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What Is a Real Estate Purchase Agreement?

Real estate investors should know what's in a purchase agreement so they can draft a strong one when looking to buy property.

Apr 23, 2021 by Laura Agadoni
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A real estate purchase agreement is to buying a property as a lease is to renting a property: Both are binding legal contracts. While a lease is between a landlord and tenant, a purchase agreement is between a seller and buyer. Whenever a property is sold by one party and bought by another, a purchase agreement or sales agreement is part of the transaction.

The purchase agreement process

A potential homebuyer starts the purchase agreement process by making an offer on a property. If the buyer is using a real estate agent, the agent uses a standard state form. If the buyer isn't using an agent, they can make their own purchase agreement by obtaining a legal template online. If not using a Realtor, it's recommended you hire a real estate attorney to either draw up a purchase agreement or to at least look over the general template you might use and then provide legal advice.

What a real estate purchase agreement includes

A real estate purchase agreement includes all the details of the sale. What's typically included in the purchase agreement are the following:

  • Seller and buyer names: The full legal names of both parties would be listed on the purchase agreement. If real estate agents are involved, their names and the real estate broker they work under will be listed on the purchase agreement as well.
  • Description of the property: This includes the property address and a legal description of the property as what's found in the deed.
  • Purchase price/purchase offer: This is the total sales price you're offering to pay for the property.
  • Payment/financing terms: This tells the home seller how you intend to pay for the property. You could be an all-cash buyer (proof of funds would be required); you could be getting a loan, such as a conventional, jumbo, FHA, VA, or USDA loan; you could be assuming the seller's mortgage; or you could be entering a seller financing arrangement whereby you'd be making payments to the seller instead of a mortgage lender. If you'll be getting a mortgage, it's a good idea to be preapproved first so you can present your preapproval letter with your offer.
  • Earnest money deposit: This tells the seller how much money you'll put down, usually within three days after the seller accepts the offer. It lets the seller know you're serious about buying the property. The money typically goes into an escrow account, and the amount is usually 1% to 3% of the purchase price. If you back out of the deal for reasons not in the purchase agreement contract, you lose your earnest money to the seller.
  • Contingencies: You can include as many contingencies (or conditions) as you like, but the more contingencies you include, the weaker your offer looks to the seller. Contingencies are for the buyer's benefit. For example, a financing contingency lets you out of the contract if you can't get a loan. An inspection contingency lets you out of the contract if, after having a home inspection, you don't like the condition the home is in. An appraisal contingency lets you out of the contract if the home appraises lower than your offer. A home sale contingency lets you out of the contract if you can't sell your current home.
  • Closing costs: There are always costs involved in the purchase of a house. They typically run 2% to 6% of the purchase price and go toward agent commission, inspection fees, title insurance, attorney fees, etc. The purchase agreement lists who will pay the closing costs. Either the buyer or seller can pay them, or they can be shared. When the closing date will occur is also specified. A 30-day closing period is common, but this could be longer or shorter.
  • Expiration date: It's a good idea to put an expiration date on the purchase agreement, which gives the seller a certain amount of time to respond. If there's no response by the deadline, the deal is off. Usually, 24 to 72 hours is good.

Other items can be included in the purchase agreement, such as whether any appliances or furnishings will be included with the sale, or perhaps whether the buyer will allow the seller to rent the property back for a specified time, typically to give the seller more time to complete the moving process. These extra items are often included after acceptance of the offer as addendums.

The next step of the purchase agreement process

After the potential buyer presents the purchase agreement contract to the seller, the seller can do any of the following: accept the offer, reject the offer, make a counteroffer that states the terms the seller would like changed, or ignore the offer until it expires.

If the seller accepts the offer, both parties sign the purchase agreement, and the property is "under contract."

If the seller rejects the offer, the deal is off.

If the seller counteroffers, the buyer can then accept, reject, or counter back with new terms. This process continues until the deal is off or both parties are in agreement and sign the purchase agreement.

The purchase agreement doesn't become a legal contract unless and until both parties sign it.

The Millionacres bottom line

Once you understand what's in a purchase agreement, you can be better prepared to make a complete offer on a property you wish to purchase. The more the terms are specified upfront in this legal document, the easier the transaction will likely be.

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