You might have heard of a purchase agreement. It is a document used to seal off a purchase. For a big purchase like real estate property, a purchase agreement is a part of the sale. It might be managed by the real estate agents and is discussed between two parties before the signing process. It is a terms and conditions document for both parties in a real estate purchase. Sellers might declare that the purchase is done when the buyer paid a certain amount to the sellers or buyers might ask the seller to declare that the house is in a good condition.
What is a Purchase Agreement?
A purchase agreement is considered a legally binding contract. It is signed by two parties involved in a buy-and-sell process. Such as real estate purchases, car purchases, and other things. In real estate, a purchase agreement is signed by home buyers and sellers. It is to confirm that they have agreed to a specific clause of sale terms and conditions. Such documents are used as a written agreement to purchase real estate.
A home purchase agreement states all the details of the home sale transaction. Buyers can propose conditions for the sale, including the offering price. The home seller then can accept, reject, or even negotiate with the buyers for other terms and conditions regarding the offer. When both parties sign the purchase agreement, then they are legally bound under a contract to fulfill the stated agreement. Once the conditions are met, the sale can be closed and ownership of the home can be transferred from the seller to the buyer.
How to Fill a Purchase Agreement?
As a seller or buyer with no legal practice, you can’t create a purchase agreement. But you can fill out a pre-existing purchase agreement template. These templates are usually created by real estate attorneys. Here are some things you need to prepare before filing out a purchase agreement:
1) Buyer and Seller Information
2) Property’s description
3) Purchase price and details
4) Disclosure description
5) Assumption of loan
6) Financing contingencies
7) Sale contingencies
8) Representations
9) Inspection details
10) Title insurance details
11) Closing details and deliverables
12) Assumption of leases
13) Governing law, dispute, and miscellaneous information
Purchase Agreement Tips
Follow these tips so the purchase agreement is beneficial for you as a buyer:
- Include all clauses – Real estate attorneys have created a simplified purchase agreement. So it’s best for you to include all clauses, even when you think you don’t need them. This step can provide protection for both the buyers and the sellers. It is also to help minimize the risk of a potential dispute in the future.
- Specific inspection – In some states like Alabama, Florida, New Jersey, and Massachusetts, the real estate laws don’t require the seller to disclose house defects. Therefore, you might need to conduct additional inspections before signing the purchase agreement. You can also negotiate with the sellers regarding these findings.
What’s Included in a Purchase Agreement?
1) Buyer’s and seller’s information: full name, contact number, physical address. Indicate the status of both parties (individual or corporation).
2) Property Description: Address of the property, including unit or apartment number. Write down the legal description of the property according to the county accessor.
3) Personal property description: what’s included and excluded in the house sale. The sale must include the seller’sright, title, and interest in the real estate, buildings, improvements, and fixtures. If there are any personal property items, the list should also be provided.
4) Purchase price: write down the price in U.S. Dollars amounts.
5) Earnest money deposit: Write the total amount of earnest money deposit, generally 3% of the purchase price.
6) Payment method: how the buyer going to pay. There are choices like official bank checks, wire transfers, or certified checks. If there are any payment options, they should be described in the purchase agreement.
7) Disclosure and defects: Seller must specify disclosures, such as disclosures regarding environmental hazards, flooding or drainage issues, plumbing problems, etc.
8) Assumption of loan: If the property is still on an ongoing mortgage, state whether or not the buyer will take over the seller’s mortgage. If so, provide the purchase agreement with the mortgage details.
9) Terms of mortgage
10) Buyer’s obligations
11) Standard seller representations and warranties: It is to state that the seller’s representations and warranties are included with the title, and selling authority. Therefore, the property is not violating governmental rules, codes, permits, and regulations.
12) Inspection details: Buyers are allowed to list an inspection contingency before signing a purchase agreement for a house. With an inspection, the buyers can negotiate a repair of the property.
13) Closing details: Including date and location of purchase’s closing, and closing cost for both parties. Also, describe the terms and conditions for delayed closing (if any).
14) Assumption of leases: State if the property is being leased to another party. Including the name and date of the lease agreement.
15) Property possession date: State the date on which the seller must deliver or transfer the possession of the property.
Purchase Agreement Conditions
Before filing out a purchase agreement, you need to make sure that these 7 conditions are prepared. This will ensure the process of buying a property.
- Earnest money
Earnest money is a deposit you pay to show your commitment to completing the sale. Usually, it is 1% to 3% of the purchase price. This money is an act of good faith in the competitive real estate market. The amount of earnest money can be negotiated with the seller. Once the seller receives this money and the purchase agreement is signed, it can’t be taken back. It can also serve as the buyer’s down payment and closing costs.
- Contingency
Contingency means that there are things both parties have to do before the signing process. Maybe the seller wanted the buyer to sell a property they already own. The buyer could also ask the buyers to conduct a house inspection so that the property is in the best condition. This act will protect both parties in the sale process. If the contingencies are not met, then they might not be signing process. Therefore, buyers wouldn’t lose their earnest money.
- Settlement date
The settlement date is the closing day. Where both parties met to finalize the sale. This date should be negotiated properly so that both parties can finish the due diligence process. Inspections, appraisals, and any other contingencies must be done before the settlement date. Therefore you need to take as much time as you could so it could be finished. If you can’t finish the obligations before the settlement date, then you may lose the earnest money and be considered “in default.”
- Possession date
The possession date is the date when you can occupy the new property. You can offer to purchase real estate and give time for the previous owner to move out 60 days after the settlement date. But sellers might also allow buyers to move in before the settlement date if the property is already vacant. Generally, 30 to 45 days after the settlement is the most common deal. This is also the date when the property title is transferred to you, naming you the legal owner.
- Home Warranty
A home warranty is a written policy that covers the cost of renovation if there is any damage. This term is used to bait buyers. Sellers usually offer $300 as a home warranty. It is also the case if the sellers need to sell the house quickly and the house is old.
- Escrow
An escrow is used to hold important items. For example, once you sign an agreement to purchase real estate, you will need to give the earnest money. Then, it will be stored in escrow until the deal is finalized. It is also needed to keep both parties from fraud until the settlement date. The escrow holder is usually someone from the real estate agents, an attorney, or even a closing company.
- Delivery
It is a chosen form of communication during the property transaction. When buyers and sellers sign a purchase agreement, they need to communicate the terms and conditions. Even though email is the most famous form of communication, there might be people who prefer letters or snail mail to receive important documents. Therefore it must be agreed upon to minimize the risk of miscommunication.
Purchase Agreement Pros and Cons
Before you sign a purchase agreement, you might want to consider these pros and cons:
Pros:
- Shows the buyer’s commitment to closing the deal
- Meets the requirement in the contract
- Declare rights and responsibilities of both parties
- Define contingencies regarding the contract for sale of real estate
- Minimizing legal process, waste less time
Cons:
- Must be filled with great details, can miss some legal clauses
- It may not be beneficial for both parties at once, but can be time-consuming if need negotiation
- Only covers basic contingencies of the sale
- Can’t be legally created by the sellers, buyers, or real estate agents without legal practice
FAQs
Who prepares the Purchase Agreement?
A purchase agreement is created by real estate attorneys. This process is to create a legally correct document for the client to fill. The details in the document can be discussed between the seller and the buyer. However, it is encouraged to use a real estate agent service to fill in a purchase agreement template.
Can a Purchase Agreement Expire?
Yes. A purchase agreement can expire. The expiration date of this document should be explicitly stated so both parties know when it does.
Can a House Purchase Agreement be Cancelled?
A purchase agreement is binding. Unless there are terms and conditions that could cancel the purchase agreement, it is not cancelable. You might even get charged for canceling a house purchase agreement without reasons or negotiation with the seller.
How Binding is a Purchase Agreement?
It is legally binding. Since it is created by real estate attorneys. However, it might not be needed to be recorded or notarized. There is also a penalty if the conditions are not met by the stated date.
When to Use Purchase Agreement?
A real estate purchase agreement can be used if you are one of the following:
- A potential buyer of real estate property
- A potential seller of real estate property
- Someone who needs to define the legal rights of each party regarding the sale
- Someone who needs to outline respective duties before the transfer process of a legal title
A purchase agreement can be used for any real estate sale as long as the home’s construction is done before the closing date of the contract.
Should a Purchase Agreement be Notarized?
No. Even though it is legally binding, it doesn’t need to be recorded in the county office. Therefore, not every people can create a purchase agreement. It should be created by a person with legal practices, such as a real estate attorney.
There are a lot of components inside a purchase agreement. Even with the most simple purchase agreement, you still need the help of a real estate agent to review the clause. Even if a purchase agreement isn’t notarized, it is still legally binding and can be pursued through lawsuits if there are any violations between the two parties.
If you decide to not use a real estate sales contract, there might be some consequences that you need to face in the future. Since real estate is a big possession, it could be pursued through a lawsuit. Especially if there is no clarity about the property’s title or ownership. Without a purchase agreement, the contingencies might not be met before closing, therefore creating a disadvantage for both parties. It is also a gap for breaches and scams.
You might want to pay attention to these things before signing a purchase agreement for a house. With these, you might be able to gain benefits from the documents. It will also provide you with property protection and give clear terms and conditions before the property title is transferred to you as the new owner.