What Is a Purchase Agreement?

When your offer on a house is accepted, you and the seller will sign a purchase agreement to solidify the deal. A purchase agreement is a legally binding document that establishes the terms of the transaction, including price, contingencies and other information relevant to the deal. Keep reading to find out what’s included in a purchase agreement, how long the agreement lasts, and how legally binding it is.

What is included in a purchase contract?

The purchase agreement, also known as the purchase and sale agreement or purchase contract, should include information relevant to the real estate transaction. A purchase agreement’s structure varies by state, but most contracts include the following sections.

Basic buyer, seller, and property information

The legal names of all parties involved should be at the top of a purchase agreement. This includes the buyer, seller, and anyone else who has held or will hold the property title. A clear description of the property being purchased should also be included, such as the property’s physical address, square footage, and land plot information. There should be no ambiguities regarding the property’s description.

Title information

Purchase contracts should also include details about the property’s title, such as title status, title history, and title insurance policies. This includes the name and address of the title company being used. The title company sometimes holds funds in escrow until the home sale is finalized. In some states, title companies also handle closings. These processes may also be done by an escrow company or real estate attorney. 

Purchase price and financing details

One of the most important aspects of a purchase agreement is the home’s final purchase price. Although this price can be negotiated in the future, it’s important for the buyer and seller to get a sales price in writing. This provides buyers with the documentation they need to apply for a mortgage. It’s also important to include the type of financing you’ll be seeking and how much money you’re asking to borrow. 

Earnest money deposit

Before a buyer signs a purchase contract, they’ll usually need to make an earnest money deposit. This money is a sign of good faith, showing that the buyer is serious about their offer. It reassures the seller that they aren’t wasting their time or missing out on other opportunities by considering the buyer’s offer. 

The amount of earnest money paid to the seller is stated in the purchase contract and later applied towards the buyer’s down payment, or closing costs at closing. If a buyer chooses to back out of a transaction, they’ll lose their earnest money deposit, (unless the seller fails to meet one of the contingencies stated in the contract). 

Escrow company

Earnest money deposits aren’t immediately given to the seller. Instead, they’re held in escrow by a third party company to make sure the deposit goes to the right person. The escrow company also receives the funds from your mortgage loan once you’re approved. If everything goes according to plan, these funds are released on closing day.

The purchase agreement should include the name of your escrow company and escrow agent, as well as the person responsible for paying escrow fees. Unless otherwise noted, the escrow company and title insurance company are the same.

Closing date

Purchase agreements will also include a closing date that both the buyer and seller agree on. This is the final step in the process, when the buyer becomes the legal owner of the home. The closing date is typically scheduled for 30-60 days after the purchase agreement is signed. This gives the buyer the time they need to get a mortgage loan, have the home appraised and inspected, and perform a title search. 

Purchase contract contingencies

Contingencies represent conditions that must be met in order for a contract to remain valid. In a real estate contract, contingencies are included in a purchase agreement to make sure the home sale is a fair deal for both parties. The property sale cannot be finalized until all contingencies are met. 

Some contingencies commonly found in purchase contracts include:

• Inspection contingencies: Allow buyers to back out of a home purchase penalty-free if a home inspection reveals major property damage. 
• Appraisal contingencies: Allow buyers to back out of a home purchase penalty-free if the home appraised value is below the agreed-upon purchase price. 
• Financing contingencies: Allow buyers to back out of a home purchase penalty-free if they’re unable to secure adequate financing.
• Title contingencies: Allow buyers to back out of a home purchase penalty-free if the title search reveals property liens or other legitimate claims on the house.  
• Home sale contingencies: Allow buyers to back out of a home purchase penalty-free if they’re unable to sell their current home.

What is not covered in a purchase agreement?

While a purchase agreement contains a lot of information about a real estate transaction, it doesn’t include every detail of a home sale. Purchase contracts don’t usually breakdown closing costs, the cost of an appraisal, or the cost of an inspection. This information can be found on the Loan Estimate and the final Closing Disclosure, which you typically receive at least three days before your closing date. 

Purchase agreement timeline

Given its many components, purchase agreements take some time to finalize. It’s important to stay on top of your purchase agreement timeline to make sure your home sale goes smoothly. Here’s an idea of what you can expect after initiating a purchase contract.

• Make an offer: The buyer’s real estate agent drafts an offer letter. The seller can either accept, reject, or send the buyer a counter offer. 
• Negotiations: Agreeing on a purchase price can take a few days if the buyer and seller want to negotiate. After the buyer’s offer is accepted, a purchase agreement is drafted and signed. Both parties typically have 10-14 days to sign a purchase agreement once it’s drafted. 
• Agreement signed: Once the agreement is signed, the home is taken off the market and labeled “under contract.” This prevents the seller from accepting further offers and provides the buyer time to schedule a home appraisal, inspection, title search, and get approved for a mortgage.
• Due diligence period: After the buyer conducts their due diligence and obtains financing, the seller prepares to vacate the home. Both parties have 30-60 days to complete these tasks. 
• Review closing documents At least 3 business days before closing, the buyer and the seller will receive a final purchase contract and closing statement, which they can review before closing day. 
• Closing day: On closing day, both parties sign the final purchase contract and complete the real estate transaction. It typically takes between 30-60 days to close on a new home. 

Who drafts the purchase agreement?

In most cases, the parties involved in the transaction will use a standard home purchase agreement template. The template is authorized in the respective state and developed by state real estate commissions, realtor associates, or other authorized entities. If the seller wants to make a counter offer, they’ll follow a similar process and submit a new form with amendments. The purchase agreement signed by the buyer and seller will likely be a combination of the original offer drafted by the buyer's agent, and the counteroffer drafted by the seller’s agent.

How binding is a purchase agreement?

Purchase agreements are legally binding contracts. Although there’s room to negotiate before the contract is signed, both parties are expected to move forward with the deal once all contingencies are met. The consequences associated with backing out of a purchase contract differ from one state to another. Generally, the earnest money deposit is at stake when either party backs out of the agreement, unless the seller is backing out due to a contingency that has not been met due to action or inaction by the buyer. 

*Zillow Home Loans; an equal housing lender. NMLS #10287.