What is a Purchase Agreement?
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A purchase agreement’s purpose is to provide protection, rights, responsibilities, and to set proper expectations for both parties in a real estate transaction. Only legally competent adults can sign a purchase agreement to make it valid.
The purchase agreement can serve as the first offer a buyer presents to the seller. The buyer would fill out (or have their real estate agent fill out) the purchase agreement form, which generally states the following:
- The property’s address
- The legal description of the property
- The identity of the buyer and seller
- The price the buyer offers to pay for the property
- Whether the buyer will ask the seller to contribute to closing costs
- The closing date
- Who covers closing costs
- Who will hold the earnest money
- How much the earnest money will be
- How long the due diligence period will be
- The date the offer will expire
- Any special stipulations unique to the deal
There can be more details included in the purchase agreement, depending on the deal. For example, closing contingencies can be listed in a purchase agreement. Contingencies help the buyer on the deal, but if there are too many contingencies, the seller might reject the offer, counteroffer, or ignore the offer.
Typical contingencies buyers ask for are the following:
- Inspection contingency: The buyer can back out if major problems are found.
- Financing contingency: The buyer can back out if they can’t get a loan.
- Appraisal contingency: The buyer can back out if the home doesn’t appraise for the offer amount.
- Title contingency: The buyer can back out if the seller cannot prove they possess title to the home.
- Contingent on the sale of another property: The buyer can back out if their previous home doesn’t sell by a certain date.
The seller, after receiving the offer from the buyer, has four options regarding what they can do:
- Accept the offer
- Reject the offer
- Ignore the offer
If the seller accepts the offer, this initial purchase agreement can serve as the contract that both parties abide by as the closing moves forward. Once both parties sign it and the buyer submits their earnest money deposit, it becomes a binding legal document.
Sellers, at this point, often need to include disclosures, which is a list of anything wrong with the home (the presence of lead-based paint or asbestos, a cracked or leaking foundation, flood zone issues, etc).
If the seller makes a counteroffer, a new purchase agreement can be drafted and signed by both parties.
When sellers make a counteroffer, it usually means they are close to accepting the offer if the buyer will agree to the changes presented in the counteroffer, such as paying more for the home, removing some or all contingencies, agreeing to a longer or shorter closing, or offering a larger earnest money deposit.
The buyer has options when they receive a counteroffer, but buyers typically need to exercise their options quickly, as counteroffers come with an expiration date. Plus, the seller can cancel the counteroffer if they get a better offer while waiting for the original buyer’s response. The buyer’s options during a counteroffer from the seller are the following:
- Accept the counteroffer
- Counter back with a new offer
- Reject the counter offer and move on
This offer-counteroffer process can go back and forth indefinitely until both parties can agree to a deal and sign the purchase agreement or, if they cannot come to an agreement, they can cancel the deal altogether.
The purchase agreement typically comes from the buyer (or buyer’s agent) and is presented to the seller (or seller’s agent), but an agent doesn’t have to be involved in the process. If a buyer and seller initiate contact with one another and are comfortable communicating directly, the two parties can draft and sign their own purchase agreement and deliver it to their closing agent of choice to complete the transaction.
Real estate agents generally use a standardized state purchase agreement that has been drafted by an attorney. Having a one-size-fits-all form that can be filled out by an agent is a convenient option, especially because all agents are familiar with the same document. However, a standardized purchase agreement is much longer than is necessary for each individual transaction because it contains every possible scenario and contingency, many of which won’t apply.
For a home buyer or seller who isn’t familiar with the standardized state form, they may find the standard purchase agreement to be much longer, more complicated, and intimidating than it needs to be. For this reason, it may be beneficial to have an attorney draft a customized purchase agreement that contains only the provisions that are relevant to the specifics of the buyer, seller, and subject property.