What is a purchase agreement?
The homebuying process is littered with legal hoops that you have to jump through before you can land your dream house. That’s why working with a homebuying team — real estate agents, loan officers and attorneys — is so beneficial: They’ll take care of all the legal documentation and process work so you can focus on getting your finances in order, preparing for your move and getting ready to enjoy life in your new home.
Arguably the most important legal document in this whole journey: the purchase agreement. You can’t buy a house without one. But this dense paperwork can be tough to penetrate for the average homebuyer — which is a shame, because it contains some very valuable info about your transaction.
Let’s break down real estate purchase agreements to their most fundamental components so you can better understand what they include, why they matter and what they mean for your homebuying prospects.
What is a real estate purchase agreement?
When you find the home that’s just right for you and you’re ready to buy, the first thing you need to do is submit an offer. But you can’t just shoot the seller an email or text with your suggested sale price. The real estate industry doesn’t work like that. What you need to do is work with your work with your agent to put together a real estate purchase agreement.
Purchase agreement definition
A purchase agreement is a legal document detailing the terms of a potential real estate transaction. Once signed, you are contractually bound to hold up your end of the deal.
The terms frequently included in a home purchase agreement include:
- How much you’ll pay the seller
- When you’ll close on the property
- How you plan to finance the purchase
- What appliances, fixtures and amenities will be included in the sale
- What contingencies you’re building into the agreement
Homebuyers often view purchase agreements as an offer form because when you submit this document to the seller, that’s really all it is at that point in the transaction. But you need to be aware that these documents are contracts and, as such, legally binding once both parties have signed. Deviating from any detail listed in your purchase agreement could raise issues during the ensuing attorney review.
Does a purchase agreement mean you own the property?
Even after the seller agrees to the terms of a sale and signs the purchase agreement, there’s still a long way to go before the property officially changes hands. We’re talking home inspections, appraisals, attorney reviews, underwriting — it’s a lot.
Purchase agreements solidify the broad strokes of the transaction. You and the seller will have locked down the sale price (which can be negotiated later under certain conditions), your closing date and any contingencies that could be exercised to cancel the deal. Truthfully, sales fall through all the time, for one reason or another, after both parties have signed a purchase contract.
What terms are included in a purchase agreement?
Real estate purchase contracts can cover a lot of ground — maybe not quite as much as a closing disclosure or mortgage note, mind you, but they’re still pretty detailed and dense. Even so, it’s worth going through each section and seeing what ground this essential real estate document covers.
That’s easier than you might think because a purchase agreement form is a pretty uniform piece of paperwork, at least within each state. Regulations on what to include will vary from state to state, but each one should have its own standard form to follow. Thanks to Central Michigan University, we have a pretty typical purchase agreement template to serve as an example.
Note that the exact order of these items may change across real estate sales contracts, but you should expect to find them in any home purchase agreement:
- Parties: This includes the basic information regarding the buyer and seller.
- Real estate: Here you’ll find the broad strokes about the property itself (address, type of housing, any attached structures, parking, storage, etc.)
- Fixtures and personal property at no added value: Essentially, what fixtures and appliances will the seller be leaving behind with the property? Think: refrigerators, air conditioners, security systems and even plants in the garden.
- Purchase price and payment: This is a big one. It spells out how much you’re offering to pay for the home and how much earnest money you’ll be putting forward. Earnest money is kind of like the down payment before the down payment. It’s a small chunk of money the buyer puts into escrow to show the seller that the offer is serious.
- Closing: This lists the buyer’s desired closing date. Pretty straightforward.
- Possession: This section simply clarifies how possession of the property will transfer from seller to buyer (seller vacates the premises, hands over the keys, etc.).
- Financing: Another very important portion to review, this section details your financing terms, including what percentage of the purchase price will be financed with a loan, how long that loan will last and when you as the buyer need to secure a mortgage agreement. You’ll also find more information about your loan contingency here — in particular, what happens if you’re unable to get approved for a loan by the agreed-upon date.
- Statutory disclosures: Usually just a series of checkboxes, this portion of the sale purchase agreement marks whether the buyer has received various disclosures from the seller.
- Prorations: Figuring out who owes property taxes when a home changes hands can be tricky, but here you’ll see how taxes, homeowners association dues and any other annual fees will be prorated for the buyer.
- Attorney review: Even after you and the seller have agreed to preliminary terms and you’ve scheduled an inspection of the property, attorneys representing both parties still have an opportunity to hash out any issues before the deal can move forward. This section simply describes how the attorney review process will unfold, including how much time real estate attorneys have to accept, reject or suggest alterations to the real estate contract.
- Professional inspections: Describes the home inspection process and notifies the seller if the buyer chooses to waive the inspection — side note: do not waive the home inspection.
- Insurance requirements: Every homebuyer is required to obtain homeowners insurance and hazard insurance before property can legally change hands. Depending on the location of your new home and the area’s environmental risks, your lender may insist that you get extra coverage for threats like earthquakes and floods.
- Contingencies: Loan contingencies are built into just about any home purchase contract that involves financing. But there are other contingencies that a buyer could choose to exercise. For instance, sale contingencies let you walk away from a purchase if you’re not able to sell your current home in a timely manner. You’ll find any contingencies that are in place listed here.
How much money do you need to put forward with a purchase agreement?
You won’t owe any money when you submit your offer to purchase real estate, but that all changes once the seller accepts it. From the time they sign the house sale contract, you’ll have a certain window of time — often a week, but it could vary — to put down your earnest money. This deposit usually runs anywhere from 1% to 2% of the sale price. That can mean putting up a few thousand dollars just to show the seller that you’re serious about buying a house.
Don’t think of earnest money as an extra cost, though. Those funds will be placed into escrow and will go toward your down payment. When you get to the closing table and review your closing documents, you’ll see that your earnest money will be subtracted from the amount owed on your down payment.
Can you back out of a house offer?
It’s worth reiterating that when you submit an offer, you’re essentially putting forward a sales agreement contract. That’s why real estate agents require you to read over and sign these documents before they send them to sellers.
That being said, you may still be able to cancel the deal after agreeing to terms with the seller and still get out with most of your money intact. For instance, let’s say some issues come up in the home inspection (they usually do), and you and the seller reach an impasse as far as who will pay for those repairs. If you can’t reach an agreement, you’re perfectly within your rights as the homebuyer to walk away from the deal and recoup your earnest money.
Contingencies built into your purchase contract protect your interests too — well, the lender’s interest first and foremost, but the two are usually mutually inclusive. Appraisal contingencies check that the property offers suitable collateral for your home loan, but if an appraisal says otherwise, you may be able to negotiate the sale price or kill the deal entirely.
These are just a few examples to consider, but there are a lot of outs built into the purchase process for buyers to use. However, if you back out just because you’re having second thoughts and there’s nothing actually wrong with the property, then you’ll likely lose your earnest money.
Can the seller cancel the transaction after signing a purchase agreement?
Sellers don’t enjoy as much flexibility as buyers when it comes to wriggling out of a signed real estate sales agreement. For example, a seller can’t just cancel a deal because another prospect buyer comes forward with a better offer.
One notable exception would be if you’re still in the attorney review phase. Real estate attorneys can find any number of valid reasons to render the contract null and void.
Like buyers, sellers can back out if the two sides are unable to come to terms on a deal. This happens somewhat frequently when buyers request credits or repairs that sellers find excessive or prohibitively expensive.
Another common scenario that gives sellers the freedom to end a real estate transaction is when the homebuyer fails to meet the terms of the purchase agreement. If your financing falls through or you don’t pay the earnest money, for instance, then you’ve violated the terms of your contract. In that case, the seller would be well within their rights to walk away.
That’s also why we strongly urge you to hold onto your contingencies. There’s not much — if any — benefit to waiving home inspection contingencies or other safeguards built into any simple real estate contract. If you do waive them, you won’t have much recourse when issues arise.
What happens after both parties have signed a purchase agreement?
Coming to terms on a purchase agreement is just the beginning of the homebuying journey. It usually takes anywhere from 30 to 45 days to close on a house. There’s still plenty to do behind the scenes before you take possession of the property and move into your new home:
- Home inspection
- Home appraisal
- Submitting your loan for approval
- Processing your loan
- Underwriting review
- Conditional approval
- Clear to close
- Funding the loan
With so many steps in the mortgage process, no wonder it can take over a month to go from the initial purchase agreement to closing. But that also gives you time to get your finances in order.
The purchase agreement is a real estate contract between the buyer and seller that defines the terms of the real estate sale. Frequently, these documents provide the broad strokes of the deal: sale price, closing date, contingencies, etc. While it will provide a cursory glance of your financing, you’ll need to work with your lender to find an exact mortgage rate and other loan options.
Ideally, you’ll already be preapproved for a mortgage by the time you’re ready to submit an offer on a house. The last thing any homebuyer wants is to find out too late that financing has fallen through due to borrower credentials or lender concerns.
In competitive markets, sellers may not even consider an offer from buyers who are still waiting to be preapproved. Be sure you have a preapproval letter in hand when you find your forever home so you can avoid any unpleasant financial surprises.
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