The Key Elements of a Real Estate Purchase Agreement

Identifying the Address and Parties Involved

First and foremost, a purchase agreement must outline the property at stake. It should include the exact address of the property and a clear legal description. Additionally, the contract should include the identity of the seller and the buyer or buyers.

Buyers should determine whether they intend to act as joint tenants or tenants in common and include that information in the purchase agreement. Joint tenants enjoy the right of survivorship; if one tenant passes away, the property immediately passes to the other without going through probate.

With tenancy in common, each tenant owns a share of the property. Shares are not always equal and may be transferred freely to someone besides the other tenant. In most situations, tenants who reside together classify their setup as joint tenancy.

Price and Terms

The purchase agreement should include the offered price accepted by the seller as well as the means by which it will be furnished. Common methods include paying in full with cash, with a cash down payment and a new mortgage, or with some arrangement involving an already existing mortgage. This information may be detailed in the purchase agreement or a financing addendum may be included to clearly outline the buyer's down payment and lending situation.

The purchase agreement often includes earnest money requirements. Earnest money is used to confirm the contract; rates vary from one purchase to the next, but typically, buyers can expect to pay at least $1,000. In most cases, the earnest money goes toward the eventual down payment. Some sellers may choose to add contingencies stipulating the forfeit of earnest money if the sale does not go through due to financing issues. In other situations, the earnest money is fully refundable to the buyer if key conditions are not met.

Closing Date and Costs

The date of the sale's closing should be included in the purchase agreement as well as the stipulation that any changes in closing must be agreed to in writing. Possession of the property typically transfers to the buyer upon the listed closing date and time. More importantly, the closing date marks the conveyance of the property's title from the seller to the buyer. This conveyance may eventually be recorded in a bill of sale.

Closing costs for both the seller and the buyer should also be included. These costs—and who covers them—can vary significantly from one property to the next. Often, the buyer covers the entirety of the closing costs, although the seller may agree to pay for closing. The buyer and seller may also split closing costs. This division of expenses should be clearly described in the purchase agreement.

Real Estate Taxes and Special Assessments

As of the date of closing, property taxes and other costs (such as fuel, maintenance fees, or homeowners' association fees) should be prorated. If taxes cannot immediately be assessed or must otherwise be rolled back, they can be addressed in an addendum. The seller is responsible for paying special assessments during or prior to closing.

Homestead Classification

In some states and municipalities, classified homestead property is eligible for significant tax reductions. As such, the intention of homesteading is outlined in the purchase agreement. A property does not qualify for homestead classification unless it is occupied by its owner or by a qualifying relative. A property can also qualify for homestead classification if it is used for homestead purposes but separated by a road. Adjacent property primarily used for gardening or storing the owner's vehicles in a garage, for example, would qualify.

Items that are Included or Excluded

The purchase agreement may thoroughly detail all items to be included or excluded from the property's sale. Outlined items should include not only structures, but also fixtures attached to those structures, including the following items:

• Light fixtures
• Heating and cooling equipment
• Windows
• Window treatments
• Doors
• Built-in kitchen appliances
• Bathroom fixtures

Certain items may be on display when the property is shown, but not intended to be included in the sale. These excluded items should also be highlighted in the purchase agreement.

Sellers are legally obligated to disclose information that may impact the property's safety or value. In most states, it is illegal to purposefully conceal known defects, particularly if they put homesteading buyers' health at risk. Sellers rarely are required to actively search for defects, but they must make any issues of which they are aware known. Disclosure laws are incredibly strict in some states, however, with sellers required to specifically search for certain defects.

Contingencies

Sellers and buyers can mandate a purchase agreement contingent upon certain conditions which must be met before the property is sold. Detailed below are a few of the most common contingencies:

Delivery, Acceptance Date, and Offer Expiration

Both buyer and seller should know exactly when the purchase agreement will expire if not accepted. This information should be outlined directly in the contract. Additionally, prior to acceptance of the purchase agreement, the party making the offer may withdraw, as long as notice is provided.

If all parties accept the terms of the purchase agreement, this acceptance must be communicated. At this point, the offer becomes a legally binding contract. Terms of the agreement may later be summarized in a purchase and sale agreement (P&S), which is received after both parties have agreed to the offer.

Default

Buyers and sellers are given numerous opportunities to cancel purchase agreements—but cancellation must only occur within the terms of the agreement. For example, the buyer is justified in backing out if one or more of the contract's contingencies cannot be satisfied. However, if the buyer or seller fails to satisfy certain demands in the agreement, he or she may be considered in default of the contract. Default may occur in the following situations:

• Buyer fails to pay earnest money on time
• Buyer or seller fails to return signed disclosure forms on time
• Buyer or seller cancels the sale after all contingencies have been removed
• Seller does not complete contractually obligated work on the property
• Seller prevents access for inspection or final walk-through
• Seller does not move out on time

Purchase agreements often contain directives indicating steps buyers or sellers are allowed to take if the other party defaults on the agreement. These may include forfeiting earnest money or pursuing litigation.

Counter Offer

Upon receiving the initial purchase agreement, the seller can elect to turn down the offer, accept and sign the contract, or present a counter offer. Like the previous purchase agreement, the counter offer is a legally binding contract. It may be virtually identical to the original agreement, but with a few key changes, such as price or contingencies. Common changes presented in counter offers include:

• a higher price for the property,
• higher earnest money requirements,
• refusal to cover or help cover closing costs,
• refusal to adopt certain contingencies,
• altered time frames for addressing contingencies, and
• excluding personal property from the agreement.

Once the counter offer has been made, the buyer can accept it, reject it, or make a second counter offer, sometimes referred to as a counter-counter offer. In most states, an unlimited number of counter offers can be submitted between the buyer and seller.

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