What Is a Purchase Agreement in Real Estate?

 

A purchase agreement is a legally binding contract between a buyer and a seller when they agree to complete a real estate sale. It is the most important element that must be present in a real estate deal because it outlines the price, the rules that need to be followed by both buyer and seller, and the important dates that must be remembered. As both the buyer and seller sign the document, this expresses their interests to move forward.

So, why does this document exist? Or why do people need to have a purchase agreement? Well, the answer is quite simple. If you are in the middle of a real estate transaction, you will ask yourself this: "How can I make sure I protect my interest?” This question is true for both the buyer and the seller. This document exists solely for that purpose, to protect the buyer and seller and for them to know what to expect and what rules to follow.

If you feel like you need to consult this with someone, then you are right. A transaction this big is not as simple as buying a day-to-day commodity. For some people, the largest or biggest financial decision they will encounter in their lives would be their home. So, consult it with your lawyer or real estate agent to make sure your hard-earned money is spent safely and well. However, if you are confident you can do it yourself, that is fine as well.

 

What Does a Purchase Agreement Include?

As mentioned earlier, it includes the price, the rules that must be followed by both the buyer and the seller, and the important dates they need to remember, as they will serve as their deadlines. But, it is not just all those. For you to better understand what they include, we have written below the things that are essential in what makes a purchase agreement a purchase agreement.

Purchase Price

The purchase price is the amount that the buyer has agreed to pay for the property in question. This is the most important of all because in the purchase agreement it must clearly state how much the home will sell for. Although, there are times when the listing price is different from the purchase price depending on the negotiation between the buyer and the seller.

Earnest Money

Earnest money is the money the buyer pays to show their intention that they are serious in acquiring the property. Earnest money is sometimes called “good-faith money” or “good-faith deposit” as a means of showing good faith to the seller. This money is usually around 1-5% of the purchase price and will be held in escrow until closing. This money will then be part of the closing costs or the down payment, but if the buyer is showing insolvency later on, this can be used as payment for the wasted time and/or damages.

Contingencies

Contingencies are conditions that must be met before the sale can move forward. These clauses help protect both the buyer and seller by allowing the transaction to be canceled if certain requirements are not satisfied. Common contingencies include:

• Home inspection contingency — allows the buyer to have the home inspected and request repairs or cancel if major problems are found
• Financing contingency — protects the buyer if they are unable to secure a home loan
• Appraisal contingency — helps make sure the home’s appraised value is not lower than the agreed purchase price

Closing Date

The closing date is the date when the transaction is expected to be completed. However, closing dates can be changed, whether earlier or much later, as long as it is not excessive and unreasonable. Having to change the closing date a few days earlier or later is not an issue according to a Reddit post.

Automatic Extension

Sometimes called an “evergreen clause," it is simply a clause where it automatically extends the stipulated date, allowing both sellers and buyers to enjoy additional time if the closing date is not feasible considering the circumstances. However, it is important still to have a document stating that the seller has agreed to the extended date.

 

Missing the Closing Date

Missing the closing date is bad but can sometimes happen because the financing can be unpredictable, and their end is never in your control. You have to wait for them to finish before you can even proceed. Other delays that are common culprits in delays would be appraisal problems and title issues.

 

Buyers Can Ask The Seller for More Time

If you do not have a clause mentioned in your contract where it says there is an automatic extension should there be delays, then you can ask the seller right away and execute a supporting document that allows you an extension.

 

Sellers Can Ask For Additional Fees

If sellers feel like you are not going to actually move forward with the close, they can actually ask you for fees if you ask them to have an extension, especially if it's not the first time. Fees like paying the cost of a mortgage per day are common.

 

Sellers Have a Higher Offer

A contract is a contract and must be honored by both parties, so there will be instances where the seller is not interested in giving the buyer an extension simply because they have other higher offers.

Items Included in the Sale

This section lists the items that will stay with the home after the sale is completed. These are often called fixtures or included property items. Examples may include:

• Kitchen appliances
• Light fixtures
• Built-in cabinets
• Ceiling fans
• Other permanent features attached to the home

 

When Does an Offer Become a Purchase Agreement?

An offer becomes a purchase agreement once both parties agree and sign. The property will then be considered under contract, meaning the offer has officially become a legally binding purchase agreement.

 

Can You Back Out of a Purchase Agreement?

Yes. A purchase agreement is something that both buyers and sellers have to honor once signed because it is a binding contract, and you can back out depending on WHEN you want to, but it is not going to be as easy as simply deciding. It is easier if you back out before the seller signs, but after the seller signs and you decide to back out, that becomes very tricky.

Before the Seller Signs

If the seller has not yet signed the contract, just like any other legally binding agreement, if it is missing an element, which in this case is a signature from the other party to make it officially legally binding, then you can definitely back out without any consequences since there has been no finality yet made.

After the Agreement Is Signed

If both the buyer and the seller have already signed and one of the parties decides to back out, usually the easiest way to do this is for both parties to agree to rescind. In this way, there will be no penalties just as long as both parties agree, and this must be done in writing to be safe.

However, this is not always the case, and if either party insists on having the contract followed through, then you must have a valid reason to cancel.

Valid Reasons to Cancel

Buyers may still be able to cancel the agreement if certain conditions are not met, including:

• Financing falls through
• Major issues are discovered during the home inspection
• The home’s appraisal value is lower than the purchase price
• Other contingencies listed in the contract allow cancellation

What Happens to Earnest Money

If a buyer cancels the agreement without a valid reason allowed in the contract, they will lose their earnest money deposit. This deposit may be given to the seller as compensation for the time and effort spent during the transaction. But if the cancellation is due to valid reasons, then the earnest money will be returned.

 

How Long Does a Purchase Agreement Last?

A purchase agreement usually lasts 30 to 60 days. Most contracts are designed to cover the period from signing to closing to property transfer within this timeframe. There are purchase agreements, however, that last shorter than 30 to 60, but the least common would be more than 60 since it would most likely be considered a breach of contract.

There are, however, factors that affect the timeline, and these are:

• Financing—Some loans cause delays in approval
• Cash payment—much faster closing
• Contingencies—some contingencies may take longer like inspection, title search, etc.

 

Can a Purchase Agreement Be Changed After Both Parties Have Signed?

Yes. A change in the purchase agreement can be achieved through a contract amendment, and it is commonly used in other forms of contracts in many different industries. It simply means that both parties agree to make slight changes to the contract based on what they recently agreed on.

Changes in the contract can include changing the price, timeline or deadlines, payment terms, contingencies, and other factors material to the contract. Once changes are in place, the original contract must be referenced, meaning it has to acknowledge the existence of the previous contract by clearly stating the name, date, and parties involved.

 

 

 

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