If you’re buying or selling a home, you’re going to come across a purchase and sale agreement -- and understanding what it is, what it contains, and what to look out for in one is going to be crucial.
Put simply, a purchase and sale agreement is a contract -- a binding document that breaks down all the details of the transaction -- including things like the final sale price, purchase terms, earnest money deposit, closing date, and contingencies (more on those later). It also spells out the timeline for the purchase.
After the seller has accepted your terms, or you’ve gone through negotiations and settled on different ones, you’ll both sign the document, acknowledging and agreeing to all the conditions it outlines. Both of you should read the document carefully and thoroughly before signing on that dotted line.
What’s the point of a purchase and sale agreement?
The purpose behind a purchase and sale agreement is two-fold: 1) to spell out all nitty gritty details of the transaction and 2) to legally bind both parties to its terms and conditions.
It also serves to protect both parties. The buyer protects themselves by adding various contingencies and conditions, while the seller protects themselves by including strict deadlines or by negotiating a higher earnest money deposit (or both.)
What’s included on a purchase and sale agreement?
The exact details of a purchase and sale agreement vary slightly by state. In fact, in some places, your offer is your purchase and sale agreement.
But while the exact form and format of your agreement might change, in general, you can expect your purchase and sale agreement to contain at least these items:
- Sale price - This is the final purchase price that you and the seller agreed upon. Keep in mind that this number can change later on. If, for example, the home inspection reveals serious repairs are needed, you may need to renegotiate with the seller to make up for those costs.
- Earnest money deposit - Your earnest money deposit basically holds your place in line while you go about your home inspection, appraisal, and mortgage processes. It forces the seller to take the home off the market, but still gives them some sort of financial protection if you back out of the deal. Earnest money deposits are traditionally 1% to 3% of the sale price, though you can offer more or less depending on your interest in the home.
- Closing date - This is the date you’ll pay your down payment and closing costs and when the seller will transfer the property to your name. It’s typically 3 to 4 weeks from when you put an offer on the home, though it may change if your loan is delayed or issues with the inspection or appraisal crop up.
- Title company - This is the company that will issue the property title in your name once the transaction is complete. It also may be the location where you sign your paperwork on closing day. You have the option to request another title company if you are unhappy with who the sellers have designated.
- Contingencies - These are conditions that protect the buyer in case their financing falls through, there are issues with the inspection or other problems occur. It gives you a back-door exit, if you will, and lets you cancel the transaction and get your earnest money back in full. All contingency conditions must be met in order for the transaction to proceed. (Read more on contingencies below).
Purchase and sale agreements will also typically include details as to who will pay for the home inspection, survey, title insurance and other must-haves along the way, and they may also break down the process for transferring utilities, property taxes, HOA memberships, and more.
In some cases, either you or the seller may want to include details as to what items will (or will not) be included with the house -- things like appliances, window treatments, furniture, etc. These are traditionally added in as “riders” at the end of the agreement.
What contingencies should you include on your purchase and sale agreement?
As a buyer, contingencies are one of the most important parts of your purchase and sale agreement. Why? Because they protect you -- both financially and physically. They ensure you purchase a safe, hazard-free home that you have the financial resources to afford.
The gist is this: contingencies spell out certain conditions that, if not met, will allow you to back out of the deal without any sort of financial penalty. The most common contingencies in when buying a home are:
- The mortgage contingency clause - This condition essentially means you agree to purchase the home if, and only if, you’re able to secure the mortgage you need to cover the costs. If you’re unable to get a mortgage loan -- or the conditions of the loan change significantly once processed by your lender -- you can exit the transaction unscathed.
- The appraisal contingency - Your lender will inevitably have the home appraised to make sure it’s worth what they’re loaning you. If it doesn’t add up? You’re stuck footing the bill for the missing cash. The appraisal contingency gives you the option to renegotiate the sales price or back out of the deal should this occur.
- The sale of your current home - If you’re selling one home and buying another, you’ll likely want to include this contingency, which basically gives you time to sell your current home before finalizing the sale on your new home. It lets you cancel the purchase if you’re unable to find a seller for your current property.
- The home inspection contingency - This contingency allows a small window of time in which you can have the home inspected. If that inspection reveals problems on the property, you can renegotiate with the seller, asking them to fix the issues or lower the sales price to make up for it. If you can’t come to an agreement, the contingency allows you to exit the deal.
- The title contingency - The title contingency gives you the power to review the home’s title before finalizing the transaction. If your review shows ownership conflicts or other issues with the title, you’re allowed to cancel the transaction without forfeiting your earnest money.
Now, it’s important to note: contingencies are a risk for sellers.
They don’t want a buyer backing out, as it means they’re back to square one -- looking for new bidders and re-marketing their property. Because of this, it’s important to consider your contingencies carefully. In hot markets, many buyers waive contingencies in order to stand out from other bidders. This, too, comes with added risk.
Make sure to talk to your real estate agent, a real estate attorney, or another industry expert if you’re unsure of which contingencies (if any) to include in your contract.
And remember, contingencies aren’t a built-in part of the agreement -- even if you’re using an agent. You’ll want to look very carefully to make sure the right contingencies are on the agreement before you sign and it becomes legally binding. If you’re not sure, have a real estate attorney look over the document to make sure you’re protected.
Riders to purchase and sale agreements
Both buyers and sellers can add what are called “riders” to the purchase and sale agreement before signing off on it. These are essentially addendums, detailing an added request or condition that’s not accounted for in the original document.
You might add a rider if:
- You want the seller to cover part of your closing costs
- You’d like the seller to leave behind certain appliances, pieces of furniture or decor in the home
- You want the seller to include a warranty on the home
- You’re requesting credits toward repairs on the home
- You need or want access to the home before the title is transferred
Sellers may also add riders, as well, though it is typically less common. A rider, like the original purchase and sale agreement, is a legally binding contract once both parties have signed and agreed to it.
Finalizing the purchase and sale agreement
It’s very important you read your purchase and sale agreement (and any riders or addendums) carefully before signing on the dotted line. Once both parties have signed and the contract has been executed, there’s no going back.
In particular, you’ll want to pay close attention to:
- The purchase price and earnest money deposit - Is it what you agreed to? Have you gotten pre-qualified to make sure you’ll have adequate funds?
- Your contingencies and their deadlines - Are all the contingencies you need in place? Do the deadlines for those allow enough time to do your due diligence?
- Any riders or addendums - Have you read these in full? Were you aware of these before the agreement was drawn up?
Depending on your state, you may finalize and sign the agreement with your agent or through a real estate attorney. After both you and the seller have signed off on the document, it becomes a legally binding contract and the transaction proceeds toward closing. As long as all your contingency conditions are met, you should be a proud homeowner in just a few weeks. 💪
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