As a seller, you’ll first encounter a purchase agreement when you receive an offer from a buyer. The purchase agreement outlines the buyer’s offer price, along with contingencies, financing terms, closing costs, possession date, and more.
You must meticulously review the purchase agreement before you sign and turn the document into a legally binding sales contract. A minor oversight can lead to home sale delays — or worse, trap you in a bad deal. With insight from a top real estate agent, we’ll walk you through the ins and outs of purchase agreements, so you understand the role this document plays in your home sale.
A purchase agreement is an offer that evolves into a contract
A purchase agreement, also known as a real estate sales contract, is the document the buyer and seller use to detail the sale price and terms.
“The purchase agreement not only sets the price being offered by the buyer but also terms and conditions,” says top real estate agent Jeffrey Cummings, who has 15 years of experience in the Greater Indianapolis Area. He shares that the document is typically 7 to 10 pages long.
Here are some of the key elements of a purchase agreement:
- Details regarding the buyer, seller, and property
- Closing costs, and which party is responsible for paying them
- Financing terms
- Closing timeline and possession date
- Earnest money deposit and down payment
- Buyer contingencies, requesting an inspection, appraisal, etc.
- Repairs required to finalize the sale
- Fixtures and appliances the buyer would like included in the sale
- Grounds for terminating the sale
The purchase agreement is a working document until signed
In most states, real estate agents have a generic purchase agreement on file, which is drafted by a team of real estate attorneys and updated annually. The buyer’s agent typically prepares the document, customizing it to include a buyer’s purchase price, disclosures, contingencies, and so on.
Here’s how the residential purchase agreement evolves during a home sale:
- A buyer’s agent prepares a purchase agreement as their client’s formal offer on a property, then sends the offer to the seller’s listing agent.
- The listing agent presents the document to the seller. If the seller isn’t happy with the offer, they can decline or counteroffer, usually within 24 hours.
- The listing agent and buyer’s agent negotiate the price and terms on behalf of the seller and buyer until both parties reach an agreement.
- When both parties have agreed to the terms outlined, they sign the agreement, which becomes a legally binding contract to ratify the sale. In real estate, this phase is called “under contract.”
- Once the buyer and seller are under contract, both parties have roughly 30 to 45 days to get their ducks in a row before officially closing on the property. Depending on what information surfaces during this time (for example, if a home inspection reveals mold or if the buyer is unable to obtain financing), the buyer may revise the agreement or even back out of the sale.
- While under contract, the buyer submits their earnest money deposit, schedules a home inspection and appraisal (if they included an inspection and appraisal contingency), and finalizes their loan approval.
- During this time, the seller responds to buyer-requested repairs and begins clearing their belongings out of the home.
- Within the final week of closing, the parties sign all closing documents. The lender sends funds to escrow to be dispersed accordingly, the local county’s recording office transfers the title to the new owner, and of course, the seller hands over the keys.
Types of purchase agreements
Here are the three main types of purchase agreements:
State/association purchase agreement: If you’re working with a real estate agent, this is likely the agreement they’ll use. It’s a standard form based on the local real estate association’s guidelines. For reference, take a look at this sample purchase agreement from the New Mexico Association of Realtors.
General purchase agreement: This is a shortened version of the state/association agreement. It’s typically for buyers who purchase a property without the help of a real estate agent.
Property-specific purchase agreement: This specialized contract is for property transactions outside of single-family homes, such as mobile homes and vacant land. While these documents share most of the same information as the two options above, they often include additional clauses unique to the property involved. For example, a purchase agreement for a mobile home may have a “Residency Application” section, specifying that a buyer must obtain residency approval if the property is on rented or leased land as a contingency of the agreement.
Review the purchase agreement in-depth before you sign
Once you sign the purchase agreement, it becomes a legally binding contract. Both parties commit to the sale and may only negotiate or cancel the sale without repercussions if the agreed-upon contingencies and deadlines are unmet.
The significance of signing for the buyer:
- The buyer agrees to the price and terms of the sale.
- They can only further negotiate the terms of the sale through the contingencies outlined in the purchase agreement. We’ll detail the most common contingencies in a moment.
- If they back out of the sale for a reason not covered by their contingencies or otherwise detailed in the contract, they forfeit their earnest money.
The significance of signing for the seller:
- The seller agrees to the price and terms of the sale.
- They agree to the buyer’s contingencies, meaning they agree that the buyer may leave the sale with their earnest money intact if a contingency is unmet.
- They commit to selling their home to the buyer, even if a better offer comes along or they otherwise change their mind.
- They can only leave the deal if the buyer violates the contract (e.g., the buyer does not meet agreed-to deadlines).
As a seller, it is very difficult to back out of a sale after both parties have signed the purchase agreement. Most of the “loopholes” in the purchase agreement protect the buyer, not the seller. So once you sign the contract, you must follow through with the sale even if you receive a more competitive offer, struggle to find a new home before closing, or simply have a change of heart. Without a relevant contingency or significant buyer error, you would need to fight the contract in court, which can be a drawn-out and expensive battle.
To protect your interests and assets and ensure a smooth transaction, you must clearly understand all conditions and contingencies before you sign on the dotted line.
Examine the buyer’s “escape hatches”
There are plenty of reasonable requests buyers make in the purchase agreement, but there’s also potential to include easy-out escape hatches masquerading as minor contingencies.
Depending on what issues or complications arise after signing, you may face closing delays — or worse, lose your buyer through a loophole. As a result, the buyer walks away with their earnest money in hand, leaving you with a sale gone sour.
Before you accept an offer, here are some common contingencies to be aware of:
Inspection contingency
This contingency requires a professional home inspector to evaluate the home and allows the buyer to back out if they’re not satisfied with the assessment. Typically, this contingency expires in 7 to 10 days, during which time the buyer can arrange for an inspection.
Even if you’ve conducted a pre-listing inspection, some buyers may still request their own inspection and request that you complete or compensate for needed repairs before closing. Some of the most common repairs that buyers request after inspection include:
- Removing dead trees
- Fixing sewage problems
- Eliminating fire hazards
- Repairing roof issues
- Replacing damaged wood
A buyer may also request certain specialists to assess the home for pests, asbestos, and radon issues.
Fortunately for sellers, Cummings says buyers are less likely to make repair requests in today’s hot seller’s market, where more homebuyers compete for few properties. “Sellers are like, ‘Hey, we’ll go to one of our ten backup offers,'” he comments. “This year is unique.”
Appraisal contingency
An appraisal contingency stipulates that a buyer can back out of a sale if the home appraises for less than the agreed-upon price.
Appraisals can take anywhere from a few days to a few weeks, depending on your home’s size and the current market conditions. The appraisal typically takes place after a home inspection.
If the appraisal values a home under the contract value, the buyer can renegotiate their offer or leave the deal. The seller may have to cover the difference between the home and loan values, or the sale may fail altogether.
Financing contingency
This contingency allows the buyer to back out of the contract if they can’t obtain a mortgage.
If your purchase agreement does include a mortgage contingency, it can take a month or two for the buyer to close on their home loan. In fact, according to a January 2021 report from the National Association of Realtors (NAR), “issues related to obtaining financing” accounts for 22% of delayed contracts and 9% of terminated contracts.
Home sale contingency
With a home sale contingency, the buyer agrees to purchase your home if, and only if, they sell their house first. While this may seem like a rational request from a buyer, it is a particularly risky contingency for sellers.
To avoid this contingency, sellers can make a counteroffer, requesting the buyer remove the stipulation. They can also suggest alternatives, such as a bridge loan, or refuse to sign a contract until the buyer secures an offer and closing date on their current property.
Other contingencies
Buyers may also add custom contingencies to the purchase agreement. For instance, one Washington homebuyer included a contingency that a feng shui specialist must evaluate the property to verify if the property had the right energy.
Confirm the purchase price and closing costs responsibilities
A purchase agreement outlines the money exchanged in the home sale. Review these numbers carefully before you sign:
Purchase price: This is the total value a buyer offers to purchase your home.
Earnest money: Also called a “good faith deposit,” this amount shows how serious a buyer is about their offer. If a buyer walks away from the deal, they’ll lose this deposit. Typically, an earnest money deposit (EMD) is 1% to 3% of the total purchase price, although it can increase to 10% in more competitive conditions.
Down payment: Most buyers require a mortgage loan to afford a home purchase, but the down payment is the percentage of the purchase a buyer pays up-front and out-of-pocket. A larger down payment often indicates lower risk to a seller. Should the buyer encounter any last-minute financing snags, the seller has good reason to assume the buyer can cover the shortfall.
Escalation clauses: In a competitive market, sellers are more likely to see an addendum to some purchase agreements called an escalation clause. This clause indicates that a buyer will pay more for the property if there are better offers on the table. For instance, a buyer may offer $375,000 with an escalation clause that increases the offer to $2,000 above any competing offer. Usually, escalation clauses include a price cap indicating the highest possible offer.
“Right now, with multiple offers, we’re seeing a lot of buyers offer full price and then have an escalation clause that goes [$40,000] or $50,000 over the asking price,” Cummings explains, noting the fierce buyer competition in today’s market.
Closing costs: The purchase agreement dictates who is responsible for which closing costs. Closing costs include insurance premiums and fees, commissions, property taxes, and more. Buyers’ closing costs typically amount to 2% to 5% of the final sale price, but sellers can pay anywhere from 6% to 10%.
Depending on your market, it’s customary for sellers and buyers to cover certain closing costs while others are up for negotiation. The buyer typically pays for the inspection and appraisal, for instance, while the seller covers the real estate agents’ commissions.
Closely review the closing deadline
The closing date depends on several factors, including when a seller can move to their new home and when the lender can process the loan for the new homeowner.
The closing date is also sometimes referred to as the possession date, indicating the day a buyer takes possession of a home, but the two are not always synonymous. According to the National Association of Realtors, 1 in 4 closings experience delays, so it’s in a seller’s best interest to prepare for a hiccup or two.
“Buyers, of course, want possession at closing, but … we try to negotiate for our sellers at least a few days to move out after the closing, in case there is an issue,” Cummings shares.
Most parties schedule the closing date 30 to 45 days after signing the purchase agreement. Always discuss the closing date with your agent to ensure the closing timeline is realistic.
Understand how the buyer intends to pay
Financing issues are the number one cause of closing delays, so sellers should carefully evaluate a buyer’s financial strength before accepting an offer.
In today’s competitive market, most buyers include a pre-approval letter with their offer to assure the seller that their finances are sound. When possible, buyers also make hefty down payments, which increase the likelihood that a home sale will proceed on schedule.
“The buyers that are winning in these multiple offer situations, they’re putting at least 20% down, sometimes 50%, or sometimes cash,” says Cummings. “In a normal market, you’ll have people doing more FHA, VA, and insured conventional loans.”
Scan for any special requests
Keep an eye out for additional buyer requests. For instance, a buyer may ask that you include specific appliances or furniture in the sale. Some buyers may even request to verify that the home is not haunted!
“In our contracts, there’s a further conditions line — extra room for somebody asking for the house to be professionally cleaned before closing… [or] anything kind of random,” Cummings explains.
A top agent can help you review the purchase agreement with a fine-tooth comb
A purchase agreement may seem straightforward, but this is a complex legal document, and the contents can make or break a deal.
To help you sift through legal jargon and ensure a smooth sale, you need to partner with a top real estate agent. A top agent can help you compare multiple offers, so you select the best of the batch. Once you choose an offer, they’ll help you understand the purchase agreement and negotiate on your behalf for better terms.
And when it’s finally time to sign, your agent ensures that you meet all contingencies, conditions, and deadlines, so your closing goes off without a hitch!
Header Image Source: (Antonio Guillem / Shutterstock)
