What is a Purchase Agreement?

Buying a home will likely be the most significant purchase you make throughout your life. It is no wonder the paperwork for the mortgage process is so extensive. However, the purchase agreement is arguably the most important document you will come across in your homebuying journey.

A purchase agreement is a type of contract that will lock you into the sale or transfer of property.  It is important to know what to expect to see in a purchase agreement and what contingencies you can include. In this article, we will provide more information to help you feel confident when you officially sign on the dotted line.

What is a purchase agreement?

Real estate purchase agreements are legally binding contracts that spell out the terms that both the buyer and seller agree to in a property transaction. As a buyer, you will make an offer to purchase a new home by providing a proposal containing the conditions for the sale (for example your offer price, mortgage contingencies, and more) that the seller can approve, adjust, and deny.

Once you and the seller have agreed on the offer and signed the purchase agreement, you are both officially under contract.

What is the purpose of a purchase agreement?

This type of contract showcases the intention of all concerned parties to follow through on a home sale transaction. It also explains the conditions that must be met for the sale to close and ownership of the home to transfer to you, the buyer.

In most cases, your purchase agreement will be prepared by your real estate agent. That is why it is important to hire an experienced agent who can walk you through the process and ensure you are not submitting an offer or signing a purchase agreement that is to your detriment.

What should my purchase agreement include?

Though the paperwork itself will be on a prepared template, the details of your purchase agreement will be unique to your home purchase. However, there are a few common elements that should be included, such as:

• Buyer and seller information

• Pertinent property details

• Purchase price

• Representations and warranties (statements made by the seller regarding the condition of the property)

• Financing details (how the buyer will pay for the property)

• Title insurance

• Property taxes

• Closing date

• Contingencies

• Signatures

• Earnest money requirements

Contingencies

When it comes to purchase agreements, the contingencies you or the seller decide to include will specify any additional criteria that must be met before the sale is complete. There are multiple types of contingencies that may be built into a home purchase contract to protect the buyer and seller from unexpected changes that may occur during the buying process. Here are a few examples:

• Appraisal contingency: allows the buyer to walk away from the deal or renegotiate the price if the appraised value of the home comes back lower than the original listing price.

• Inspection contingency: if the home inspection reveals deal breaker issues in the home, the buyer can back out of the deal.

• Home sale contingency: less common due to the higher risk it poses to the seller, this type of contingency allows the buyer to back out of the home purchase in the event they are unable to sell their current home.

• Title contingency: protects buyers from fraudulent sellers and requires a seller to clear up any lien or title issues prior to closing on a purchase.

It is important to note that the condition of the market will have an impact on the contents of your purchase offer. In a buyer’s market, you have the power to add contingencies and ask for additional perks from the seller since they are more eager to get their property off the market. However, in a seller’s market, you will likely be competing with other buyers and have to make your offer as appealing as possible to beat the competition.

What is not covered in the purchase agreement?

Although your purchase agreement will be incredibly thorough and contain all of the pertinent home purchase details, there are a few items that may not be included. Most likely, your purchase agreement will not cover issues handled by verbal agreement, handwritten notes, or schedule changes.

You will also not see a specific breakdown of fees and closing costs in the document. Instead, you will have to look into your mortgage closing statement for those details.

Is a purchase agreement binding?

Even though contingencies do make it possible to walk away from a deal with little to no financial recourse, you should not sign a purchase agreement until you are confident in the deal. It is an official contract that you will be obligated to see through to closing once it is signed. Not only is it difficult for a buyer or seller to back out, but doing so can end up costing you money.

Purchase agreement timeline at a glance

The process and exact timing of a home purchase will vary depending on the state you are buying in. Here is a breakdown of what to expect:

1. Your offer letter is drafted by your real estate agent and submitted.

2. The seller’s agent will share your offer with the seller, who will follow up by accepting it as is, rejecting the offer completely or sending back a counteroffer.

3. Pricing negotiations may take a few days if you and the seller disagree.

4. Once you and the seller successfully negotiate the pricing, a purchase agreement is drafted. Both parties will have 10 to 14 days to review and sign it.

5. As soon as the agreement is signed, the house is under contract. You will have 30 to 45 days to secure financing (approval from your lender). That is also the time in which the seller has to vacate the home.

6. If the purchase agreement contains contingencies, both parties must have them met in the specified timeframe.

7. Three days prior to closing, you will receive a copy of the finalized purchase agreement and a closing statement from the closing agent.

8. You have made it to closing day! Once both parties sign the purchase agreement, the sale is complete.

Taking the time to research and understand what is expected in your purchase agreement will go a long way in helping your homebuying process go smoothly. However, it is equally important to hire the right professionals so you have a homebuying dream team to assist you every step of the way.