If the property is in an HOA, the seller must share details on the community’s rules and regulations, amenities and financial health, including homeowners association fees and assessments.  
• Titles and encumbrances: If there are any known liens on the property or title defects, the seller must disclose these to the buyer. 

Some states have particularly unique disclosures. For example, California requires the seller to disclose if a death has occurred within the previous three years. In New York, sellers must disclose if the house is considered to be haunted. 

Your agent or a real estate attorney can advise you on the disclosures that are required for each specific property.

Why Is a Written Purchase Agreement Required? 

A purchase agreement must be in writing and be signed by all parties to be enforceable in a court of law. This written contract is a legally binding agreement that explains the protections and remedies for the buyer or seller in case either one defaults. This can include financial loss, such as court fees, agent fees and attorney fees. 

For the seller, a signed purchase agreement provides protection against the loss of a potential buyer, which could result in more time on the market or the need to start the home-selling process over again.  

Standard vs. Custom Purchase Agreements 

In most cases, purchase agreement templates are created by either a regional real estate association or an attorney to ensure that all contracts conform to all local laws.

Standard Purchase Agreements 

These templates are usually drafted by state or local real estate associations. They offer a consistent format with common clauses and terms for transactions. Additionally, they are updated to comply with local laws and regulations, which reduces the risk of disputes and errors during a home sale. 

An addendum can be added to a standard purchase agreement to address the unique circumstances of a home sale, as long as the buyer and seller agree to it. 

Custom Purchase Agreements

A custom purchase agreement is typically drafted by an attorney and tailored to the specific needs of a buyer and seller. For example, builders commonly use custom contracts to sell new construction homes.

If you’re reviewing a custom agreement for a home purchase, it’s wise to have your own representation. Consult your agent or a real estate attorney to ensure you fully understand the terms and conditions before you sign.

Purchase Agreement Conditions: 3 Key Steps Prior to Close

• Meet your contingency requirements. Ensure that contingencies for home inspections, appraisals and financing are met within the time periods set in the purchase agreement.
• Ensure that there aren’t any title defects. Examples include liens, unpaid taxes or ownership disputes. Your title company or attorney can help resolve title issues. 
• Prepare for the final walk-through. Unless otherwise agreed to by all parties, the property should be clean, vacant, and any required repairs should be completed before the final walk-through. 

The Bottom Line on Purchase Agreements

A purchase agreement is more than just paperwork. It’s a safeguard to protect your interests and ensure the process is clear, organized and legally binding. Without one, you risk financial burdens, disputes and legal complications. Whether you’re a first-time buyer or a seasoned homeowner, having a real estate agent or attorney draft and review your purchase agreement is essential to ensure a successful sale.