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The Key Elements of a Real Estate Purchase Agreement

A 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.


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 purchase agreement form will protect your interests and get you on the path to a quick and easy closing.

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.


Required Disclosures

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, 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 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 cancelation 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.

LegalNature can assist you with all elements of drafting and reviewing your purchase agreement. Let us help you get started today. Click here to create your real estate purchase agreement now.

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