What Is a Real Estate Purchase Agreement?
What Is a Real Estate Purchase Agreement?
Are you about to buy a home and are wondering what a purchase agreement is? Here is everything you need to know about a real estate purchase agreement.
Throughout the entire buying and selling process, whether you are a first-time home buyer or a seasoned pro, you may run into things you've never heard of. Or things that you don't fully understand. While your real estate agent will walk you through everything, you should still be knowledgeable about every part of the process.
A real estate purchase agreement is a legally binding agreement that lays out the purchase and sale of a property. This agreement is made between the buyer and seller. It will define all the terms and conditions under which the sale will occur.
No matter the type of home you are interested in buying, it is important to ensure your contract is strong. The seller will have a chance to look over your contract and either accept, deny, or counteroffer.
A purchase agreement is especially important to lessen the chance of any potential hiccups or unexpected events. It will help buyers and sellers avoid legal and financial hurdles through the buying process. So, ensure you completely understand a real estate purchase agreement before buying your next home.
Keep reading to learn all about a real estate purchase agreement.
Chapters
1. What Is a Purchase Agreement?
In real estate, a purchase agreement is a contract that spells out the terms under which the buyer and seller must agree in order for the sale to go through. Once the agreement is signed by both parties, the property is now under contract.
A binding legal agreement will outline the main details of the home sale inspection; a purchase agreement for a house is also called a real estate sales contract, home purchase agreement, real estate purchase contract, or a house purchase agreement. All of these mean the same thing and are a crucial part of the buying process.
When the buyer makes an offer on a home, the buyer will draw out the proposed conditions for the sale and the financial details, like their offer price. This is typically written by the buyer's agent, who sends it to the listing agent and shows it to the seller. Then everything is in the seller's hands, they will have the opportunity to accept, reject, or negotiate the terms of the agreement.
While it is possible to sell and buy a home without a real estate agent, about 89% of buyers purchase their home through a real estate agent or broker. A real estate agent will represent your best interest and share their expertise.
Typically, the buyer's agent will write up the purchase agreement. However, since most agents are not practicing attorneys, they cannot create their own contracts. So, they usually fill in preexisting documents created by a law firm that specializes in real estate transactions.
2. Components of a Real Estate Purchase Agreement
A purchase agreement can also be known as a real estate sales contract, which specifies the property transaction. Here are a couple of common elements included in the agreement:
- Parties: The full names and contact information of the buyer and seller need to be included.
- Property: The address, legal description, square footage, and any other important details of the property.
- Purchase price: The proposed purchase price needs to be outlined, including any deposits or additional costs with the transaction.
- Representations and Warranties: A statement of facts made by the seller about the home's conditions, structure, and composition. This can also be disclosed by the seller in a warranty deed.
- Financial details: The buyer needs to include details of how they will be paying for the property, whether through a mortgage loan or assuming the seller's existing mortgage.
- Fixtures and appliances: All fixtures and appliances are included or excluded from the sale.
- Title insurance: The agreement needs to outline whether the buyer or seller will be responsible for purchasing title insurance to avoid potential defects in the property.
- Property taxes: Any property taxes that will be imposed on the property.
- Closing date: The exact date that the official title transfer will occur, including the date and time the buyer will receive the keys to the property.
- Contingencies: Any conditions that must be met before the sale can occur, including any repairs or inspections done by a specific date.
- Earnest Money: Terms for earnest money deposits to demonstrate the buyer's interest in purchasing a property.
- Option to terminate: The buyer will have the option to back out of the deal and terminate the contract.
- Lead-based paint disclosure: Required by law for any home built before 1978, information non the dangers of lead-based paint has to be included.
- Signatures: Both parties need to sign the agreement to finalize the deal.
3. What are Contingencies?
Contingencies are a crucial part of the purchase agreement. They are conditions that must be met in order for the purchase to go through. In real estate, the contingencies are specifying that although an offer has been made and accepted, additional criteria must be met before the deal closes.
There are many potential contingencies you may encounter as a buyer or a seller. When making an offer on a home, contingencies are escape clauses in a sales contract that would allow you to walk away from the sale with your earnest money.
Many buyers include home inspection contingencies, which state that if the home inspection reveals major problems with the home, then the buyer is free to walk away. These contingencies are meant to protect the home buyer. However, a contingent offer can cause problems if you are in a seller's market.
In a seller's market, the competition is typically high, so if you include contingencies in a popular home, you may be at risk of losing the home because your competition has fewer contingencies.
If you are buying a home in cash, you don't need to include an appraisal or financing contingency. Lenders will only require these to ensure the property is worth at least the mortgage amount.
4. Earnest Money Deposit
Earnest money is considered a good-faith deposit. This deposit protects the seller if the contract falls through. It is typically only 1% to 3% of the home price. The buyer deposits earnest money into an escrow account during the purchase process. Then, if the sale goes through, the money can go towards the down payment or closing costs.
In order to get a home during a seller's market, it may help to offer a higher deposit than average. This shows the homeowners that you are serious about buying the home.
The amount of earnest money required for the real estate contract must be defined in the purchase agreement. If the sale falls through before closing, the seller will put the home back on the market, which will result in a large financial hit. Earnest money will protect the seller in this case and help with these extra costs.
You should talk with your realtor about the exact amount of earnest money you should decide on. It may vary on the current market conditions. Keep in mind that the buyer may get this money back if the deal falls through due to a failed home inspection or a listed contingency. Earnest money is not required when buying a home, but it may be necessary in a competitive real estate market.
5. Closing Costs
Closing costs include the fees and expenses that you pay when purchasing a home. In North Carolina, closing costs come slightly below the national average at around 2% to 4% of the sales price. So, if your home closes at $300,000, you can expect to pay $6,000 to $12,000 in closing costs.
Closing costs include title fees, home appraisal fees, inspection fees, transfer tax, homeowner's insurance fees, escrow fees, and loan origination fees. In North Carolina, the buyer and seller are both responsible for a portion of the closing costs. A realtor can help you negotiate with the sellers to cover a part of the costs.
If you are taking a loan out to purchase the home, you can potentially ask your lender to cover the closing costs. Lenders will do this sometimes as an incentive to get buyers to take out loans with them. However, then you would have to pay a premium for the convenience.
A real estate attorney is required at closing, and closing costs will vary from state to state; luckily, we are here to help you through the entire process.
Methodology
We used information and data from several different sources, as well as our own data, to determine everything you need to know about a real estate purchase agreement. Most of the data was sourced from the following sources:
FAQ: A Real Estate Purchase Agreement
Here are some commonly asked questions about real estate purchase agreements.
What is the purpose of a purchase agreement?
A purchase agreement is the final document in the house-buying process. It is used to transfer a property from the seller to the buyer. This will outline the terms of the transaction, and then both parties will sign the agreement.
Is a purchase agreement the same as closing?
Signing a purchase agreement completes the sale of a home. A PSA lays out the transaction details leading up to closing, and then you'll sign the purchase agreement to finalize closing.
What happens after the purchase agreement is signed?
After the purchase agreement is signed, the home is officially under contract. However, you will still need to complete a couple of extra steps before moving into the new home. This includes making an earnest money deposit, a home inspection, and closing on the home.
Who sends the purchase agreement?
The buyer's agent will prepare the purchase agreement and their client's formal offer on the property. Then, the buyer's agent will send the letter to the seller's listing agent. Once it is in the hands of the seller's listing agent, they will show it to the seller, who can either decline, accept, or counteroffer.
Can a seller back out of a purchase agreement before closing?
In some cases, a seller can back out of a purchase agreement before closing. It will depend on the contract and contingencies. If the contract doesn't include contingencies, then it may be harder for the seller to back out than it would be for the buyer.
Real Estate Purchase Agreement - The Bottom Line
The real estate purchase agreement is a legal document outlining the terms and conditions under which a property can be sold. This is used to protect both the sellers and the buyer and ensure the transaction goes through as smoothly as possible.
Understanding the basics of a purchase agreement will not only help you feel more prepared but potentially save you a good amount of money if your realtor can negotiate with the seller.
As you decide where to move to next, consider the Triangle, which has many homes with amenities and local favorites surrounding your family. Whether you are searching for a single-family home, townhome, short sale, or apartment complex, you are bound to find the best home in Raleigh for you and your family for the best price.
Before you buy your next home in the Triangle, feel free to contact one of our helpful real estate specialists, as they are eager to help you find the perfect home. We know that buying a home can be overwhelming, but a real estate agent can walk you through the entire process.
Ryan Fitzgerald
Hi there! Nice to 'meet' you and thanks for visiting our Raleigh Real Estate Blog! My name is Ryan Fitzgerald, and I'm a REALTOR® in Raleigh-Durham, NC, the owner of Raleigh Realty. I work alongside some of the best Realtors in Raleigh. You can find more of my real estate content on Forbes, Wall Street Journal, U.S. News and more. Realtor Magazine named me a top 30 under 30 Realtor in the country (it was a long time ago haha). Any way, that's enough about me. I'd love to learn more about you if you'd like to connect with me on Facebook and Instagram or connect with our team at Raleigh Realty. Looking forward to connecting!
Related Blogs
