The Key Elements of a Real Estate Purchase Agreement

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A real estate purchase agreement is an essential step in the real estate process that outlines prices and terms for real estate transactions. Every element of the sale is covered, from earnest money requirements to well disclosures. The goal is to protect both the buyer and seller, and to ensure that all expectations are clear.

Real estate purchase agreements are standardized forms and legal documents, which can be accessed individually or through convenient subscription plans. Brokers often assist in drafting, reviewing, and facilitating the execution of purchase agreements, and professional services can help ensure compliance with legal requirements.

Purchase agreements can vary significantly from one state to the next. In some regions, agreements are relatively concise and serve purely to open the negotiation process. In other situations, the purchase agreement may be a full, legally binding contract.

The first time you glance at the purchase agreement for the property you intend to buy or sell, you may feel overwhelmed. Often a lengthy document, the agreement may contain several unfamiliar terms and concepts. It is imperative that you fully understand these concepts before you sign. This guide features several elements typically found in purchase agreements and how they impact both the buyer and seller.

If you are ready to draft a purchase agreement, look to LegalNature for step-by-step guidance. Our real estate purchase agreement will protect your interests and get you on the path to a quick and easy closing.

Introduction to a Real Estate Sales Contract

A real estate sales contract is the foundation of any real estate transaction, serving as a legally binding agreement between the buyer and seller. This document outlines all the essential terms of the sale, including the purchase price, financing arrangements, and any specific conditions that must be met before the deal closes. Understanding the real estate sales contract is crucial for both parties, as it protects their interests and sets clear expectations for the transaction.

Before signing, both the buyer and seller should carefully review the contract, ideally with the assistance of a real estate agent or attorney who can provide legal advice and ensure all details are accurate. Real estate agents play a key role in guiding their clients through the negotiation and signing process, helping to clarify any complex terms or requirements. The National Association of REALTORS® offers valuable resources and guidelines to help real estate professionals and their clients navigate the sales contract and achieve a successful real estate transaction.

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. The purchase agreement should include the full names of all parties to ensure clarity and legal validity. These details should be documented using a standardized form.

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 buyer's financial responsibilities typically include the buyer's down payment, fees, and other costs associated with purchasing the property. Lenders may require additional documentation or appraisals before approving financing.

The purchase agreement often includes earnest money requirements. Earnest money is a good faith deposit made by the buyer to show their serious intent to purchase the property. This payment is typically a percentage of the purchase price and is paid when the real estate contract is signed. The earnest money is held in escrow by a neutral third party until the closing date, ensuring that both parties are protected during the transaction.

If the sale proceeds as planned, the seller credits the earnest money toward the buyer’s down payment or closing costs. However, if the buyer fails to fulfill the terms of the contract without a valid reason, the seller may keep the earnest money as compensation for the failed sale. On the other hand, if the contract is canceled due to a contingency—such as financing or inspection issues—the earnest money is usually returned to the buyer. It is important for both parties to understand how earnest money works, as it can impact the outcome of the real estate transaction and the final payment at closing.

The purchase agreement should clearly state which party pays each cost, and it is common for the buyer to pay most closing expenses.

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. These procedures apply to both residential and commercial real estate transactions, but are most commonly associated with residential property sales. 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. These requirements are determined by state laws and local law, and must be followed as part of the closing process. 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.

Well Disclosure

Some states require sellers to disclose the location and status of any wells on the property, or whether the seller has no knowledge of existing wells. If the seller is aware of wells, the purchase agreement's disclosures must include a map highlighting the exact location of each well. The seller must also indicate whether the well is sealed or currently in use.

Lead Paint Disclosure

Due to the significant health risks associated with lead paint, it is imperative that sellers of older homes notify buyers about the risk of exposure. People selling structures built prior to 1978 may be required to include a lead paint addendum detailing the presence of lead-based paint. This addendum may highlight the current condition of painted surfaces and where potentially hazardous paint is located.

Methamphetamine Disclosure

In many states, sellers are required to disclose any knowledge of prior methamphetamine production on the property for sale. If the seller is aware of previous methamphetamine production, removal and remediation status should be outlined in the purchase agreement or in a methamphetamine addendum.

Other Common Disclosures

Required disclosures vary significantly from state to state. The following are a few of the most common disclosures:

Termite damage
Personal interest
Subsurface sewage disposal system
Adequate facilities taxes
Radon gas
Potential annexation

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:

Inspection

Purchase agreements are typically contingent on the buyer's satisfaction with a third-party home inspection. The seller must allow the buyer and the inspector of his or her choice reasonable access to the property. The buyer is responsible for paying for the inspection. Most purchase agreements include a deadline of ten days for the property inspection.

Appraisal

In addition to an inspection initiated by the buyer, an appraisal must be carried out by the lender. If the appraisal does not equal or exceed the listed value of the home, it is up to the buyer to make up the difference or negotiate a lower purchase price. The lender may also require the seller to make repairs prior to closing, at the seller's expense. If this contingency is not satisfied, the buyer is permitted to cancel the agreement.

Financing

Most buyers place a portion of the home's value down upon closing and obtain the rest of the necessary funding via mortgage financing. Although buyers generally obtain a pre-approval letter before making an offer, pre-approval never guarantees the buyer's ability to obtain financing. Buyers can protect themselves against the possibility of financing falling through by including a financing contingency. This contingency states that if the buyer cannot obtain necessary funding, then he or she can back out of the deal. Financing contingencies often allow buyers to recover earnest money or deposits upon backing out of the sale.

Title

The seller must be able to demonstrate that he or she actually possesses title to the home. A title contingency provides buyers with full confidence that they will obtain the property's title upon closing. The contingency may stipulate that a title report is completed by an authorized title company prior to closing.

Delivery, Acceptance Date, and Offer Expiration

Both the 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.

Signatures

Delivery of the signed purchase agreement may occur in person, by email, or by fax. Digital signatures and those delivered via fax or photocopy are recognized as valid.

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 that buyers or sellers are allowed to take if the other party defaults on the agreement. These may include forfeiting earnest money or pursuing litigation.

Conflict Resolution

Disagreements can sometimes arise during real estate transactions, making conflict resolution an important part of the process. Most real estate contracts include provisions for resolving disputes between the buyer and seller, often through mediation or arbitration. Mediation involves a neutral third party who helps both parties communicate and reach a mutually acceptable agreement, while arbitration results in a binding decision made by an impartial arbitrator. By including clear conflict resolution procedures in the agreement, buyers and sellers can address issues quickly and keep the transaction on track.

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.

Transfer of Ownership

The transfer of ownership marks the official change of property ownership from the seller to the buyer in a real estate transaction. This process is completed when both parties sign the deed and the seller transfers the title to the buyer. A real estate agent, attorney, or title company typically facilitates this step, ensuring that all legal requirements are met and the transaction is properly recorded.

Before the transfer, the buyer’s agent will verify that the title is clear and that the seller has the legal right to sell the property. The buyer is also responsible for obtaining title insurance, which protects against any future claims or issues with the property’s title. Understanding the transfer of ownership process is essential for both the buyer and seller, as it finalizes the sale and ensures that the new buyer becomes the legal owner of the real property.

Possession and Occupancy

Possession and occupancy refer to the buyer’s right to take control of the property after the real estate transaction is complete. The real estate sales contract will specify the exact closing date and time when the buyer can take possession. On this date, the seller is expected to vacate the property and hand over the keys, allowing the buyer to move in and begin using the property as their primary residence.

It is important for the buyer to arrange for insurance and utilities to be transferred into their name before taking possession. The real estate agent or attorney can provide guidance on these final details, ensuring a smooth transition for both parties. The National Association of REALTORS® offers best practices and resources to help real estate professionals manage the possession and occupancy process, making sure that the new owner can enjoy their property without any unexpected issues.

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