The process of buying or selling a home can be many things: exciting, stressful, overwhelming. But there’s no denying that the real estate process takes time – and a home purchase agreement can play a key role in helping speed things along during this unpredictable period.
In this guide we’ll explore what a real estate purchase agreement is, how it works and how it can help prepare you for your future.
What Is A Purchase Agreement?
A purchase agreement in real estate – also commonly referred to as a house purchase agreement, a home purchase agreement, a property purchase agreement or a real estate purchase contract – is a legally binding document detailing the terms of a real estate transaction. The interested buyer presents their proposed purchase agreement to the seller, and the seller has the ability to accept or negotiate with the buyer until both parties are satisfied.
This contract outlines everything from the offer, financing and settled-upon purchasing price, to details as small as which appliances or pieces of furniture may be included with the home. A real estate purchase agreement defines the terms and conditions under which a sale will take place, which can help govern the sale and expedite the overall purchasing process.
Although it may seem like a lot of work upfront, sorting out the details early on can help you should any unexpected obstacles pop up down the road. Real estate purchase agreements serve to protect the interest of both the home buyer and seller. They can help you keep track of the many factors that go into buying a home.
How Do Purchase Agreements Work?
Firstly, a real estate purchase agreement is typically drawn up by the buyer’s real estate agent. To ensure that the contract is legally sound, however, most agents are likely to fill out preexisting documents created by a law firm with the relevant contingencies and specifications requested by their client.
One of these specifications that is included in a purchase agreement is the “legal description.” This is the written articulation of the property or home’s boundaries and geography. A legal description will specify the precise borders of the home for sale and its exact location.
Purchase agreements are a part of what agents allude to when they talk about negotiating throughout the home buying process. They can be volleyed between the buyer and seller by using offers and counteroffers until all details are sorted and agreed upon by both parties. But once the buyer and seller are satisfied and agree upon the conditions stated in the purchase agreement, they are officially placed under contract in the eyes of the law.
What’s Included In A Purchase Agreement For A Home?
A real estate purchase agreement can seem like a lofty and intimidating piece of paperwork. But with the right agent and an understanding of what a real estate purchase agreement should look like, you’ll be well equipped for future negotiations.
Buyer And Seller Information
This is the most straightforward part of the contract for both parties involved in a transaction, as the buyer and seller information simply includes the full names and contact information of the buyer and seller.
Property information is also a cut-and-dried portion of a real estate contract. This section should include a detailed description of the condition of the property being transferred along with its official address, and any other relevant details regarding the land and home.
That legal description we discussed earlier may pop up in this section and this is also the area of a real estate contract where disclosures, details regarding past completed home inspections and home warranty information is included. By law, homes built before 1978 are required to disclose information regarding any use of lead-based paint, as it’s been proven to be a safety and health hazard.
If there have been any previous home inspections conducted their findings will be placed here. Home inspections are a great tool to learn more about a property’s physical structure and foundation, the age of a home’s appliances and fixtures throughout the house – such as HVAC and plumbing. In addition, you’ll learn about the condition of flooring, doors, windows and other interior characteristics.
If the home includes a home warranty, information about it may be included in the real estate contract. A home warranty is a short-term service contract that will provide repairs or replacements for major appliances and systems in a home.
Home warranties typically only serve 1 – 2-year terms. Even if it’s expired, the details of a home warranty can help give the buyer a better sense of what work has been done.
Closing And Possession Dates
A real estate purchase agreement should also include the closing and possession dates. These are the exact specifications regarding when the sale’s closing has taken place and when the official transfer of a property’s title will occur, down to the hour. Any changes made to closing a sale should be written and documented.
The possession date marks when the buyer will receive the keys to the home and officially call it theirs. Outlining an exact date helps keep both parties organized and creates a deadline for the seller to move out by.
Pricing And Financing
This is where the meat and potatoes of a real estate contract is: the purchasing price and the buyer’s financing information. Here you’ll find the agreed-upon selling price for the home or property, along with any deposits that have already been made and additional costs associated with the sale.
The financing section will outline in detail how the buyer intends to finance their purchase of the property, whether with a third-party lender or by taking on the seller’s existing mortgage. Since most home sales that fall through do so due to financing, spelling out these terms exactly is a great way to expedite the home buying process and ensure that neither party will be taken by surprise.
Other Transaction Expenses
A purchase agreement can also include many other costs – a down payment, closing costs, earnest money, escrow details, and insurance or tax information. Let’s take a quick look at what these factors mean:
- Down payment: The lump sum of money that goes toward closing or purchasing the home; the more money that is paid upfront, the less the buyer will have to borrow from a lender
- Closing costs: Fees that come with the transfer of a property; can include real estate agent’s commissions, appraisal or home inspection fees, lenders fees, insurance and taxes. Closing costs typically make up 3 – 6% of the purchase price.
- Earnest money: Also called a “good faith deposit,” earnest money is a deposit made by a buyer to show that they’re interested in a property and serious about buying. Earnest money is basically financial insurance for the seller. Should the buyer pull out of the contract before closing without a contingency being met, the seller will get to pocket the money. Should the contract go through, the deposit typically goes toward closing costs or the buyer’s down payment.
- Escrow: Escrow is the withholding of money by a third party until a transaction goes through. In terms of a purchase agreement, the earnest money is typically held in an escrow account until the home sale is final or terminated.
An addendum is an amendment made to the final purchase agreement – things that both parties agree upon, but were not included in the original copy of the contract. Adding these documents help keep the purchase agreement organized and easy to read and understand.
How To Prepare Your Purchase Agreement
A real estate purchase agreement is prepared by the buyer’s agent and we recommend enlisting this professional help. Although real estate agents cannot by law create a legal contract (something only practicing attorneys can do) they typically work with a law firm or have the contract drawn up and ready to be filled in.
Enlisting the help of a professional agent can be immensely helpful for negotiations or even just understanding what information to include or investigate further. Since it’s a legally binding contract, you don’t want to find yourself lost or floundering. Working with an expert along the way can help you avoid such situations.
The Bottom Line
A real estate purchase agreement is more than just the offer and final price. It’s a legally binding document that holds the buyer and seller under contract. In addition, it streamlines and organizes the home buying process while protecting and holding both parties accountable.
Blog written by: Holly Shuffett, August 16, 2021, via https://www.rockethomes.com/blog/home-buying/real-estate-purchase-agreement, all rights reserved.