How to Create a Real Estate Purchase Agreement

What Is a Real Estate Purchase Agreement?

A real estate purchase agreement contains everything you need to create a strong contract that is customized according to the wishes of the parties. In addition to the standard provisions included in most real estate purchase agreements, this agreement allows you to customize the following terms:

• The type of seller or buyer, whether an individual, married couple, business entity, or trust

• The purchase price and earnest money deposit

• The buyer’s contingencies for the transaction to occur, including the type of financing (third-party lending, seller financing, loan assumption, all cash deal, or other financing), whether an appraisal is required, whether an inspection is required, and whether this transaction is contingent on the sale of the buyer’s home or other property

• What repairs are required prior to closing, if any

• What personal property the seller is agreeing to leave behind and which fixtures on the property the seller will be removing prior to closing. The agreement should specify which light fixtures are included or excluded from the sale.

• The type of real property being purchased, including its legal description and street address

• Whether or not the buyer will be assuming any leases for tenancies that may exist on the property

• The buyer and seller information, including buyer and seller contact details for transparency

• Any custom terms the parties want to add. The agreement should include all essential components required for a valid contract, and may reference other documents as needed for compliance.

A title company is often involved in preparing or reviewing the agreement and ensuring all documents are in order.

Understanding the Purchase Price

The purchase price is one of the most important elements in any real estate purchase agreement. It represents the total cost that both the buyer and seller have agreed upon for the property. In most real estate transactions, the purchase price is determined through negotiation, taking into account factors such as market value, property condition, and any unique features of the real estate. The final purchase price should be clearly stated in the purchase agreement, leaving no room for confusion or misinterpretation. A well-drafted purchase agreement template will also outline any conditions or contingencies that could impact the final purchase price, such as appraisal results or agreed-upon repairs. By specifying the purchase price and related terms in the real estate purchase agreement, all parties involved can move forward with confidence, knowing exactly what is expected in the real estate transaction.

Providing Buyer and Seller Information

Accurate and complete information about both the buyer and seller is essential in any real estate purchase agreement. The purchase agreement should include the full legal names, current addresses, and contact details of all parties involved in the real estate transaction. If real estate agents or other representatives are part of the process, their information should also be included to ensure clear communication throughout the estate purchase. In some cases, the agreement may reference the property’s history, such as previous sales or transfers, to provide additional context. Using a comprehensive purchase agreement template helps ensure that all necessary details are captured, reducing the risk of misunderstandings and helping both the buyer and seller navigate the real estate purchase smoothly.

Completing the Agreement

First begin by completing the information for each party, including the names, party type, and address. If the seller acquired the property being sold during marriage, then you will need to select the option for a married couple as the seller type (unless you are now divorced). This simply requires the seller's spouse to sign this agreement to show that the spouse will not make any claim to the property in the future.

Buyer Contingencies

In real estate transactions, common contingencies are standard conditions that must be satisfied for the sale to proceed, such as buyer financing approval, home inspection, appraisal, and the sale of another property. These contingencies protect both parties and are essential components of most purchase agreements.

The buyer contingencies are specific conditions that the buyer requires to occur before the buyer will agree to close the deal. If a contingency is not fulfilled, then the buyer will have the right to cancel the agreement and receive a refund of the earnest money and any other deposits made. Deadlines for satisfying these contingencies are often measured in business days prior to closing, ensuring clarity and practicality in the transaction timeline. The parties agree to the terms and conditions of these contingencies, and the seller must agree to certain contingencies, such as repairs or inspection requests. If such event as a failed appraisal or inspection occurs, the agreement may be canceled or renegotiated. Buyer's failure to meet the requirements of any contingency may result in cancellation of the agreement and loss of earnest money.

However, the buyer always has the option to waive a contingency later on if it is no longer needed. Although each contingency can be negotiated between the parties, the contingency options included with this agreement are all rather typical. The contingency options included are financing, appraisal, home inspection, and property sale contingencies, each explained below.

For the financing contingency, you will be given options to select whether the buyer will receive financing for the property through a third-party lender, a mortgage assumption, seller financing, an all-cash transaction, or another form. This contingency states that the buyer must first obtain sufficient financing prior to closing. Loan approval from a financial institution is often required for this contingency to be satisfied. Thus, if the buyer is unable to obtain the necessary funds, the buyer will have the right to back out of the deal and receive a refund of the earnest money and any other deposits.

“Third-party lender” means financing by a traditional lending institution. “Mortgage assumption” means that the buyer will assume the seller’s loan obligations by agreeing to pay for the outstanding loans on the property. “Seller financing” means that the seller and buyer will create a private loan agreement between themselves. “All cash” means the buyer will fund the transaction itself, without financing. Note here that the funds do not have to actually be in cash form, as electronic wire transfers are usually accepted. Select “Other” to describe a different type of financing.

The appraisal contingency says that the property must be appraised at a value equal to or greater than the purchase price. If the appraisal is for less than the purchase price, the buyer will have the option of either canceling the agreement and receiving a refund of the earnest money or renegotiating the purchase price. The agreement requires the appraisal to be carried out within 10 business days of signing this agreement. You will have the option of specifying which party will be required to pay for and obtain the appraisal.

Similarly, the home inspection contingency says that a professional must inspect the property prior to closing. If the inspection is not conducted by that time, or if the inspection occurs but reveals the existence of a material defect, then the buyer will have the right to either cancel the agreement and receive a refund of the earnest money or require the seller to repair the defect. The agreement requires the inspection to be carried out within 10 business days of signing this agreement.

The last contingency option requires that the buyer sell its home or another property prior to closing. The buyer may need to sell their primary residence before closing to secure funds for the purchase. If the sale of the buyer’s property does not occur, then the buyer may choose to cancel the agreement and receive a refund of the earnest money.

Required Repairs

Another important term you will specify is whether or not the property is in need of any repairs. Required repairs may include addressing material defects that affect the property's value or safety. The seller agrees to complete such repairs as outlined in the agreement. The seller's responsibility also includes disclosing any known issues and ensuring repairs are completed as required. All matters disclosed regarding the property's condition should be addressed before closing. This includes anything on the property that has structural or mechanical problems or is in disrepair, including any problems with the foundation, walls, support structures, roof, water and electrical systems, plumbing, or mechanical systems. Unless the buyer agrees otherwise, the seller will be required to repair these items. However, as usual, the buyer can always waive the requirement for the seller to make the repairs.

State and Federal Disclosure Requirements

State and federal law may require that the seller of real estate make certain disclosures. In addition to federal requirements, state laws may require additional disclosures or impose specific regulations regarding real estate transactions. For instance, for all properties built before 1978, federal law requires that the sellers and buyers of real estate sign a “Disclosure of Information on Lead-Based Paint,” which is included for you in the agreement. The agreement should also clearly specify what is being purchased, including any personal property or fixtures that are part of the transaction. Sellers should keep the signed copy of the “Disclosure of Information on Lead-Based Paint” for at least three years. State or local law may require other disclosures, such as a flood area warning or radon gas warning. Seller credits may be applied to the buyer's closing costs or down payment, and the agreement should outline which fees or costs the buyer pays. Before closing, all final details regarding disclosures and compliance should be confirmed.

Earnest Money Deposit

An earnest money deposit is a key feature of most real estate purchase agreements, serving as a sign of good faith from the buyer. This deposit, typically a percentage of the purchase price, is held in escrow until the closing date. It can be applied toward the down payment or closing costs when the real estate transaction is finalized. If the buyer fails to complete the purchase without a valid reason, the seller may be entitled to keep the earnest money deposit as liquidated damages. On the other hand, if the seller fails to meet the agreed-upon terms, the earnest money is usually returned to the buyer. Including clear terms about the earnest money deposit in the estate purchase agreement protects both parties and helps ensure a smooth purchasing process.

Reviewing the Agreement

Before finalizing a real estate purchase agreement, it is vital for both the buyer and seller to thoroughly review the document. This review should confirm that all terms, including the purchase price and parties’ information, are accurate and reflect the agreed-upon terms of the real estate transaction. It is wise for both the buyer and seller to review the purchase agreement separately and together, and to consult with a real estate agent or attorney if any part of the agreement is unclear. Using a reliable purchase agreement template can help ensure that the document is comprehensive and legally binding. Careful review helps prevent costly mistakes and ensures that the estate purchase proceeds smoothly, with all parties fully informed and protected.

Executing the Agreement

To execute the agreement, the parties must simply sign and date it in the presence of a notary public or two witnesses. Most states just require one notary to act as a witness. However, two witnesses are always required to sign mortgage agreements in Connecticut, Florida, Louisiana, and South Carolina. These states also allow a notary to sign in the place of one of the witnesses.

Once all parties have signed and all contractual conditions are met, the deal closes and ownership is officially transferred.

After your agreement has been signed and witnessed, distribute the final copies of the agreement to the buyer and seller. Be sure to refer to the agreement throughout the closing process to ensure that each party is performing accordingly.